The CreditWatch is the result of R&SA's announcement that it intends to strengthen its U.S. reserve position by approximately $600 million (pretax) or more in third-quarter 2003, and that it has entered into a definitive agreement to sell the renewal rights of RSA USA's standard personal lines and a majority of its commercial lines business to Travelers Property Casualty Corp. (A-/Neg/-; see related press release).
"The uncertainty with RSA USA's loss reserve adequacy has historically been factored into the U.S. group's financial strength rating; however, the magnitude of such a reserve strengthening was not," said Standard & Poor's credit analyst Frederick Loeloff. Expectations are that once the balance is confirmed, it will either be established as a central claims provision for R&SA, or it could be established at RSA USA. The renewal rights encompass approximately $1.5 billion in gross premium volume and are a substantial portion of RSA USA's more profitable books of business. While Standard & Poor's recognizes that some of the above initiatives were taken in accordance with R&SA's strategic plan announced Nov. 7, 2002, to restructure its operations and free operating capital, the rating implications reflect Standard & Poor's ongoing concern for RSA USA's continued weak operating performance, deficient capital position, and prospective loss reserve adequacy. Also reflected are Standard & Poor's concerns for the potential short-term operational risks that RSA USA (and indirectly R&SA) may incur through additional restructuring efforts and management of the U.S. operation's discontinued business lines (estimated today to be greater than 60% of RSA USA's net loss reserve position at year-end 2003). As announced, the reserve strengthening and any additional restructuring costs for R&SA's U.S. operations will require the group to implement a Rights issue to raise GBP960 million; however, no funds will be contributed to RSA USA (in the immediate term) unless they are required to maintain regulatory requirements. Standard & Poor's will discuss with RSA USA, along with R&SA management, their plans concerning RSA USA's prospective strategic fit to R&SAIP and business model applications to address earnings potential and capital management. Based on those conversations, RSA USA's financial strength and counterparty credit ratings could be affirmed or lowered up to one category.
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.rati