DBRS Morningstar Assigns AA (low) Financial Strength Ratings to RSA’s Operating Entities

DBRS Ratings Limited (DBRS Morningstar) assigned an Issuer Rating of ‘A’ with a Stable trend to RSA Insurance Group Limited (RSA) and a Financial Strength Rating (FSR) of AA (low) to RSA’s operating subsidiaries, which were acquired by Intact Financial Corporation in June 2021. DBRS Morningstar also assigned ratings to various RSA debt issuances. A full list of assigned ratings is included at the end of this press release.

KEY RATING CONSIDERATIONS

As wholly owned, strategically important subsidiaries of Intact Financial Corporation (Intact), the ratings of RSA and its subsidiaries (jointly RSA entities) are primarily driven by the ratings of the parent organisation. In the UK, RSA is among the top five providers of general insurance and enjoys strong brand recognition. Its international operations include Ireland, continental Europe, and the Middle East. RSA is the intermediate holding company for the above operating entities within Intact. The FSRs assigned to RSA’s operating subsidiaries are aligned with those of Intact’s Canadian operating subsidiaries. This takes into account our view that there is a very high probability of potential support from Intact to the RSA entities, reflecting the strategic importance of the RSA acquisition to Intact. Through the acquisition of RSA’s UK and International businesses, Intact aims to broaden and diversify its franchise and expects to achieve economies of scale by extending its operating model and digital platforms across the new commercial and personal portfolios. The acquisition should enhance Intact’s distribution capacity and strengthen its position in the Specialty insurance sector.

RATING DRIVERS

The ratings on the RSA entities are driven by support from Intact, and therefore any change in the ratings or trends of the parent organisation would lead to a change in the ratings or trends of the RSA entities. Any developments that would lead to a weakening of our perceived assessment of Intact’s support to RSA would also lead to a downgrade.

RATING RATIONALE

The joint acquisition of RSA by Intact and Tryg A/S (Tryg) was completed on June 1, 2021. The acquisition has led to substantial changes in RSA’s structure. RSA retained its UK and International business (which in the pre-acquisition structure of RSA represented the 'UK & International' segment) and has become the interim holding company for the subsidiaries operating in those markets within Intact. RSA’s Canadian business was transferred to Intact’s intermediate holding company dedicated to RSA’s Canadian operations. Pursuant to the acquisition agreement, RSA transferred its operations in Sweden and Norway to Tryg. The Danish business was transferred to a 50/50 joint venture controlled by Intact and Tryg. Subsequent to this, Intact and Tryg have entered into an agreement to sell the Danish business to a third party, with the transaction expected to close during the first half of 2022. RSA was re-registered as a private limited company (its legal name changed to RSA Insurance Group Limited from RSA Insurance Group plc) and delisted. Following the acquisition, RSA is 100%-owned by Regent Bidco Limited, a wholly-owned subsidiary of Intact.

RSA in its new form continues to provide general insurance to personal and commercial customers in its UK and International markets. It benefits from a very well established brand and is ranked in the top five in the UK. RSA has a multi-channel distribution strategy, which includes the direct channel, agents, and affinity partners.

RSA has traditionally maintained a well- developed risk management framework, which should continue to provide good control over all key activities of RSA in its new structure. RSA has some exposure to natural catastrophes, which is mitigated through reinsurance. Following the disposal of the Scandinavian and Canadian operations, RSA's investment portfolio has been downsized and, while there were some changes in its composition, its overall quality should remain high. Market risk is well-managed and exposure to riskier asset classes has been maintained at low levels.

RSA's new organisational form is largely a continuation of the 'UK & International segment' as reported under the previous pre-acquisition organisational structure. The segment's revenue generation has been supported by its solid franchise in its core markets, high customer retention rates, and good diversification. However, the underwriting performance over the last 5 years has been volatile with the combined ratio varying in the 97% - 103% range, reflecting international and domestic natural catastrophes, large loss volatility, and claims inflation. A refocus by management to have a less volatile commercial portfolio in 2018 has had a positive impact on the underwriting performance in subsequent years. In July 2021, RSA broadened its reinsurance coverage, which should reduce the volatility of its underwriting results further. In H1 2021, RSA's underlying performance remained healthy, however the reported results were affected by significant one-off charges. Continuing operations generated a net loss of GBP 0.3 billion and discontinued operations (Scandinavian and Canadian operations which were disposed of) generated GBP 4.5 billion profit, mainly related to the gain on their sale. The overall net profit of RSA was GBP 4.3 billion. The combined ratio for Intact’s “UK & International” division was 94.2% in H1 2021.

RSA has traditionally managed its liquidity conservatively, maintaining a substantial part of its investment portfolio in short-term, highly liquid placements, which can be activated on a short time basis to manage its operational requirements. While claims in the personal product categories are highly predictable and relatively stable, the corporate business has generated some technical result volatility in the past. RSA’s liquidity position is supported by stable cash flows from policyholders and benefits from the integration into Intact.

RSA has maintained solid capitalisation, commensurate with its generally low risk profile and solvency ratios have remained well above the regulatory minima. The balance sheet leverage has been sustained at moderate levels. Following its acquisition by Intact, Royal & Sun Alliance Insurance Limited (RSAI) is the main entity subject to regulatory capital requirements. RSAI uses internal models to calculate its Solvency II solvency capital level. At end-H1 2021, RSAI’s Solvency II ratio was approximately 1.6x (end-2020: 2.0x). Following the ownership change and reorganisation, RSA's equity declined to GBP 2.8 billion from GBP 4.7 billion at end-2020. DBRS Morningstar estimates that the financial leverage ratio was 26.1% as at June 30, 2021.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262

DBRS Morningstar notes that this Press Release was amended on 9 November 2021 to correct the financial leverage ratio.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (16 July 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021; https://www.dbrsmorningstar.com/research/373262) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (31 May 2021; https://www.dbrsmorningstar.com/research/379424).

The sources of information used for this rating include Company Documents, RSA Insurance Group Limited Condensed Consolidated Financial Statements for the 6 month Period Ended June 30, 2021, Q1 2021 Trading Update, Solvency and Financial Condition Report (SFCR) 2020, 2020 Preliminary Accounts, Annual Report and Accounts 2020, Annual Report and Accounts 2019, Annual Report and Accounts 2018, RSA Insurance Group Limited Bond Prospectuses, Annual Reports 2019-2020 (RSA subsidiaries), and Q2 2021 Review of Performance (Intact Financial Corporation). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/386478

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 25 October 2021
Last Rating Date: Not applicable as there is no last rating date.

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