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R&SA impresses as capital position improves

Refocused UK general insurer Royal & Sun Alliance (R&SA) reported half year figures slightly ahead of forecasts on 12 August, and saw its share price rise 5.5 percent as markets and analysts took a more bullish line on the group's capital position and future prospects.

Although lower investment returns, US reorganisation costs and a reduced contribution from the life businesses caused the operating result to drop from £351mn for the first half of 2003 to £301mn, R&SA reported strong underlying performance in its core UK, Scandinavian and Canadian units, with a healthy 93.6 percent combined ratio for ongoing operations.

With the disposal of a number of business units in the last year, including US surplus lines operation RSUI and Australasian division Promina, net premiums written dropped off significantly from £3.645bn to £2.488bn.

The group also announced that it had rejected overtures for its Scandinavian insurance operation Codan and has no plans to divest the strong performing division.

R&SA chief executive Andy Haste commented: "This is a major step forward and will significantly derisk our balance sheet. Together with the work to optimise our debt structure it will also strengthen our capital position and gives us confidence of complying with the new regulatory regime."

According to the insurer's risk based capital model - designed to comply with the introduction of new FSA funding requirements - R&SA enjoyed a surplus of £530mn at the end of June, down from £700mn at the end of the first quarter. But once post-30 June actions are factored in, with the disposal of UK and Scandinavian life operations and the recently completed £450mn subordinated debt transaction; the surplus rises to a healthy £1.640bn.

Insurance analyst Tim Young of Collins Stewart highlighted the strong operating performance and said that, despite the turning cycle, R&SA would probably experience a relatively shallow dip, due to the commoditised lines in which it operates.

He also noted that the group had seen no further call on the £200mn contingent liability put in place after last October's rights issue to absorb further deterioration in prior year reserves. Although he cautioned that R&SA hasn't changed its view on the £800mn reserve shortfall announced at the halfway point last year, he added: "In our opinion, as a desk-clearing exercise in the post-Mendelsohn era, management will have taken the most conservative position on reserve weakness given available information."

R&SA is understood to be on the lookout for a reinsurance solution to prior-year liabilities in the US.

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