NIG to get financial strength rating

RBS Insurance is seeking a credit rating in the next few months in a move which would see its broker-only insurer NIG get a full financial strength rating.

The plans come as RBS prepares to issue subordinated debt ahead of its initial public offering next year.

As part of the process of obtaining a credit rating for the debt issue, the Royal Bank of Scotland-owned insurance group will first need to obtain an insurance financial strength rating.

This means that by extension, commercial lines underwriter NIG will get a full financial strength rating, which could improve its standing with brokers.

NIG currently has a rating of BBBpi from Standard & Poor’s, but this is not a paid-for, in-depth rating and is only based on publicly-available information.

RBSI finance director John Reizenstein declined to specify which rating agency RBSI is working with, other than to say “the usual ones”. The four main insurance rating agencies are Standard & Poor’s, AM Best, Moody’s and Fitch, but AM Best, as an insurance-only agency, does not provide credit ratings.

Reizenstein said the financial strength rating was simply a means to obtaining the credit rating for debt issuance purposes. He contended RBSI did not really need an insurance financial strength rating as its business is predominantly direct personal lines.

However, a financial strength rating would be useful for NIG as a writer of brokered commercial lines business. Brokers typically use ratings as part of their due diligence process.

“NIG will get the benefit of the rating but that’s not really the aim,” Reizenstein said.

Reizenstein said RBSI is looking to issue several hundreds of millions of pounds of subordinated debt, around the £500m mark, subject to FSA approval and market conditions.

As subordinated debt counts as capital from a solvency standpoint, the issue would allow RBSI to free up some of its equity, which would be paid to the RBS group in the form of a dividend.

The reduction in the equity levels in turn would boost RBSI’s return on equity numbers - the company estimates the improvement could be as much as three percentage points. “That obviously gives it quite a big boost. But we are still looking for operational improvement. We are not satisfied with these results. We want to do a lot better.”

RBSI’s ROE for the first nine months of 2011 was 10% on the back of a £329m operating profit. The company told analysts last month it believes a sensible ROE as a standalone entity will be in the mid-teens.

As part of its separation from the RBS Group, RBSI has hired Neil Manser to head its investor relations function. He starts in the new role today. Manser was previously head of investor relations at Lloyd’s insurer Brit, and before that he was an equity analyst covering the insurance industry, most recently at Merrill Lynch.