Royal & Sun closes life arm, cuts dividend and axes 1,200 UK jobs

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Royal & SunAlliance, Britain's cash-strapped insurer, yesterday announced plans to slash nearly half of its staff in its UK life insurance arm and close down that part of the business entirely to save money.

But the insurer ducked the question of whether it would organise a rights issue to shore up its weak balance sheet. Bob Mendelsohn, chief executive of RSA, said he "could not rule out" a rights issue next year.

The ongoing uncertainty, coupled with a 55 per cent cut in RSA's dividend to 4p, caused its shares to plunge 22 per cent to 112p.

The dramatic fall in RSA's shares, which has lost 70 per cent of their value this year, leaves RSA in danger of falling out of the FTSE 100 index.

RSA will make 1,200 employees, or 5 per cent of its total UK workforce, redundant in Bristol, Liverpool, and Horsham, in Sussex and is closing its two remaining life insurance funds in the UK to new business.

The insurer said the move, along with the sale of part of Canada Life, would free up £350m of capital that was being used for marketing costs, solvency cover and reinsurance.

The company closed its with-profits businesses at the end of last year to try to preserve capital and outside the UK retains only three life businesses in Scandinavia, Latin America and Australia.

Mr Mendelsohn said: "I feel badly for the number of employees who have worked very hard and for whom we no longer have jobs. But I think history shows we have taken the right decision to move away from life and concentrate on general insurance."

Life insurers, including RSA, have been battered by the falling stock markets of the last two years and waning consumer confidence.

RSA decided to try to sell its life insurance arm more than a year ago to concentrate on general insurance. It failed to find a buyer and has now been forced to wind down those businesses, so that existing policies will continue to maturity, but no new policyholders will be taken on.

Mr Mendelsohn said RSA's trends in general insurance were "positive", with premiums up on average 15 per cent compared to last year. But the company had to warn it had increased its estimated liabilities from the attacks on the World Trade Centre by a further £66m, making its total estimated liabilities £281m.

The insurer improved the overall profitability of its property-casualty business in the first half, with costs and claims as a proportion of premiums earned falling to a combined ratio of 103 per cent in the six months to 30 June. The ratio needs to be under 100 for companies to make a profit from a given line of underwriting.

Its US commercial insurance dragged down its performance and overall, pre-tax profit fell 18 per cent to £301m.

Roman Cizdyn, an analyst at Commerzbank, said: "This should be happy valley for them. World Trade Centre should be historic and they should be in the rich grasses of premium rate rises. But instead there is uncertainty about their capital and dividend and about exactly what has happened on the life side."

RSA is keen to take advantage of the strong rise in premium rates in general insurance. To do so it has raised almost £800m through a series of disposals.

Critics believe the cash will not be exclusively used to invest in new general insurance business, with some of it being siphoned off to meet solvency requirements on its life business.

Mr Mendelsohn admitted that the new capital might be used to bolster solvency on the life side in the form of loans to the life funds. "This gives the right balance between policyholders, who get solvency, and shareholders, for whom the loans are not for ever and will be repaid with interest," Mr Mendelsohn said.

Gordon Aitken, an analyst at CSFB, said if Mr Mendelsohn were to raise more capital next year through a rights issue, he would have to overcome a series of problems. "Investors are nervous because it would have to be massively discounted and could knock a third off the valuation of the company. They are asking themselves, how much more bad news can the company take?"