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Rating Action:

Moody’s affirms RSA Insurance’s A2 IFSR on announced acquisition by Intact

18 November 2020


Codan's A2 IFSR placed on review for downgrade

London , November 18, 2020 – Moody's Investors Service (Moody's) has today affirmed the following ratings of RSA Insurance Group plc (RSA, the Group): the A2 insurance financial strength rating (IFSR) of Royal & Sun Alliance Insurance plc (RSAI), RSA's Baa1(hyb) guaranteed subordinated debt rating and Ba2(hyb) perpetual restricted Tier 1 contingent convertible notes rating. The outlooks remain stable. In the same rating action, Moody's has placed the A2 IFSR on Codan Forsikring A/S (Codan) on review for downgrade.

These rating actions follow the offers made for RSA by Intact Financial Corporation (Intact) and Tryg A/S (Tryg) whereby Intact would acquire RSA's Canada, UK and International operations, while Tryg would acquire RSA's Sweden and Norway operations, and Intact and Tryg would co-own RSA's Denmark business.

Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003788 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RSAI AND RSA

The affirmation of RSA's ratings reflects its top tier market positions in the UK and Canadian Property and Casualty markets, improving profitability, and solid capitalisation. The disposal of Scandinavia, which is RSA's most profitable business, will weaken RSA's credit profile especially from a market position, geographic diversification, profitability and reserve adequacy perspective. However, this negative impact will be off-set by implicit support from Intact which is financially stronger than RSA, and the rating agency expects that RSA will maintain solid capitalization.

The Scandinavian business, which represents around 30% of RSA's net written premium (NWP), commands top tier market positions in Denmark and Sweden. Furthermore, at YE19 and H1 20, it produced around 55% of the Group's underwriting result with excellent combined ratios, driven by Sweden, of around 87% and 83% respectively, with consistent reserve releases a feature. In contrast, RSA's largest country business, the UK, which represents around 45% of RSA's NWP excluding Scandinavia, has been a weak performer historically. The combined ratio of the UK business has averaged around 100% from 2019-2015, although Moody's expects future performance to benefit – as witnessed during 2020 to-date – from the extensive management, structural and portfolio changes effected over a number of years.

Following the closing of the transaction, Moody's expects RSA's UK and International business to continue managing its operations under its current banner as separate brand from Intact, but for RSA's Canadian operations to be fully integrated under the Intact banner. As a result, RSA's credit profile will decline further once its Canadian business, which represents round 25% of the Group's NWP with a solid profitability record, is merged with Intact's Canadian business.

However, the weakening of RSA's stand-alone credit profile will be off-set by Moody's expectation of implicit support from Intact for both the insurance and debt obligations of RSA, resulting in one notch of support relative to RSA's A3 standalone credit profile.

CODAN FORSIKRING A/S

The review for downgrade is driven by the weakening of Codan's stand-alone credit profile following the intended purchase of its Swedish and Norwegian business by Tryg, and the split ownership of the remaining Danish focused insurer. Sweden represents around 60% of Codan's net written premium and has generated the vast majority of underwriting profit in recent years with very low combined ratios (as reported by RSA) of 75% and 77% at YE19 and H1 20. In contrast, Denmark, which is around half the size of the Swedish business, reported a combined ratio of 103% at YE19 although this significantly improved to around 90% supported by a strong turnaround in Commercial Lines. The review for downgrade will focus on the company's prospective profitability and capital adequacy and support from its future owners.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

RSAI AND RSA

The following factors could lead to an upgrade of RSAI and RSA: 1) successful integration with Intact with evidence of strong explicit support; 2) sustained improvement in profitability with return on capital (ROC) of at least 8%; 3) meaningfully enhanced capital adequacy with Solvency II ratio consistently above 180%.

Conversely, the following factors could lead to a downgrade: 1) significant business disruption following the acquisition with material deterioration in business profile; 2) sustained deterioration in profitability with ROC reducing below 5%; 3) meaningfully reduced capital adequacy with gross underwriting leverage of above 5.5x on a sustained basis and Solvency II coverage below 130%

RSA's PERPETUAL CONTINGENT CONVERTIBLE NOTES

The key drivers of the notes' rating are the level of RSA Group's Solvency II ratio and the A2 IFSR of RSAI. Positive rating action on the notes could occur if RSA's Solvency II ratio is consistently above the top end of its current target range, and/or if RSAI's A2 IFSR is upgraded. Conversely, negative rating action on the notes could occur if RSA's Solvency II ratio deteriorates towards the bottom end of its current target range, and/or if RSAI's A2 IFSR is downgraded.

CODAN FORSIKRING A/S

The following factors could lead to a downgrade of Codan: 1) completion of the acquisition by Intact and Tryg, and the assumption of Codan's Swedish and Norwegian business by Tryg; 2) an absence of strong explicit support from Intact and Tryg. Conversely, a termination of the planned transaction, with no material change to Codan's current financial profile, would most likely result in a confirmation of the current rating with a stable outlook.

SUMMARY PROFILE OF AFFECTED GROUP

RSA is an international Property and Casualty insurance group headquartered in London, UK and as at 31 December 2019, reported total net written premiums of £6,417 million and total equity of £4,342 million.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003788 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Endorsement

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon James Robin Ainsworth
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 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
Client Service : 44 20 7772 5454

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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