S&P rating could drop two notches within 90 days

RSA risks being downgraded by a key ratings agency to a level at which many brokers and corporate clients refuse to place business unless it raises equity, ratings experts Litmus Analysis has warned.

Last night Standard & Poor’s downgraded RSA from A to A-, its lowest level in more than a decade.

It also moved the rating to a “CreditWatch developing” status, which means the rating could drop by two notches to a BBB rating within the next 90 days.

S&P said it would lower its rating of RSA if its ongoing reassessment of the insurer’s enterprise risk management (ERM) procedures is negative, or if it thinks management actions to strengthen capital and profitability are inadequate.

A downgrade by two notches would give RSA a BBB rating, a level at which many brokers and larger commercial insurance buyers will not place cover.

Litmus said there was a serious risk of a further downgrade unless it raises fresh equity such as from a rights issue or selling a subsidiary.

RSA’s current rating is buoyed by S&P’s “very strong” business risk profile score and highest possible assessment for its enterprise risk management. Those scores compensate for its lower capital score.

Litmus said RSA’s high ERM score is not consistent with its recent profits warning – a strong assessment is supposed to indicate a robust ability to avoid surprise losses.

“We continue to believe that RSA will need fresh equity,” said analytical partner Stuart Shipperlee. “It’s difficult to see how capital can be restored purely from future retained profits.”

Shipperlee added: “Raising capital, however, is never easy when shareholders are nursing unexpected losses, and in this case especially so, since it is difficult to see how this could be done without further pressurising the group’s expected ‘return on equity’.  

“RSA might convince S&P that its actions now will generate sufficiently strong retained capital from future earnings to avoid the need for equity raising, but that would require a considerable leap of faith by the agency given recent events.

“All of which may well make for a trade sale or substantial disposals that are much more attractive for shareholders. That though, requires that the buyer has a lot of confidence that there are no further skeletons in the cupboard.”