NEW YORK--(BUSINESS WIRE)--July 16, 2003--Standard & Poor's
Ratings Services today commented on the members of the Royal
SunAlliance USA group (RSA USA): Royal Insurance Co. of America, Royal
Indemnity Co., Connecticut Indemnity Co., Security Insurance Co. of
Hartford, American & Foreign Insurance Co., Guaranty National
Insurance Co., Fire & Casualty Insurance Co. of Connecticut, Viking
Insurance Co. of WI, Safeguard Insurance Co., Globe Indemnity Co.,
Viking County Mutual Insurance Co., Peak Property & Casualty Insurance
Corp., and Guaranty National Insurance Co. Connecticut.
On July 8, 2003, Standard & Poor's revised its outlook on RSA USA
to negative from developing. At the same time, Standard & Poor's
affirmed its 'BBB+' counterparty and financial strength ratings on
these companies.
On July 8, 2003, Standard & Poor's also withdrew its 'BBB+'
counterparty and financial strength ratings on RSA USA subsidiary
Landmark American Insurance Co. at RSA USA's request. This nonadmitted
shell company is expected to be sold by October 2003 to Allegheny
Insurance Holdings LLC in conjunction with the group's recent disposal
of ex-managing general agent, Royal Specialty Underwriting Inc.
Regulatory approval of the sale is pending.
"The outlook revision reflected Standard & Poor's concerns that
Royal & Sun Alliance Insurance Group PLC (R&SA), the ultimate parent,
might not achieve the necessary recovery in operating performance or
fully deliver on the group's restructuring and capital-release
program," explained Standard & Poor's credit analyst Frederick
Loeloff. "These concerns relate primarily to RSA USA's operations."
Standard & Poor's is concerned about RSA USA's continuous weak
operating performance, near-term deficiencies in its capital position,
concerns over loss reserve adequacy, and execution risk associated
with implementing its business strategy over the next two years.
Offsetting these issues are the group's good market position within
the U.S. insurance sector, Royal & Sun Alliance Insurance PLC's
(RSA&IP; RS&A's main operating company) support of and historical
capital contributions to RSA USA, and the expectations of improved
capital adequacy and managerial interaction with its U.S. affiliate.

Major Rating Factors

-- Strategic importance to parent. RSA USA is considered
strategically important to RSA&IP's business model and global
spread of business. Although stand-alone operations have
weakened considerably over the last two years, RSA USA
benefits from ratings enhancement as a strategically important
member of a higher rated group. As of Dec. 31, 2002, RSA USA
contributed about 22% of its parent's net premium volume and
continues to be a modest earnings contributor.

-- Restructured operations. RSA USA's continuing efforts to
restructure and consolidate its business model should free
trapped operating capital while reducing market risk,
aggregate exposures, and writings of noncore business lines.
Combined with improving pricing discipline and expenditure
management, expectations are that underwriting profits and
earnings stability will emerge in two to three years.

-- Uncertain loss-reserve adequacy. Since 1998, RSA USA's net
loss and loss adjustment expense reserves have increased 40%
because of increased writings, reserves strengthening for
asbestos liabilities, and discontinued business lines.
Historically, reserves have been deficient and prone to
reserve creep. Although management has taken proactive steps
to improve the U.S. group's overall reserve position during
the past two years, Standard & Poor's remains concerned that
RSA USA's loss reserves might be deficient and could take
additional strengthening in 2003 or 2004.

-- Weak capitalization. RSA USA's capital adequacy ratio--as
measured by Standard & Poor's model--was 70% at year-end 2002
and remains well below what is typically required for the
rating. Continuous adverse loss-reserve development,
historical susceptibility to market risk, and asbestos reserve
strengthening have caused unassigned surplus to be negative
74.4% of policyholders' surplus for 2002. They also caused RSA
USA's total surplus to decline $1.58 billion since 1998. To
benefit from the ratings enhancement as a strategically
important member of a higher-rated group, Standard & Poor's
expects the level of capitalization to improve substantially
over the next 18 months.

-- Material leverage. RSA USA's capital structure remains highly
leveraged and susceptible to both credit and underwriting
risks, as the group's net loss and loss adjustment expense
reserves are 3.6x surplus, reinsurance utilization is 41.9%,
and net writings are 2.3x the group's surplus base for 2002.
In addition, risk-portfolio concentration exists with workers'
compensation (25.0%), and two other business lines (private
passenger auto and other liability) combined constitute 52.2%
of RSA USA's net premium writings for 2002.

-- Weak operating cash flow. For 2002, RSA USA's underwriting and
operating cash flow ratios were 79.4% and 91.2%, respectively,
which are below the group's 80.2% and 93.3% five-year
averages. Increased loss costs and high expenses, offset by
flat premium collections and investment income, have strained
the group's operating cash flow and diminished its invested
asset base over the last four years.

-- Parent's restricted financial flexibility. The current capital
market environment restricts R&SA's ability to secure external
capital on favorable terms relative to its needs for capital
to fund ongoing requirements. The group has also fully
utilized its hybrid debt-issuance capacity according to
Standard & Poor's criteria.

Outlook

Standard & Poor's believes that both RSA USA and its parent have
refocused their efforts to improve RSA USA's operating performance,
capitalization, and business-model execution. Nevertheless, continued
adverse development, large loss events, and loss-cost inflation have
all stalled the U.S. group's ability to improve and stabilize its
operating performance and remain as near-term concerns for the ratings
on RSA&IP. For 2003, Standard & Poor's believes RSA USA will post
modest underwriting and earnings improvement, with a combined ratio of
about 108% and an ROR of about 8.0%.

Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor's Web-based credit analysis system, at
www.ratingsdirect.com. All ratings affected by this rating action can
be found on Standard & Poor's Web site at www.standardandpoors.com;
under Credit Ratings in the left navigation bar, select Credit Ratings
Actions.