DBRS Morningstar Changes Trend on RSA Insurance Group Limited and Its Operating Entities to Positive from Stable; Confirms Financial Strength Ratings at AA (low)

DBRS Limited (DBRS Morningstar) changed the trend on RSA Insurance Group Limited (RSA or the Issuer) and RSA’s operating entities to Positive from Stable and confirmed the Issuer Rating of “A” for RSA and the Financial Strength Rating (FSR) of AA (low) for all RSA’s operating subsidiaries. DBRS Morningstar has also discontinued the ratings on RSA’s Perpetual Restricted Tier 1 Contingent Convertible Notes because they have been repaid. RSA was acquired by Canada’s Intact Financial Corporation (Intact) in June 2021.

KEY RATING CONSIDERATIONS
As wholly owned, strategically important subsidiaries of Intact, the ratings of RSA and its subsidiaries (jointly RSA entities) are primarily driven by the ratings of the parent organization. In the UK, RSA is among the top five providers of general insurance and enjoys strong brand recognition. Its international operations are now focused on Ireland and continental Europe, following the sale of its Middle East and Danish entities earlier in the year. RSA is the intermediate holding company for the RSA 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.

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 organization 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. Through the acquisition of RSA’s operations, Intact has broadened and diversified its franchise. By making technological investments, it expects to improve the profitability of RSA entities thereby extending its proven operating model and pricing discipline across the new commercial and personal insurance portfolios. The acquisition has enhanced Intact’s distribution capacity and strengthened its position in the specialty commercial insurance providing it with the potential to significantly expand its specialty commercial business line into the U.S and European markets. The acquisition has also led to substantial changes in RSA’s structure. RSA has become the interim holding company for the subsidiaries operating in the UK and Ireland 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, the Danish business was transferred to a 50/50 joint venture controlled by Intact and Tryg and this was subsequently sold to a third party in May 2022. The Middle East operations were sold in July 2022.

RSA in its new form provides general insurance to personal and commercial customers in the UK and Ireland. It benefits from a very well-established brand and is ranked among the five largest property and casualty (P&C) insurers in the market. RSA has a multi-channel distribution strategy, which includes the direct channel, agents, and affinity partners.

As part of the RSA integration, Intact’s group risk management function oversees risk management within RSA. The integration of the investment and liquidity management has been fully completed. RSA's investment portfolio has been downsized and repositioned to better align with Intact’s risk appetite and investment philosophy. This repositioning is subject to further smaller adjustments yet to be completed, subject to market conditions. The resulting portfolio is somewhat more exposed to non-liquid assets, including private debt, as a percentage of total invested assets.

RSA's underwriting performance over the last five years has been volatile, with the combined ratio varying in the 97% to 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. As a result, RSA’s combined ratio improved to 92% in 2020 and 94% in 2021. Intact aspires to further improve RSA’s underwriting profitability by making technology investments and applying its pricing discipline and focus on data analytics.

RSA has maintained good liquidity and solid capitalization, commensurate with its generally low risk profile. As of H1 2022, RSA’s Solvency II ratio was 180%, well above the regulatory minimum of 100%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
Environmental Factors
Environmental concerns regarding Climate & Weather Risks are relevant to the rating of Intact as a P&C insurer but did not affect the assigned rating or trend. As part of its P&C product offering, Intact is exposed to weather-related losses from natural catastrophic events, such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased reinsurance cost. DBRS Morningstar considers this ESG factor as part of product risk when assessing the Company’s risk profile.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022).

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (August 31, 2022; https://www.dbrsmorningstar.com/research/402220/). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/) in its consideration of ESG factors, and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683/) was used to rate debt guaranteed by entities within the group.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Insurance Companies and Insurance Organizations” (August 31, 2022) was used to evaluate the Issuer, the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (May 17, 2022) was used to assess ESG factors, and the “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (April 4, 2022) was used to rate debt guaranteed by entities within the group.

This is the first rating action since the Initial Rating Date.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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.

Lead Analyst: Nadja Dreff, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: October 25, 2021

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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