Fitch Ratings has affirmed Royal & Sun Alliance Insurance Insurer Financial Strength (IFS) rating at ‘A’ and Long-term Issuer Default Rating (IDR) at ‘A-‘. The agency has also affirmed RSA Insurance Group plc’s Long-term IDR at ‘BBB+’. RSA Insurance Group plc is the group’s top holding company and RSA is its main operating entity. The Outlooks on the IFS rating and IDRs are Stable. The subordinated debt and capital securities guaranteed by RSA (GBP500m 2039, GBP450m perpetual, and GBP375m perpetual) have been affirmed at ‘BBB’.
KEY RATING DRIVERS
RSA’s ratings reflect the group’s solid operating profile, strong business franchise and growing geographical diversification. The ratings also take into account the insurer’s ability to maintain strong underwriting profitability through the cycle, its prudent reserve levels and its low risk investment portfolio. Fitch considers that these strengths to some extent compensate for a capital position that looks weaker than similarly rated peers.
RSA’s level of capital, as assessed using Fitch’s risk-adjusted method, is somewhat below that expected for the insurer’s rating level, with coverage showing a modest deterioration in recent years, largely due to growing premium volumes. RSA’s own economic capital surplus figures and insurance groups directive (IGD) surplus also indicate a decline. For the rating to be maintained at the current level, Fitch would expect to see a reversal of this trend. In this respect, Fitch considers the reduction in the dividend payout ratio as positive for the ratings because it should allow RSA to retain more funds to strengthen its capitalisation. It will also be necessary for growth in retained earnings to exceed growth in the capital charges associated with larger premium volumes.
Fitch views RSA’s stable earnings generation, with solid underwriting controls, as a positive rating factor. For 2012, RSA reported another year of strong underwriting performance: its combined ratio remained fairly stable at 95.4% (2011: 94.9%). This outcome reflects RSA’s consistently solid management of its operations. In a context of continued expansion abroad, RSA’s operations in overseas and emerging markets also delivered a stable positive technical result. In 2012 its emerging market combined ratio improved to 96.9% (2011: 98.7%), reflecting strong premium growth and controlled expenses.
Fitch views the continued geographical expansion and increased revenue and earnings diversification of RSA’s business positively. RSA has successfully diversified its premium income away from the historically core UK market and in recent years most of its operating profits have been generated outside the UK. Recent acquisitions have, however, led to an increase in goodwill and intangibles, negatively affecting the quality of RSA’s capital.
RSA continues to adhere to a conservative investment strategy, with a focus on high quality, fixed income instruments. The agency expects the prolonged low interest rate environment to result in lower investment income and consequently put pressure on earnings.
RATING SENSTITIVITIES
Key triggers for a rating downgrade would include: a significant and sustainable deterioration in RSA’s capitalisation as measured by Fitch’s risk-adjusted capital assessment and IGD coverage of 1.7x or below (2012: 1.9x).
A significant deterioration of underwriting performance (i.e., a group combined ratio consistently above 103%) would also trigger a downgrade, as Fitch views this metric as one of RSA’s key strengths.
Fitch views RSA’s financial leverage and fixed-charge coverage as being in line with the rating level. However, if financial leverage increased consistently above 35% or fixed-charge coverage fell below 3x, this could lead to a downgrade.
A material and sustained improvement in the company’s capital position, as measured both by Fitch’s own risk-adjusted assessment and IGD coverage of 2.2x or more, could lead to an upgrade.
