A.M. Best Downgrades Royal & SunAlliance USA

A.M. Best Co. has downgraded the financial strength ratings to B+ (Very Good) from A- (Excellent) of the Royal & SunAlliance USA Insurance Pool (North Carolina) and the Royal Surplus Lines Insurance Company (Connecticut). The surplus lines company is a wholly-owned subsidiary of Royal Insurance Company of America, a member of the pool. The ratings remain under review with negative implications.

The rating actions follow A.M. Best’s review of the U.S. group’s business profile, portfolio uncertainties and reduced financial flexibility following the Sept. 4 announcement by the U.S. group’s UK parent, Royal & Sun Alliance Insurance Group plc (RS&A), of the group’s restructuring of its U.S. business. The restructuring will include a substantial charge for loss reserves as well as disposition of a sizable portion of the U.S. group’s mid-market commercial and personal lines business.

While the proposed restructuring in the U.S. will reduce the group’s global consolidated risk capital requirements for ongoing business, the restructuring will negatively impact the business profile of its U.S. operations as well as significantly erode the capital position of R&SA’s U.S. insurance entities. As a result, the companies’ ability to sustain additional adverse loss reserve development of existing liabilities is hampered.

In A.M. Best’s opinion, there is potential for additional reserve development in light of the significant and lengthy history of reserve deficiencies experienced by the U.S. entities. In addition, A.M. Best no longer considers the U.S. group to be strategically important to the UK parent, significantly reducing the U.S. group’s financial flexibility.

However, the UK parent remains committed to ensuring that the US operation’s statutory surplus is maintained at appropriate levels for regulatory purposes. A.M. Best expects to resolve the under review status of the U.S. ratings following a review of the group’s third quarter and pro forma full-year operating performance, capitalization and reserve adequacy.