Fitch Downgrades Royal & Sun Alliance

Stephen Clark, a representative for the London-based R&SA, said the company was disappointed that Fitch did not wait until March 6, when R&SA releases its 2002 results.

"As we outlined in November 2002 [when the company announced a major operational and financial review], we are taking a number of actions to improve our capital position and performance," Mr. Clark said. "We will be giving an update on our progress on March 6, which will address many of the points raised by Fitch."

R&SA has ongoing rating-agency relationships with A.M. Best and Standard & Poor's, which have both rated the company "A-minus," Mr. Clark said.

The biggest problem for the company is capital flexibility, said David Wharrier, an analyst with Fitch, noting that R&SA previously announced it would be adding ?250 million ($400 million, calculated at current exchange rates) to its reserves in the fourth quarter of 2002 (net of tax and discount), Fitch said.

The gross reserving figure (before tax and discount) is ?440 million ($704 million), he said. Of that figure, Mr. Wharrier added, the United States accounts for ?300 million ($480 million), the United Kingdom accounts for ?60 million ($96 million) and the rest of the world is ?80 million ($128 million).

(In November, R&SA said the U.S. strengthening included $225 million in respect of asbestos and environmental provisions, while the majority of the United Kingdom and the rest of the world relates to strengthening in respect of motor liability claims.)

Mr. Wharrier said R&SA has calculated that it has a capital shortfall of ?600 million ($960 million) for the level of non-life business it wants to write. (R&SA said this ?600 million figure was calculated according to its own capital adequacy measures, which are significantly more strenuous than statutory requirements.)

As part of its effort to address the capital shortfall, R&SA announced in November that it plans to sell some subsidiaries. "They are aiming to make a capital gain of ?300 million [$480 million] via the sale of RSUI, their surplus lines carrier in the States, and an IPO of most of their Asia/Pacific operations," Mr. Wharrier said.

"However, they're trying to do these sales when investor confidence in the insurance sector is low," he said, and when the balance sheets of potential buyers are also under stress.

The IPO will include its Australia and New Zealand operations, which account for 85 percent of its Asia/Pacific business, Mr. Clark said.

R&SA "has made no announcements regarding these disposals to date and in view of the continuing difficult conditions in international financial markets, Fitch is concerned that the opportunities may be becoming more constrained," said Fitch in a statement announcing the downgrade.

"Since we put a negative outlook on the company in November, things in the industry and in the investment markets have gotten worse, which has added more pressure on to the management team, which already has a big job on its hands," Mr. Wharrier said.

"We took the view of downgrading the company to a more conservative ?triple-B-plus,'" he said. "Hopefully, they'll make the sales and things will start moving in the right direction, at which time we'll quickly review the rating."

"In November, we outlined a program of actions, which are due to be instituted over 18 months to two years," Mr. Clark said. "At the end of period, we are projecting that our ?600 million shortfall [$960 million] would be a ?750 million surplus [$1.2 billion]?again according to our own internal measures," he said.

"We conducted a comprehensive strategic review of our businesses and felt that going forward we needed to be a smaller more focused business, while still remaining a major international player," Mr. Clark said.

He emphasized that R&SA will still have very strong presence in major markets such as the United Kingdom, the United States, Canada and Scandinavia.

The company announced in November that it planned to cut net written premium by exiting underperforming, more volatile or higher risk lines.

"We would be moving from ?8.5 billion [$13.6 billion] in annual net written premiums down to ?5.5 billion [$8.8 billion], which is still obviously a substantial business," Mr. Clark said.