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Fitch Affirms Royal & Sun Alliance at IFS 'A'; Outlook Stable
June 8, 2017 / 11:09 AM / 5 months ago

Fitch Affirms Royal & Sun Alliance at IFS 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 08 (Fitch) Fitch Ratings has affirmed Royal & Sun Alliance Insurance plc's (RSA) Insurer Financial Strength (IFS) Rating at 'A' and Long-Term Issuer Default Rating (IDR) at 'A-'. At the same time the agency has upgraded RSA Insurance Group plc's Long-Term IDR to 'A-' from 'BBB+'. The Outlooks on the IFS rating and IDRs are Stable. The subordinated debt and capital securities guaranteed by RSA (GBP46.97 million 2039, GBP400 million 2045, and GBP27.96 million perpetual) have been affirmed at 'BBB'. Restricted Tier 1 notes issued by RSA Insurance Group plc (SEK2,500 million, DKK650 million) have been upgraded to 'BB+' from 'BB'. Fitch previously applied a difference of one notch between operating and holding company IDRs as more than 30% of RSA's earnings and capital were sourced from countries that are expected to ring-fence regulatory capital resources in a stressed scenario (even if a group solvency approach is applied locally). However, as RSA has now completed its disposals and restructuring programme, the proportion of earnings and capital associated with "ring-fence" regulatory environments is less than 30% and we expect this to remain stable as RSA is focusing its strategy on the core markets - the UK and Ireland, Scandinavia and Canada. Therefore we have now compressed the notching between the operating company and holding company IDRs to reflect our expectation of lower probability of default at the holding company. KEY RATING DRIVERS The ratings of RSA reflects its strengthened capital position, improving underwriting performance and a leading position in its core markets, along with a low-risk investment portfolio. Offsetting factors are RSA's low debt servicing ability driven by weak operating performance due to ongoing restructuring costs since 2013. At end-2016, RSA's risk-adjusted capitalisation was 'Very Strong', as measured by Fitch's Prism Factor Based Model (FBM). At end-2016 RSA remained at the upper end of its target Solvency II coverage range of 130%-160% with a coverage of 158% (end-2015: 143%). RSA strengthened its capital position by replacing GBP200 million of subordinated debt with SEK2,500 million and DKK650 million restricted Tier 1 (RT1) contingent convertible notes issued in March 2017. This action is positive for RSA's Fitch-calculated financial leverage ratio and capital adequacy. RSA reported a group underwriting profit of GBP380 million in 2016 (2015: GBP220 million) and a combined ratio of 94% (2015: 97%). This was underpinned by strong performance of the three core segments: the UK, Scandinavia and Canada. The robust underwriting results were supported by a number of initiatives RSA implemented recently, including optimising pricing and claims processes, investing in new IT infrastructure and focusing on underwriting discipline and cost control. RSA's debt servicing ability is low for the ratings, with a Fitch-calculated fixed-charge coverage ratio of 2x due to ongoing restructuring costs. RSA's operating performance improved in 2016, although these improvements were offset by restructuring and debt buy-back costs. Net income fell to GBP27 million (2015: GBP235 million) equivalent to 1% return on equity (ROE). As RSA has now completed its three-year restructuring programme, Fitch expects its overall performance and fixed-charge coverage to improve in 2017. Fitch believes that RSA's ability to achieve and maintain a leading position in the group's core markets is a positive rating factor, as it offers greater flexibility and influence over the premium rating environment in these territories. The group has leading positions in its main markets - it is the third-largest non-life insurer in the UK, with the fifth- and sixth-largest market positions in Scandinavia and Canada, respectively. RSA continues to adhere to a conservative investment strategy, with a focus on high quality fixed income instruments. Fitch believes RSA has a high-quality investment portfolio, which does not expose the insurer's capital to significant risks. The portfolio is focused on fixed-income instruments and cash with limited exposure to equities. RATING SENSITIVITIES Failure to maintain a Fitch-calculated combined ratio lower than 100% (2016: 95%) could lead to a downgrade. The ratings could also be downgraded if the net income ROE remains below 6% on a sustained basis (2016: 1%). Continued improvement in operating performance as evidenced by a net income ROE greater than 10%, combined with a Prism FBM score of 'Very Strong', could lead to an upgrade. Contact: Primary Analyst Ekaterina Ishchenko Associate Director +44 20 3530 1532 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ralf Ehrhardt Director +44 20 3530 1551 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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