The upgrades reflect RSA’s solid and robust financial profile, characterised by a strong business franchise, consistent across-cycle earnings and a growing level of geographical and class-of-business diversification. The primary offsetting factor continues to be the level of risk-adjusted capitalisation based on Fitch’s internal capital assessment, which remains moderately below the current rating level. The agency considers that this negative factor is mitigated by the low level of volatility exhibited by this measure in recent years, reflecting, in the agency’s opinion, the lower level of risk inherent in RSA’s business model, when compared with some peers.
“The upgrade of RSA’s ratings recognises the financial strength and growing diversity of the insurer’s business profile,” says Martyn Street, Director in Fitch’s Insurance Group. “These qualities were reflected in the solid set of financial results reported by RSA at full-year 2010, a year that presented insurers with a number of earnings challenges. Assuming a more normal level of weather-related losses during the current financial year, Fitch anticipates that RSA will report an improved level of profitability for 2011.”
Fitch’s prospective view of RSA’s ratings will focus on the ongoing development of the insurer’s business. Primary consideration will be given to the level of bottom-line profitability from the growing emerging market (EM) and mature UK segments, contribution from future acquisitions and management of exposure to large-loss events. The agency anticipates that continued revenue growth of the EM segment will translate into improved profitability, as the costs associated with this expansion are further offset. Fitch also expects RSA to maintain a prudent approach to the level of risk assumed within its business.
The primary driver for an upgrade would be a significant strengthening of the capital position. An upgrade recommendation would also consider the continued development of RSA’s operations, including the diversity of operating income by segment.
A material weakening of RSA’s capital position from the currently assessed level, most likely to be caused by either an operating loss or excessive dividend payments, could lead to a downgrade. Given the contrast of coverage strength between Fitch’s risk-adjusted assessment and the published regulatory position, any rating action would factor in the relative movement of both measures. A significant deterioration of underwriting performance, with a group combined ratio above 100%, would also likely cause negative rating pressure given that Fitch views this as a key strength to the business.
RSA reported net written premium (NWP) growth to GBP7.5bn in 2010, a y-o-y increase of 11% (8% on a currency-adjusted basis) with net income of GBP355m, a y-o-y decrease of 15%. The reduction in net income was due to the effects of severe weather claims following the harsh start to the European winter season in November and December 2010, as well as the Chilean earthquake. The adverse weather resulted in claims of GBP255m above normal (2009: GBP175m above normal). This was reflected in the combined ratio, which deteriorated to 96.4% (2009: 94.6%), with the weather losses adding 3.5% to the combined ratio (2009: 2.4%). Positively, Fitch notes that RSA’s net loss estimate for the Chilean quake remains unchanged from the initial estimate of GBP30m.
RSA’s high-quality and low-risk investment portfolio continues to make a significant contribution to earnings, with 2010 producing an underlying yield of 3.8% or GBP538m (2009: 3.9%, GBP523m).
RSA is a leading multinational insurer with the capability of writing business in over 130 countries. RSA’s business is organised into three main operating segments: International, which generated 48% of 2010 NWP, UK (39%) and Emerging Markets (13%).
Source : Fitch Press Release
