OREANDA-NEWS. August 31, 2015. Fitch Ratings has revised Royal & Sun Alliance Insurance plc's (RSA) Outlook to Stable from Negative and affirmed its Insurer Financial Strength (IFS) rating at 'A' and Long-term Issuer Default Rating (IDR) at 'A-'.

The agency has also revised the Outlook of RSA Insurance Group plc to Stable from Negative and affirmed its Long-term IDR at 'BBB+'. RSA Insurance Group plc is the group's top holding company and RSA is its main operating entity. The subordinated debt and capital securities issued by RSA Insurance Group plc and guaranteed by RSA (GBP500m due 2039, GBP450m and GBP375m perpetual) have been affirmed at 'BBB'.

RSA is currently in negotiations for a possible acquisition by Zurich Insurance Company Ltd (Zurich; IFS rating AA-/Stable). Zurich is one of the largest composite insurance groups in Europe, with a strong global brand. Although RSA's rating Outlook is currently Stable, Fitch believes that, should the deal take place, gaining a larger, more diversified and higher-rated parent would ultimately be positive for the ratings.

KEY RATING DRIVERS
The revision of the Outlooks reflects Fitch's view that RSA's earnings have been restored to a level more commensurate with an 'A' rating. At end-1H15 RSA reported an underwriting profit of GBP101m (1H14: GBP23m loss) and a combined ratio of 96.9% (1H14: 100.3%). The company has undertaken a significant rebalancing of its underwriting portfolio and has shown increased underwriting discipline as evidenced by significant rate increases in underperforming lines. Fitch believes that uncertainty around RSA's cost reduction programme is diminishing and the company has reported that cost savings are ahead of plan with the core business's controllable costs down 5% yoy in real terms.

RSA has achieved a significant increase in capital resources as a result of management actions taken since its strategic review. The speed with which non-core businesses have been disposed of is positive for the ratings, as are the sale prices achieved. The disposals have provided a significant boost to RSA's capital position, with GBP835m of sales agreed since February 2014 and net gains of approximately GBP500m.

At end-2014, RSA's risk-adjusted capitalisation was 'Strong' as measured by Fitch's Prism Factor Based Model, although the ratio of net written premiums to equity of 1.8x (2013: 2.7x) is worse than peers. Total equity and reserves increased to GBP3,825m in 2014 from GBP2,893m in 2013.

RSA reported an underlying return on tangible equity of 9.7% at end-1H15. Fitch expects RSA's performance to improve further in the second half of the year as the cost reduction programme and rebalancing of the underwriting portfolio continue apace. Profit before tax improved to GBP288m in 1H15 (1H14: GBP69m), including GBP140m of disposal gains partly offset by GBP55m of costs associated with redundancy and restructuring.

RSA's 1H15 results showed an improvement in the attritional loss ratio and a significant narrowing of losses in respect of the Irish division. Fitch expects RSA's performance to improve further with continued cost reductions, a combined ratio of less than 97% and a return on equity above 10%.

The ratings reflect the group's strong business franchise in its core markets despite the difficulties it has faced, particularly in its Irish business.

RATING SENSITIVITIES
Failure to maintain a combined ratio of less than 97% (1H15: 96.9%, 2014: 99.6%) and a return on equity of more than 10% (1H15: 9.7%) could lead to a downgrade.

Fitch views RSA's 1H15 Insurance Groups Directive (IGD) coverage of 2.2x and 'Strong' Prism FBM score as commensurate with the ratings. If IGD coverage falls below 1.7x or the Prism FBM score falls to 'Adequate', this could lead to a downgrade.

Sustained improvement in capital strength as evidenced by a Prism FBM score of 'Very Strong' combined with continued improvements in operating performance could lead to an upgrade.

If the company is acquired by Zurich, it is likely that the ratings would be upgraded.