Insurer's radical cuts fail to impress ratings agencies

Royal & SunAlliance (R&SA) was left reeling by ratings agencies' downbeat assessment of its financial strength, after it embarked on radical surgery to cure its ills.

The ratings downgrades will put pressure on brokers to place business elsewhere to protect their clients.

Moody's downgraded the insurer to BAA1 from A3 and said the outlook was now stable.

Fitch downgraded R&SA's long term rating to BBB from A- and cut its rating on $1bn (£629m) of the company's junior subordinated debt to BBB- from BBB+.

Fitch said its rating outlook was negative - meaning there could be further cuts to come.

The agency cast doubt on R&SA's chances of pulling off the "high execution risk" strategy of slashing business back to build up a leaner company with a larger cash cushion. It said there was a danger that the company wouldn't raise enough money, or that earnings would fail to live up to expectations.

Fitch added that R&SA would fail to meet Fitch's expectations of hitting a 103% combined ratio and a 10% real return on risk-based capital within the short to medium term.

Ratings agency Standard and Poor's lowered its rating on R&SA to A- from A, pulled the company off credit watch and said the long term outlook was "developing".

Fellow agency AM Best was more bullish. It affirmed R&SA at A- (excellent) and revised its outlook to stable from negative.

Last week, R&SA announced a major restructuring strategy which will see it cut £500m from premium written in the UK, reducing its personal lines by a quarter. The cut will mainly affect intermediated personal lines brokers.

Overall, 900 UK jobs will be lost in a capital-raising exercise, involving the sale of RSUI in the US and the demerger of its Australian business. This will float in late 2003. Around 1,700 jobs are expected to go worldwide.

R&SA said it would exit or discontinue businesses in which it did not have a competitive advantage, and deploy the capital in parts of the company where rates were increasing.

These measures will equate to a £3.5bn reduction in gross written premiums. The process, which will be completed by 2004, should, claimed R&SA, free up £750m of capital.

Chief executive Duncan Boyle said it was looking to launch an initial public offering for its Asian businesses in late 2003. He said senior managers in Australia were likely to launch a management buy-out, but would not be drawn on which investment banks were involved, or in which country the listing would take place.

It is understood investment banks Cazenove and Goldman Sachs were involved in the failed rights issue, but are still advising R&SA on its capital raising plans.

Duncan Boyle on...
Disposals: We have had a lot of interest for Australia and RSUI. They are extremely profitable businesses. And you will have seen from the price IAG paid for Aviva at 2.1 times net asset, there is a premium to be made in the Australian market. It is far more robust than most other markets. It has excellent brands and is without a doubt stronger than Aviva.

Replacement for Bob Mendelsohn: Bob Gunn is the acting group chief executive and we are giving him all our support. Basically, we are getting on with the plans. But we don't have a specific timeline for replacing Bob Mendelsohn.

Halifax contract: We have an agreed contract with Halifax which is until 2005. That is all I can say.

Relationship with unions after job cuts: We are consulting our unions, as you would expect. Obviously, they are not thrilled by job losses, but appreciate the moves the company is taking and the need for action. They are very supportive.

Personal lines business: We require all our businesses to return the hurdle rate of return for the group, which is 10% net real return on capital.

Asbestos: We have made a clear statement to analysts on our reserves and have conducted a thorough study of our UK reserves position. This involved external auditors and that is why we made significant adjustments to our reserves last year. We keep them under review. We are very comfortable with the position at the moment.