Feb 28 (The following statement was released by the rating agency)
Fitch Ratings has maintained Royal & Sun Alliance Insurance plc's (RSA) Insurer Financial Strength (IFS) rating of 'A' on Rating Watch Negative (RWN). Fitch has also maintained RSA's Long-term Issuer Default Rating (IDR) of 'A-', RSA Insurance Group plc's Long-term IDR of 'BBB+' and the subordinated debt and capital securities guaranteed by RSA (GBP500m 2039, GBP450m perpetual, and GBP375m perpetual) rated at 'BBB' on RWN.
KEY RATING DRIVERS
The rating actions follow the announcement of RSA's 2013 results at which the insurer's recently appointed CEO outlined a strategic plan that seeks to restore the group's financial position and improve future operating performance. Fitch expects to resolve the RWN on completion of the proposed rights issue, expected in 2Q14. On successful completion of the rights issue, Fitch expects to affirm RSA's ratings, likely with a Negative Outlook, to reflect our current view that the group faces a significant challenge in restoring and improving its financial performance. In particular, continued restructuring costs are likely to subdue financial performance over at least the short term.
The rights issue should restore RSA's capital position to a level more commensurate with the current rating. The Insurance Groups Directive (IGD) coverage is forecast to improve to approximately 1.8x as a result of the GBP775m issue. Fitch previously stated IGD remaining below 1.7x during 2014 would be a downgrade trigger.
Fitch believes that although these measures will improve the company's capital resources, uncertainty remains concerning the quantitative and qualitative contribution that will be provided from plans to further improve capitalisation, including the disposal of non-core businesses, which are expected to be realised over the next few years.
The timely execution of the strategic plan will be enhanced by the presence of the new CEO, who has a strong track record of delivering restructuring plans. Fitch also views this key appointment as improving RSA's ability to access the external financing that the insurer currently requires.
RSA's ratings continue to reflect the group's strong business franchise in its core markets and also take into account the insurer's ability to maintain underwriting profitability despite the difficulties it faced in 2013.
Fitch expects to affirm the ratings, with a Negative Outlook, on successful completion of the rights issue. Subsequently, RSA's ability to restore earnings to a level that is supportive of the current ratings is viewed as a key rating trigger. Failure to achieve and maintain a combined ratio of less than 97% and a return on equity of more than 10% could lead to a downgrade.
Fitch views RSA's post-rights issue financial leverage and fixed-charge coverage as being in line with the rating. However, if financial leverage increased above 35% or fixed-charge coverage fell below 3x, this could also lead to a downgrade.