A.M. Best Downgrades Rating of Royal SunAlliance USA

A.M. Best Co. has downgraded the financial strength ratings of the Royal & SunAlliance USA Insurance Pool (Royal USA) (Charlotte, N.C.) and the Royal Surplus Lines Insurance Company (Charlotte) to B (Fair) from B+ (Very Good).

The surplus lines company is a wholly-owned subsidiary of Royal Insurance Company of America, a member of the pool. The ratings have been removed from under review with negative implications, and a negative outlook has been assigned to both entities.

The ratings had been placed under review on Sept. 26, 2003, following the Sept. 4 announcement by the U.S. group’s U.K. parent, Royal & Sun Alliance Insurance Group plc (R&SA), of the group’s restructuring of its U.S. business. The restructuring will include a substantial third quarter net charge for loss reserves, as well as ongoing disposition of a sizable portion of Royal USA’s mid-market commercial business and personal lines business. The restructuring of the U.S. group includes actions taken to make more efficient use of assets, increasing the U.S. admissibility for solvency.

While reducing the group’s global consolidated risk capital requirements for ongoing business, the negative impact on the business profile of its U.S. operations, as well as the significant erosion to the capital position and financial flexibility of R&SA’s U.S. insurance entities, precludes the U.S. operations from a Secure A.M. Best rating.

In addition, the companies’ ability to sustain additional adverse loss reserve development remains in question as does the outcome of a significant lawsuit with MBIA over fraudulent student loans. The ultimate outcome of this lawsuit is not expected to be known for another year and, if adverse to Royal USA, could further erode the U.S. surplus position.

In A.M. Best’s opinion, there is potential for additional reserve development in light of the significant and lengthy history of reserve deficiencies experienced by the U.S. entities. As a result of the significant level of uncertainty regarding all of these issues, A.M. Best has assigned a negative outlook to the ratings.