RSA increases reserves to cover asbestos claims

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The Independent Online

Royal & Sunalliance, Britain's third-largest insurer, yesterday warned its operating profit for 2001 would be wiped out after it made a massive increase in reserves to cope with the asbestos claims expected to flow in over the next 20 years.

Royal & Sunalliance, Britain's third-largest insurer, yesterday warned its operating profit for 2001 would be wiped out after it made a massive increase in reserves to cope with the asbestos claims expected to flow in over the next 20 years.

RSA said that due to an expansion of legal claims over asbestos in America last year it has increased its expected liabilities in Britain and the US and set aside £371m to pay claims. It is reserving a further £145m to pay claims in a number of small businesses it is winding down.

RSA's shares climbed 0.75p to 317.75p. The shares had already tumbled 24 per cent since the end of last year on City speculation the company would be forced into a rights issue to raise capital to fund new business.

Bob Mendelsohn, RSA's chief executive, rebuffed the speculation."We can fund our projected growth without having to go to the capital markets," he said.

Mr Mendelsohn expected the current environment of increased premiums, fewer insurers in the market and more demand for cover post 11 September to benefit the business for "several years".

But in the meantime the company has had to increase its provision for liabilities on the World Trade Centre by £15m to £215m and also expects the collapse of Enron to create a £15m liability. RSA said it has had to pay more for its own reinsurance in 2002, but aims to pass the increased cost on to customers.

Gordon Aitken, an insurance analyst at Credit Suisse First Boston, said: "The company is capital constrained and yet they are issuing a 16p dividend which will come straight out of shareholders funds. But nearly 100 per cent of shareholders funds are in equities so if the market picks up it will get them out of their problems."

RSA said in November that it would raise £800m from selling off or winding down less profitable parts of the business. Two of the main divisions which the company wants to dispose off are life insurance and asset management, so that it can concentrate on expanding its non-life side.

But despite having the life business on the market for three months, no serious bidders have come forward. One bidder is understood to have pulled out over fears about the financial strength of RSA's with-profit fund – which closed to new business at the end of last year.

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