Insurer could be downgraded if it cannot keep its COR below 97%

RSA could face further write-offs or reserve strengthening as it tries to turn around its performance, according to Fitch.

The ratings agency also said it could downgrade the insurer if it cannot keep its combined operating ratio (COR) below 97% or its return on equity above 10%.

Affirmed rating

Fitch has affirmed RSA’s insurer financial strength rating of A with a negative outlook.

The agency said the negative outlook reflects the risk that RSA will be unable to execute its turnaround plan, which involves cost cutting and rebalancing its underwriting portfolio, on a timely basis.

It added: “Fitch believes there is also a possibility of further write-offs or reserve strengthening. As a result there is still significant uncertainty around the time it will take to restore earnings to a level commensurate with the ratings.”

‘Weak’ results

Fitch said it saw RSA’s sale of non-core businesses as positive, but that the company’s third quarter 2014 underwriting results were “weak” because of low insurance rates and investment returns.

The agency said: “This highlights that the company still faces significant challenges in improving its financial performance.”

Potential for downgrade

The outlook on RSA’s rating could be restored to stable from negative if there is evidence of successful implementation of its turnaround plan and if profit is restored to a level that supports the rating, Fitch said.

But it added that failure to achieve and maintain a COR of less than 97% and return on equity of more than 10% could lead to a downgrade.

RSA reported a COR of 100.8% and a negative return on equity of 0.1% in the first half of 2014.

The agency warned RSA could also be downgraded if its capital level falls below 1.7 times the amount required under the European Commission’s Insurance Groups Directive (IGD).

RSA’s IGD surplus was 1.9 times the required level in the first half of 2014.