RSA facing $393m bill to settle US lawsuits over student loans

Royal & SunAlliance, the insurer trying to raise £1bn in a rights issue to bolster its reserves, is facing a potential $393m (£245m) bill to settle law suits in the US involving truck drivers, it emerged yesterday.

Royal & SunAlliance, the insurer trying to raise £1bn in a rights issue to bolster its reserves, is facing a potential $393m (£245m) bill to settle law suits in the US involving truck drivers, it emerged yesterday.

The insurer has outlined the size of the risk from insurance it provided in the US to cover loans to students learning to become truck drivers in the prospectus for its rights issue, currently being circulated to shareholders. The prospectus also reveals that Andy Haste, the new chief executive of RSA, is to be paid £600,000 a year as a basic salary. And he has received a bumper crop of share options worth £3m.

A dispute has arisen between RSA and the banks that provided the student loans in the US, after RSA tried to rescind its policies on the grounds of "systematic fraud, mis-representation and cover-up" by various parties, particularly over the default rates on the loans. The banks are, however, in a separate court, demanding a payout on their policies and the case is yet to be resolved.

RSA's prospectus revealed that were it to lose and be forced to pay out, it would have to award $281m to the US banks Wells Fargo and MBIA, $99m to PNC Bank and $13.3m to the Wilmington Trust. "This is an additional problem for RSA, on top of its existing reserving hole," one insurance analyst said yesterday. "It seems possible that the case could go against them, and where would they find the money to pay up? They would have to do another rights issue".

RSA says in its prospectus that the directors "do not believe that pending litigation will have a material adverse affect on its financial position". But it does admit that if the case was lost and appeals failed, the cost is "likely to have a material adverse effect on the financial condition" on its US interests. The news of additional liabilities lurking in RSA's business will not help its management, which is trying to win over shareholders to support its rights issue.