Fitch places Royal & Sun Alliance on rating watch negative

Dec 16 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has placed Royal & Sun Alliance Insurance plc's (RSA) Insurer Financial Strength (IFS (SES: E1:I49.SI - news) ) rating of 'A' on Rating Watch Negative (RWN).

RSA's Long-term Issuer Default Rating (IDR) of 'A-', RSA Insurance Group plc's Long-term IDR of 'BBB+' and the subordinated debt and capital securities guaranteed by RSA (GBP500m 2039, GBP450m perpetual, and GBP375m perpetual) rated at 'BBB' have also been placed on RWN.

KEY RATING DRIVERS

Today's action follows the announcement of further reserve strengthening of GBP130m in relation to RSA's Irish insurance business, and is in addition to GBP70m of strengthening announced in November 2013.

The RWN reflects further weakening of the group's capital position as well as renewed uncertainty regarding the ability of RSA to restore its capital position through retained earnings growth. Insurance Group Directive (IGD (Berlin: IF8.BE - news) ) capital surplus worsened to 1.5x at end-3Q13 (end-2012 1.9x) and given the latest announcements it is likely to deteriorate further. Recent acquisitions have led to an increase in goodwill and intangibles, negatively affecting the quality of RSA's capital and financial leverage. Some of RSA's key financial metrics are weaker than its ratings would suggest.

The latest reserve strengthening follows RSA's review of reserves at its Irish operations. There are currently two further reviews underway - an independent external review of the issues that have arisen is due to be concluded in January 2014 and a more general internal review of the group's business which is due to report when results for 2013 are published. RSA is taking steps to improve its capital position.

Fitch plans to resolve the RWN when the findings of the external review of the Irish operations are known, and once RSA has published its 2013 results. The speed of any significant strategic review being implemented by RSA will be influenced by the time taken to appoint a new CEO, which could slow the restoration of capital strength.

RATING SENSITIVITIES

When resolving the RWN Fitch will assess the current and prospective strength of RSA's group capital position. If IGD capital coverage looks set to remain below 1.7x during 2014, RSA's ratings will likely be downgraded by one notch. A rating downgrade would also occur if the ongoing reviews uncover additional operational or accounting deficiencies that require significant financial resources to correct, as they would weaken capital and could further erode confidence in management.