Fitch Affirms Sirius' Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Sirius International Group, Ltd.'s (Sirius) Long-Term Issuer Default Rating (IDR) at 'BBB' and senior debt rating at 'BBB-'. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of Sirius' operating subsidiaries at 'A-' and published Sirius Bermuda Insurance Company Ltd.'s IFS of 'A-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch's rating rationale for the affirmation of Sirius' ratings reflects the company's established reinsurance franchise, solid earnings, low financial leverage and very strong capitalization. These positive factors are partially offset by CMIG's ownership, Sirius' more moderate business profile, low fixed charge coverage and Fitch's negative sector outlook on global reinsurance.

Fitch considers Sirius to have a moderate business profile with net premiums written of $847.6 million in 2015 and GAAP shareholders' equity of $2.2 billion at Sept. 30, 2016. Although Sirius is relatively small compared to most reinsurers, Fitch views the company as having a strong and established reinsurance franchise (formed in 1945), with a diversified platform of non-life (re)insurance business.

Profitability is very strong, characterized by low and stable combined and operating ratios and high net returns on average common equity, with the most recent five-year averages (2011 - 2015) at 86.7%, 80.6% and 14.2%, respectfully. Sirius posted a GAAP combined ratio of 96.2% for the first nine months of 2016, which included 11.8 points for catastrophe losses, mainly due to the Fort McMurray, Alberta Canada wildfires and the Ecuador earthquake. This compares to 85.1% in 2015, which included a lower 2.5 points of catastrophe losses. Sirius does not expect fourth quarter 2016 losses from Hurricane Matthew to be material to its overall financial condition.

Fitch views Sirius' ownership by China Minsheng Investment Corp., Ltd. (CMIG), a private investment company founded in May 2014, since April 2016 as less strategic than that of its previous owner White Mountains Insurance Group, Ltd. (Long-Term IDR rated 'BBB+'), with a lower level of credit quality and by a company with a limited track record. This creates added uncertainties with respect to Sirius' business and operating profile until there is a period of seasoning under CMIG ownership. Sirius' ratings reflect a one notch adjustment lower due to ownership concerns. Fitch expects that CMIG will maintain a conservative dividend policy with respect to Sirius, preferring to allow capital to grow to support opportunistically expanding the (re)insurance platform.

Sirius' financial leverage ratio continues to be modest at 13.6% at Sept. 30, 2016, down slightly from 14.1% at Dec. 31, 2015 due to a 2% increase in total shareholders' equity. In October 2016, Sirius issued $400 million of 4.6% senior notes due Nov. 1, 2026. The company expects to use the net proceeds from the offering to refinance by year-end 2016 its $389.7 million of senior notes due March 20, 2017. As such, Sirius' financial leverage ratio should remain unchanged following the refinancing. GAAP fixed charge coverage (excluding net realized and unrealized investment gains and losses) has been weak in recent years, averaging a low 3.9x from 2011 - 2015, although statutory fixed charge coverage was an extremely strong 14x for 2016.

Sirius' ratings also reflect Fitch's negative sector outlook on global reinsurance as the sector's fundamentals have deteriorated with declining premium pricing and weakening of terms and conditions, thus limiting organic growth potential. The continued soft market, combined with low investment yields, are promoting adverse profit fundamentals as record capitalization levels drive a heightened competitive reinsurance market environment.

RATING SENSITIVITIES

The key rating triggers that could lead to an upgrade include seasoning of ownership by CMIG without any adverse consequences or perceived weakening in CMIG's credit profile; and improvement in business profile while continuing to produce favorable operating results in the challenging reinsurance environment.

The key rating triggers that could lead to a downgrade include:

--Deterioration in reinsurance sector fundamentals or consolidation in the reinsurance landscape that Fitch views as weakening Sirius' competitive position;

--Business profile or overall profitability;

--Sustained combined ratios above 104% or operating ratios above 96%;

--Sizable deterioration in capitalization;

--Significant changes to the operating profile or investment portfolio that increases risk or reduces liquidity; or

--A financial leverage ratio maintained above 32%.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings with a Stable Outlook:

Sirius International Group, Ltd.

--Long-Term IDR at 'BBB';

--$400 million 4.6% senior notes due Nov. 1, 2026 at 'BBB-';

--$390 million 6.375% senior notes due March 20, 2017 at

'BBB-';

--$250 million non-cumulative perpetual preference shares at 'BB+'.

Sirius International Insurance Corporation

Sirius America Insurance Company

--Insurer Financial Strength at 'A-'.

Fitch publishes the following rating with a Stable Outlook:

Sirius Bermuda Insurance Company Ltd.

--Insurer Financial Strength 'A-'.

Summary of Financial Statement Adjustments:

Fitch has adjusted Sirius' total capital and financial leverage ratio to include Sirius International Insurance Corporation's (Sirius International) safety reserve balance without any provision for deferred taxes. Sirius International allocates the majority of its pre-tax income, after group contributions (tax-sharing payments), to an untaxed safety reserve account, as permitted under Swedish law. Under GAAP, an amount equal to the safety reserve, net of a related deferred tax liability is classified as shareholders' equity. This deferred tax liability is only required to be paid by Sirius International if it fails to maintain prescribed levels of premium writings and loss reserves in future years. As a result of the indefinite deferral of these taxes, Fitch includes the safety reserve, without any provision for deferred taxes, when calculating available capital for the Prism factor-based capital model and for financial leverage. The noted adjustment did not result in a different rating than had the adjustment not been made, but it is material in how Fitch views capital and financial leverage.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016054

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016054

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst:
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
or
Committee Chairperson:
Donald F. Thorpe, CFA, CPA, +1-312-606-2353
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
or
Committee Chairperson:
Donald F. Thorpe, CFA, CPA, +1-312-606-2353
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com