Royal & Sun to Restructure U.S. Operations

The U.K.’s Royal & SunAlliance Group recently announced its nine-month results and at the same time revealed plans to significantly restructure it’s operations. Royal & SunAlliance USA (R&SA USA) will be split into two operating groups and will exit several lines of business.

The Group posted overall operating income of $739 million for the first nine months of the year, compared to $482 million for the same period in 2001, which was heavily impacted by the attacks of Sept. 11. If these are excluded, the group’s income would have risen by 5 percent to around $840 million.

R&SA’s combined operating ratio on its P/C activities improved to 104 percent during the period, compared to 107.9 percent for the first three quarters in 2001. The company said this reflected “continuing good performance, particularly across commercial and direct personal lines of business.” It added, however that there was still a significant “drag effect” from prior-year claims included in the figure. If these are excluded, the Group combined ratio was 102.1 percent, which R&SA indicated “reflects the current sound underwriting environment.”

Bob Gunn, R&SA’s Group COO, acting as CEO following the departure of Bob Mendelsohn in September, noted that the results showed “continued improvement but are still not at an acceptable level.” Gunn’s task is nothing less than to turn R&SA around following a series of losses, a 50 percent cut in its dividends and a 90 percent drop in its share price, due primarily to reserve strengthening for asbestos, the drop in equity values, and several severe weather events. (See IJ West Oct. 14).

His efforts seem to be producing results, but at a cost. Concurrently with the earnings report, he stated, “We have announced a series of important actions that we believe will set us on the path to better performance, stronger results and improved returns for our shareholders. The scope and scale of these actions are more significant and far-reaching than anything we have previously undertaken, and we are committed to achieving them.”

The most far-reaching changes will occur at R&SA USA. The plan calls for establishing two divisions, described as “focusing on mainstream property & casualty business insurance and standard and nonstandard personal insurance.” The company also intends to sell off what it termed “several non-core U.S. businesses that do not align with the company’s long-term goals.”

Steve Mulready, R&SA USA president and CEO, noted that, “Like most other insurers, we’ve seen our capital base erode and our financial ratings suffer, due to a wide range of issues including falling equity prices and the impact of the World Trade Center tragedy. After an exhaustive business and capital review, we have arrived at a strategy that we believe will generate the capital necessary to support significant profitable growth in 2003 and beyond.”

R&SA USA said that the Business Insurance Division would focus on the center of the commercial P/C marketplace. Its two largest businesses will be Risk Management & Global, “which provides customized program service and risk management solutions to larger commercial clients,” and its Mid-Market Segments, “which target mid-size commercial customers in selected industries.” The division will include Grocers Insurance, DPIC, Marsh Advantage America, Asia Operations, Marine, Reverse Flow and ProFin. The second operations area, R&SA USA’s Personal Insurance Division, will consist of its Standard businesses, including Automobile, Homeowners, Umbrella, Boat and Motorhome, as well as its Nonstandard Auto businesses.

The “non-core” activities it plans to exit are its RSUI, Artis, Affinity Programs, Financial Services and REMi businesses. It will also discontinue its World Assurance business.

“Our disposal actions should have minimal impact on the customers and distribution systems of our businesses going forward,” Mulready indicated. “As we exit these six businesses, we will reduce the capital dependency associated with them, significantly contributing to the capital program of our worldwide organization.”

The restructuring will also result in the loss of 725 staff positions and an additional 800 dependent jobs, including 400 in infrastructure support for the exited businesses. “The reductions will take place nationwide over the next several months as part of an ongoing evaluation of operations,” said R&SA.” “Consequently, details about specific locations being affected are not available.”

The combined ratio for U.S. operations “improved to 109.2 percent for the first nine months of 2002 vs. 116.6 percent for the same period last year,” said the earnings report. It further noted the prior years impact of the WTC attacks, which had “increased the reported combined ratio by 4.5 and 11.1 points in 2002 and 2001, respectively.”

The rating agencies, who have been systematically downgrading R&SA over the last year, had somewhat mixed reactions to the news. Standard & Poor’s said it was lowering its long-term counterparty credit and insurer financial strength ratings on various R&SA operating entities to single-‘A’-minus from single-‘A.’

A.M. Best Co. reacted more positively to the news, announcing that it had affirmed R&SA’s financial strength rating of A- (Excellent) and the “bbb” and “bbb-” ratings of its subordinated debt and preferred stock. Best also changed its outlook to stable from negative.

Fitch Ratings and Moodys Investors Service also downgraded their ratings following the announcement. All of the rating agencies and a number of analysts have expressed concern that the restructuring of R&SA USA will significantly diminish the subsidiary’s importance to the parent company. Some commentators have even speculated that the actions could be a preliminary move towards the eventual sale of the U.S. operations.

While no one at this point can accurately predict what the future may hold in store for R&SA, the debate continues over the effects the restructuring will have. Gunn’s overall goal is to concentrate R&SA’s somewhat diminished capital resources on areas that are the most profitable, and where it has a strong market position.

S&P’s is concerned that the “change in status reflects the current position of the group, which makes it difficult to consider any operation outside R&SA’s home market as core.”

A.M. Best said that, while it believes that R&SA’s revised strategy will potentially “reduce net premiums by 2 to 3 billion pounds—between 3 and 4.7 billion dollars,” it’s still a positive development, as it will enable R&SA “to focus its existing capital resources on continuing to grow in its priority lines in its key geographic markets, the United Kingdom and the United States.” That assumes that any rumors about R&SA USA eventually being sold are unfounded.

Ultimately the Group’s future may lie with events outside its control. More asbestos losses, more natural disasters and continued weakness in the equity markets could thwart the benefits of any restructuring plan.

Topics USA Property Casualty