Tough times for insurers

When Royal & Sun Alliance publishes its results next week, investors will be particularly vigilant because recent plunges in the stock exchange, storm damage and asbestos claims have wreaked havoc on insurance companies’ finances.

Worries that Royal & Sun Alliance will cut its dividends or resort to a rights issue to bolster its balance sheet led to a dramatic fall in the company’s stocks last week, resulting in the lowest share price in 20 years.

But the company’s shares were already weak because investors were twitchy over negative results released by competitors last week. On 25 February, Prudential’s shares dropped nearly 18% and rivals Friends Provident and Legal & General closed 9% to 11% lower, while Standard Life announced it was planning to ask the FSA for a solvency waiver.

Like other insurers, Royal & Sun Alliance has had a nightmarish year, with resignations from top management, job and bonus cuts, as well as masses of unplanned claims.

The 2002 financial year ended with the ousting of chief executive Bob Mendelsohn. As the company said: ‘It is the board’s view that the interests of the group will be best served by a change in the top management.’ He was replaced by Andy Haste, previously of AXA Sun Life, who has just four years’ experience in life assurance.

Royal & Sun Alliance made other job cuts too during the year. It axed 2,100 jobs in August and November, with the announcements coming after drops in operating profits in its half-year and nine-month results.

In September, the company estimated the early autumn storms that ravaged Europe could cost it £100m. The Turner and Newall claims, which drove Federal Mogul into bankruptcy, are also threatening the bottom line. And in February it asserted it would not pay compensation to Clyde shipyard workers for asbestos claims.

The latest thorn in the insurer’s side has been yet another downgrade of its US subsidiaries by a ratings company. Just last week, Fitch Ratings in New York said it was increasingly concerned Royal & Sun Alliance would not be able to raise enough capital to support its prior ratings and that earnings would not improve as expected.

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