Fitch Revises OneBeacon's Outlook to Negative; Affirms White Mountains and Sirius

CHICAGO--()--Fitch Ratings has affirmed all ratings of OneBeacon Insurance Group, Ltd.'s (NYSE: OB) (OneBeacon) holding company and operating subsidiaries. Fitch has also revised the Rating Outlook to Negative from Stable for the company's 'BBB+' Issuer Default Rating (IDR) and 'A' Insurer Financial Strength (IFS) ratings.

Concurrently, Fitch has affirmed with a Stable Outlook the IDRs, debt, and IFS ratings for White Mountains Insurance Group, Ltd. (NYSE: WTM) (White Mountains), OneBeacon's parent with 75% ownership, and Sirius International Insurance Group, Ltd.'s subsidiaries (Sirius Group; 100% ownership by White Mountains). A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch's Outlook revision to Negative from Stable for OneBeacon is driven by the $90 million in adverse reserve development the company reported for full year 2014, which represents 8.5% of prior year equity (5.3% after-tax). The majority of the reserve strengthening arose from the Professional Insurance segment in particular lawyer's legal liability. Fitch notes this level of strengthening was inconsistent with prior rating expectations of flat to favorable reserve development.

Fitch's current ratings of OneBeacon reflect an expectation that future reserve development will be neutral to modestly favorable over the next 12 to 18 months. Adverse reserve development in 2015 that is 5% or greater of 2014 year end equity would likely lead to a downgrade of all OneBeacon IFS ratings by one notch.

For full year 2014 OneBeacon reported a GAAP calendar year combined ratio of 101.7% materially worse than 92.4% in prior period. Despite the unfavorable underwriting the company reported a small profit due to realized and unrealized gains. Favorably, Fitch also notes that in late December OneBeacon successfully sold its legacy run-off business, which included asbestos and environmental reserves, to Armour Group Holdings Limited.

Fitch's rating rationale for the affirmation of White Mountains' and Sirius Group's ratings reflects the company's low financial and operating leverage, opportunistic business approach, platform of property/casualty specialty insurance and global reinsurance, and favorable financial flexibility. The ratings also reflect Fitch's current negative sector outlook on global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with declining premium pricing and weakening of terms and conditions across a wide range of lines.

White Mountains posted net income of $313 million for full year 2014, a modest decline over prior period of $322 million. The company's return on common equity was 7.9% for full year 2014, compared to 8.4% for full-year 2013.

White Mountains' financial leverage ratio continues to be modest at 14.2% at Dec. 31, 2014, modestly up from 13.2% at Dec. 31, 2013. GAAP operating earnings-based interest expense and preferred dividend coverage (excluding net gains and losses on investments) has been weak in recent years, averaging a low 2.1x from 2010-2014 as operating earnings at OneBeacon and Sirius Group have been offset by losses at start-up municipal bond insurer Build America Mutual (which are allocated to non-controlling interest) and in other operations, including White Mountains Life Re runoff business. Earnings coverage was 1.7x for full year 2014 and 4.3x in 2013.

Fitch believes that White Mountains utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with net premiums written to (re)insurance segment equity of approximately 0.6x for 2014. Total GAAP shareholders' equity increased 3% for the 12 months ended Dec. 31, 2014 to $4.5 billion, from favorable net income with increased realized and unrealized investment gains, partially offset by foreign currency losses, dividends and share repurchases.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade of OneBeacon ratings include further adverse loss reserve development of 5% or greater of prior year equity, a calendar year combined ratio of 100% or higher, or financial leverage of 30% or higher.

Key rating triggers that could lead to a return to Stable Outlook at OneBeacon include neutral to favorable adverse loss reserve development, a calendar year combined ratio below 100%, or maintaining current financial leverage.

Key rating triggers that could lead to a downgrade of White Mountains or Sirius Group's ratings are adverse reserve development greater than 5% of prior year equity, future earnings that are significantly below industry levels, sizable deterioration in insurance subsidiary capitalization that causes total company net written premiums to (re)insurance segment GAAP equity to exceed 1.0x, financial leverage maintained above 30%, or run-rate operating fixed charge coverage ratio of less than 5.0x.

Key rating triggers that could lead to an upgrade of White Mountains or Sirius Group's ratings are improvement in operating results in line with higher-rated peers, overall flat to favorable loss reserve development, financial leverage ratio maintained below 20%, run rate operating fixed charge coverage of at least 8x, continued strong capitalization of the insurance subsidiaries, and increased stability in longer term strategic operations and results.

Fitch has affirmed the following ratings and revised the Outlook to Negative from Stable:

OneBeacon U.S. Holdings, Inc.

--IDR at 'BBB+';

--$275 million 4.6% due Nov. 9, 2022 at 'BBB'.

OneBeacon U.S. insurance subsidiaries:

Atlantic Specialty Insurance Company

Homeland Insurance Company of New York

Homeland Insurance Company of Delaware

OBI National Insurance Company

--IFS at 'A'.

Fitch affirms the following ratings with a Stable Outlook:

White Mountains Insurance Group, Ltd.

--IDR at 'BBB+'.

Sirius International Group, Ltd.

--IDR at 'BBB+';

--$400 million 6.375% due March 20, 2017 at 'BBB';

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

Sirius International Insurance Corporation

Sirius America Insurance Company

--IFS at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979480

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Contacts

Fitch Ratings
Primary Analyst
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
or
Committee Chairperson
R. Andrew Davidson, CFA, +1-312-368-3144
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Senior Director
or
Committee Chairperson
R. Andrew Davidson, CFA, +1-312-368-3144
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com