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Rating Action:

Moody's affirms RSA Insurance's A2 IFSR and changes outlook to stable from negative

17 Aug 2015

London, 17 August 2015 -- Moody's Investors Service has today affirmed the following ratings of RSA Insurance Group plc (RSA, the Group): the A2 insurance financial strength (IFSR) rating of Royal & Sun Alliance Insurance plc (RSAI), and RSA's Baa1(hyb) guaranteed subordinated debt rating and associated ratings. The Prime-2 commercial paper rating was also affirmed. The outlook on all of the ratings has been revised to stable from negative.

A list of all affected ratings is available at the end of this press release.

RATINGS RATIONALE

Moody's affirmation of RSA's ratings reflects the Group's strong competitive position in its key markets of the UK, Scandinavia, and Canada, its relatively well diversified business profile in terms of products, relatively conservative investment portfolio, and relatively low financial leverage.

The change in outlook to stable from negative reflects the good progress made to-date by the Group in improving its operating and underwriting performance, achieving cost reductions, and successfully disposing of non-core businesses. It also reflects Moody's view that: 1) there is now less execution risk around the Group's restructuring plan given the completed asset disposals and the planned efficiency and profit enhancement programmes are on track; 2) the Group will meet its cost reduction targets which will further improve profitability; 3) balance sheet and earnings volatility will likely reduce as a result of remedial actions; 4) the Group's good H1 15 results will help further restore shareholders' confidence. This is notwithstanding continued profitability headwinds in the form of the low investment yield environment, challenging market conditions and ongoing restructuring costs.

From a business profile perspective, Moody's said that notwithstanding significant upheaval over the last two years, RSA's competitive position has remained strong and its business retention rates have held up relatively well. Moody's expects the Group to maintain its top tier positions in the UK, Scandinavian and Canadian P&C markets, and for its business to remain well diversified. The Group has a meaningful presence in most major classes of non-life business, together with a broad split between personal (55% of YE14 NWP) and commercial lines of business (45%), although product risk is viewed as relatively high. The Group's asset disposals have somewhat diminished geographic diversification but there is only a limited loss to future earnings. As a result of its portfolio remediation work, Moody's expects the Group's future earnings profile to be better balanced amongst its core geographies with performance trends by division becoming more established.

With regard to profitability, Moody's believes that the Group's planned efficiency and profit enhancement programmes are on track. RSA's H1 15 results showed a meaningful improvement with a continued reduction in its combined ratio and current year attritional loss ratio, and a much reduced Irish operating loss. Although the H1 15 result benefited from disposal gains outweighing non-recurring charges, the Group's underlying return on tangible equity (9.7% at H1 15) is edging closer to its 12-15% target. Going forward, Moody's expects the Group's performance to improve further, benefiting from the achievement of its cost reduction target of greater than GBP250m by 2017, a continued reduction in the combined ratio to nearer 95%, and achieving a degree of profitable revenue growth. This is notwithstanding the profitability headwinds, including rate pressure in commercial lines business, particularly as RSA is now much more reliant on the performance of its current year underwriting result than in the past (i.e. we expect a diminished proportional contribution of reserve releases and investment income).

Moody's capital-related metrics for RSA improved significantly at YE14 following the Group's rights issue in 2014 with gross underwriting leverage reducing to 4.6x (YE13: 7x). Going forward, Moody's expects reduced balance sheet and earnings volatility to benefit retained earnings allowing the Group to further build capital. Moody's also said that it will continue to monitor progress with regard to the approval of RSA's Solvency II internal model and ultimately expects the Group's Solvency II coverage levels to be higher than its current ECA ones.

Moody's also expects the Group's investment portfolio to remain relatively conservative, and adjusted financial leverage and earnings coverage to remain below 30% and in the range of at least 4-5x respectively. At YE14, the Group's adjusted financial leverage reduced significantly to 24.8% (32.4%), benefiting from the rights issue and a reduced amount of debt. Earnings coverage improved to 2.9x in 2014 but is low, as is the 5 year average of 3x, but coverage improved to around 5.3x at H1 15 given the good profitability.

The affirmation of the Prime-2 rating on the commercial paper programme reflects Moody's standard rating practice for notching commercial paper programmes from long-term debt ratings.

The rating action is not related to the recent announcement by Zurich Insurance Group Ltd that it is evaluating a potential offer to acquire RSA. Moody's will assess the impact of such an acquisition on RSA's credit profile if and when it materialises.

RATING DRIVERS

In terms of rating drivers going forward, Moody's said that in the medium term, positive rating pressure could arise from: 1) sustained improvement in profitability with return on capital (Moody's definition) of at least 8% and/or 2) meaningfully enhanced capital adequacy with gross underwriting leverage of below 4x on a sustained basis and Solvency II coverage of above 180% and/or 3) adjusted financial leverage consistently below 30% and earnings coverage above 6x. Conversely negative rating pressure could arise from: 1) a material deterioration in business profile including weakening of franchise and/or 2) inability to further improve underlying operating and underwriting performance through 2016 and 2017 and/or 3) meaningfully reduced capital adequacy with gross underwriting leverage of above 5.5x on a sustained basis and Solvency II coverage below 130% and/or 4) adjusted financial leverage consistently above 30% and earnings coverage below 4x.

The following ratings were affirmed with a stable outlook:

Royal & Sun Alliance Insurance plc: A2 IFSR

Codan Forsikring A/S: A2 IFSR

RSA Insurance Group Plc guaranteed subordinated debt: Baa1(hyb)

RSA Insurance Group Plc guaranteed perpetual subordinated capital securities: Baa2(hyb)

The following rating was affirmed:

Royal & Sun Alliance Insurance plc: Prime-2 Commercial Paper

RSA is an international P&C insurance group headquartered in London, UK and as at 31 December 2014, reported total net written premiums of GBP 6,967 million and total equity of GBP 3,933 million.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Property and Casualty Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms RSA Insurance's A2 IFSR and changes outlook to stable from negative
No Related Data.
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