S&P negative on RSA A+ rating over low interest rates

Rating agency Standard & Poor’s has put the A+ financial strength rating of RSA on negative outlook because of concerns about low interest rates.

S&P assigned the negative outlook because low interest rates have prompted the rating agency to revise its earnings expectations for RSA downwards.

It added that RSA’s capitallisation was the main rating weakness - it has fallen to the BBB range from the A range. But the agency said that the ratings continued to reflect RSA’s strong competitive position and enterprise risk management.

The agency’s stance on RSA is a sharp contrast from earlier in the year. On 27 February it upgraded the insurance group to A+ from A based on its strong capitalisation.

S&P said of the negative outlook: “We currently view capital adequacy as good, but declining. A decrease in government bond yields and an increased level of intangible assets are causing the decline in capital adequacy. Our revised earnings forecasts for the group mean that RSA’s ability to rebuild its capital base into the ‘A’ range in 2012-2014 will be impaired.”

On the plus side, S&P noted that RSA is well diversified geographically, by line of business and distribution channel, which had allowed the insurer to be resilient in the face of the economic downturn.

The rating agency pointed to the company’s steady underwriting performance, illustrated by its 2011 combined ratio of 94.9% despite that year’s heavy catastrophe activity.

S&P also expects RSA’s investment portformance to remain “relatively stable” but lower than previous performance, reflecting the insurer’s conservative investment strategy.

But the agency said: “The negative outlook reflects our concern that low interest rates make it hard for RSA to improve its capital adequacy to a level in line with its rating level, despite disciplined growth and underlying underwriting performance in 2012-2014 that is expected to be strong and stable, but lower than previously forecast.

“We could lower the ratings if the capital adequacy measured by our capital model does not materially improve. We could revise the outlook to stable if we observe that management is taking remedial actions to improve its capital adequacy to strong levels.”