RSA offloads £834m of legacy liabilities to Enstar

RSA announced on Wednesday that it has signed contracts to dispose of £834m of UK legacy insurance liabilities to Enstar Group.

The FTSE 100 insurance firm said the transaction would initially take the form of a reinsurance agreement, to be effective at 31 December 2016, to be followed by completion of a subsequent legal transfer of the business.

It said the transaction is accretive to RSA's capital position, adding around 17-20 points of Solvency II coverage.

“We are pleased to have achieved this valuable risk clean-up transaction with Enstar,” said group chief executive Stephen Hester.

“It allows us to focus even more on driving the outperformance of RSA's continuing businesses.”

Hester said earnings accretion, risk reduction and capital improvement were a “happy combination” to report.

“As previously indicated, we expect to deploy the capital resources released to benefit earnings and capital quality through additional debt retirement in 2017.”

RSA said its UK legacy insurance business was contained within Royal & Sun Alliance Insurance and the Marine Insurance Company.

It said each disposal was to be implemented as an insurance business transfer pursuant to Part VII of the Financial Services and Markets Act 2000, with an interim reinsurance to transfer the economic risk of the business pending completion of the Part VII Transfer.

The reinsurance will be effected via a 100% quota share policy with a subsidiary of Enstar, and was subject to finalising and effecting certain security arrangements.

RSA said that would cover all claims payments, net of reinsurance, arising in respect of the business on and after 31 December 2016, with the Part VII Transfer expected to be completed within 18-24 months.

The transaction covers £834m of undiscounted liabilities, net of reinsurance, relating to business written in 2005 and prior.

“Around 75% of these liabilities relate to asbestos, with the balance mainly comprising abuse, deafness, marine and aviation liabilities,” RSA’s board confirmed in a statement.

“In 2015 the business accounted for a pre-tax loss of £39m in RSA Group's financial statements.

“Around £35m of net discounted post-2005 legacy liabilities will remain with RSA after the transaction.”

RSA said the reinsurance premium being paid to Enstar was £799m, settled through the transfer of a £682m portfolio of investment grade assets with the balance in cash.

No further consideration would be due in respect of the subsequent Part VII Transfer.

“The transaction will add c.17-20 points to RSA's Solvency II coverage.

“It is expected to result in a net IFRS accounting charge of £145m, with a non-cash charge of £200m recognised in RSA's FY 2016 financial results and a gain of £55m expected in 2017.”

RSA said the Part VII Transfer remained subject to court, regulatory and other approvals.

It added that its results for 2016 will be announced on 23 February.