Best Affirms R&SA’s Ratings; Revises Outlook to Stable

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) and the issuer credit rating (ICR) of “a-” of the U.K.’s Royal & Sun Alliance Insurance Group plc and its rated subsidiaries. Best has also affirmed the ratings of R&SA’s debt instruments and preferred stock, and revised its outlook on all of the ratings to stable from negative.

“The rating action reflects R&SA’s improving operating performance, the enhanced profile of its business and also factors its solid risk-adjusted capitalization,” said Best. “The main offsetting factor continues to be the potential for further reserve deterioration, particularly in the United States.”

Best said it “expects the reported consolidated combined ratio to be maintained at below 100 percent in 2006 as further sustainable operational benefits emerge from R&SA’s operational improvement program. R&SA reported a post-tax result for 2005 of £605 million ($1.041 billion), an improvement of £685 million ($1.32 billion) compared with the previous year.

“The improvement in the reported consolidated combined ratio for the year to 97.0 percent (104.8 percent for 2004) was the result of continued focused underwriting and expense savings. The operating result was achieved in spite of the impact on results of the adverse weather effects during 2005 and the costs associated with the run-off of the company’s discontinued business in the United States.”

Best also indicated that it “believes that R&SA’s overall business profile has benefited from significant restructuring over recent years. This has included the divestment of many non-core operations.

“The main offsetting factor continues to be the potential for further reserve deterioration, relating largely to discontinued business in the United States.” Best cited workers’ compensation, general liability and product liability, as lines it believes are “most at risk to adverse loss development, and that there is potential asbestos and environmental reserve deficiency.”

The rating agency also noted that it “continues to closely monitor the development of R&SA’s reserves.”