Standard & Poor's has lowered its long-term counterparty credit and insurer financial strength ratings of Royal & SunAlliance to A from A+ following a decline in the group's capital adequacy. The outlook is negative.
"The downgrades reflect the decline in R&SA's capital adequacy, and the expectation that the group's capital base will not be rebuilt to levels in line with Standard & Poor's previous expectations," said Standard & Poor's credit analyst Mark Button.
The ratings on R&SA reflect the group's excellent global market position in general insurance and an improving earnings outlook. Offsetting this, capitalization is not consistent with the ratings, and the group's ability to secure external capital is restricted.
R&SA has a very strong global market position in general insurance, with a particularly robust business franchise in commercial lines.
Underlying earnings in the first half of 2002 were in line with the groupwide target combined ratio of 103%. Earnings are expected to continue to show solid improvement in the second half of 2002 and into 2003, as the full benefits of significant rate rises toward the end of 2001 and the improved focus on underwriting and risk selection are realized.
An accumulation of pressures over the past three years has reduced capital adequacy to adequate levels in 2002, from very strong levels in 1999. R&SA has made good progress toward its target of releasing £800 million ($1.22 billion) of capital, but weak investment markets during 2002 have hindered the capital-rebuilding program. Capital adequacy is a weakness in the rating profile.
"R&SA's primary need for additional capital is to fund the expected strong growth in its core business in 2003 and beyond. Standard & Poor's expects that capital adequacy will be strengthened to meet the growth aspirations of R&SA," said Button. "The ratings on the group could be lowered by a further notch, however, if R&SA does not meet this expectation over the next six months, as this could prevent R&SA from maximizing its opportunities in the current favorable rating environment, and could negatively affect the group's very strong business position."
An accelerated improvement in reported earnings is expected during the second half of 2002 as rate rises drive the combined ratio below the 103% target. A material improvement in earnings is expected to emerge by year-end 2003 from the restructuring of the US operations.
