OREANDA-NEWS. Fitch Ratings has affirmed Royal & Sun Alliance Insurance plc's (RSA) Insurer Financial Strength (IFS) Rating at 'A' and Long-Term Issuer Default Rating (IDR) at 'A-'. The agency has also affirmed RSA Insurance Group plc's Long-Term IDR at 'BBB+'. The Outlooks on the IFS rating and IDRs are Stable.

The subordinated debt and capital securities guaranteed by RSA (GBP300m 2039, GBP400m 2045, and GBP375m perpetual) have been affirmed at 'BBB'.

KEY RATING DRIVERS

The ratings reflect RSA's strong business franchise in the group's core markets despite the difficulties it has faced, particularly in its Irish business. They also reflect RSA's improved capital position following various management actions including an equity raise and the sale of non-core operations as well as improvements in underwriting performance.

At end-2015, RSA's risk-adjusted capitalisation was 'Very Strong', as measured by Fitch's Prism Factor Based Model. The quality of capital was marginally weakened by the high level of hybrid debt in the capital structure but in July 2016, RSA redeemed GBP200m of its subordinated notes, which reduced the proportion of this debt type in the structure.

Currently, RSA's debt servicing ability is somewhat limited for the rating, with a Fitch - calculated fixed charge coverage ratio of 4x. Fitch expects RSA's financial performance to improve as the group's cost reduction programme and rebalancing of the underwriting portfolio continue, which will also lead to an improved fixed charge coverage ratio. RSA reported continued progress on its cost reduction targets and its underwriting results in 1Q16 were ahead of plan in its core markets.

RSA has completed the majority of its planned disposals, including the sale of its Latin American operations, leaving remaining operations in the UK and Ireland, Scandinavia and Canada. RSA has a leading market position in all three of these markets.

RATING SENSITIVITIES

Failure to maintain a Fitch-calculated combined ratio lower than 100% (2015: 98%, 2014: 101%) could lead to a downgrade. The ratings could also be downgraded if the net income return on equity falls below 6% (2015: 6%).

Furthermore, if the Prism FBM score falls to 'Adequate', this could also lead to a downgrade.

Continued improvement in operating performance as evidenced by a net income return on equity greater than 10% combined with maintenance of a Prism FBM score of 'Very Strong' could lead to an upgrade.