A.M. Best, commenting on Royal & Sun's recent positive developments, said the company's level of risk-adjusted capitalization has significantly improved after the $1.645 billion rights issue, which was completed last October.

Royal & Sun has implemented several cost-saving strategies, seeking to cut expenses from improved processes and information technology, as well as outsourcing and relocating some businesses to lower cost centers.

A.M. Best also said Royal & Sun is taking steps to improve underwriting results?these initiatives include improved risk profiling, more sophisticated product pricing, better use of technology, and regular underwriting and claims reviews.

But A.M. Best added it still has some concerns about Royal & Sun Alliance. The main problem, according to the ratings agency, is the potential for further reserve deterioration.

At the 2003 third quarter, Royal & Sun reported $857 million in additional reserve strengthening, related largely to discontinued business in its United States subsidiaries. Furthermore, $513 million pre-tax contingent reserve was also established for future potential adverse claims development.

Royal & Sun reported for its third quarter a 99.6 percent combined ratio, when the impact from the reserve charge is excluded. The combined ratio goes up to 108.1 percent when charges are accounted for.

(Most recently, A.M. Best Co. lowered financial strength ratings for the insurance pool of Royal & Sun Alliance USA?Charlotte, N.C.-based subsidiary of Royal & Sun Alliance Insurance Group?to "B" from "B-plus.")

A.M. Best said it believes workers' compensation, general liability and product liability are the lines of business "most at risk to adverse loss development," as well as potential asbestos and environmental reserve deficiency. In light of this, the ratings agency said, it will continue to closely monitor Royal & Sun's reserve development.