Royal & SunAlliance hit by credit rating downgrade

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The Independent Online

Royal & SunAlliance, the cash-strapped insurance giant, yesterday received a further blow when the ratings agency Standard & Poor's downgraded the company due to fears about its capital strength.

Royal & SunAlliance, the cash-strapped insurance giant, yesterday received a further blow when the ratings agency Standard & Poor's downgraded the company due to fears about its capital strength.

S&P also said the outlook for RSA was "negative", which means the ratings agency believes it is more likely to downgrade the company's rating further in the next three years rather than to upgrade it.

Mark Button, an S&P analyst, said: "The downgrade reflects the decline in RSA's capital adequacy and the expectation that the group's capital base will not be rebuilt to levels in line with previous expectations."

The move comes after Moody's, another ratings agency, last week said it had put RSA on review for a possible downgrade. In S&P's case, RSA was demoted from its A+ status to A. RSA's shares fell 2p to 106p.

The concerns of the ratings agencies do not surround RSA's ability to meet its current liabilities. But they believe RSA does not have enough capital to fund the rapid expansion of its general insurance business at a time when premiums are surging and its competitors are rushing to write large amounts of profitable business.

RSA has been trying to raise capital in the last 12 months by disposing chunks of its business it deems to be "non-core". It has so far raised £725m of its target sum of £800m.

Analysts believe this figure is no longer enough, due to the continuing fall in stock markets, which have eroded the value of its assets.

Mr Button said: "The environment has changed. The equity markets have fallen, and it has become more challenging for insurers to release capital through disposals or raise external capital through equity or debt."

RSA reiterated that it did plan to raise more capital. It said in a statement: "We are actively pursuing a number of actions to improve our capital position and it is our intention that these should put us in a position to regain our A+ credit rating."

The City has speculated that RSA would organise a massive rights issue, but the company has shelved the plan because the level of discount would have to be around 40 per cent, according to analysts. Alternatives include increasing its debt or boosting its reinsurance.

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