Fitch Revises Sirius' Rating Watch to Negative; Affirms OneBeacon's Ratings; Outlook Negative

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has revised the Rating Watch for Sirius International Group, Ltd. (Sirius) to Negative from Evolving. Fitch has also affirmed the ratings for OneBeacon Insurance Group, Ltd. OB (OneBeacon) and the Insurer Financial Strength (IFS) rating for OneBeacon's operating subsidiaries. In addition, Fitch has affirmed the ratings for White Mountains Insurance Group, Ltd. (White Mountains). A detailed list of ratings follows at the end of this release.

KEY RATING DRIVERS

Today's rating actions follow Fitch's periodic annual review of White Mountain and its subsidiaries. Fitch's rating action on Sirius follows a discussion with Sirius' management and with China Minsheng Investment Co., Ltd. (CMI) about integration plans after CMI's purchase of Sirius. CMI will purchase from White Mountains all of its outstanding shares of Sirius' parent, Sirius International Insurance Group, Ltd., for 1.3x tangible book value, or $2.2 billion based on Sirius' June 30, 2015 tangible book value. CMI was founded in May 2014 by 59 different corporate investors from China. The transaction is expected to close in the first quarter 2016 and is subject to regulatory approvals.

The revision of the Rating Watch to Negative reflects Fitch's view that ownership by CMI, as a relatively new, unrated private investment company, could negatively impact Sirius' ratings. Fitch will continue to assess CMI's credit quality and notes that its profile is changing dramatically as it deploys capital. Currently, Fitch does not foresee an upgrade to Sirius' ratings and therefore has revised the Rating Watch to Negative from Evolving, which indicates the ratings could either be affirmed or downgraded upon transaction close.

Fitch notes that this transaction offers Sirius a better opportunity to grow and expand business in Asia, a market that management has previously targeted for expansion.

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.

OneBeacon announced $90 million in adverse reserve development for full year 2014. As a result, Fitch revised OneBeacon's Outlook to Negative. Fitch notes that year-to-date the company has reported $2 million in favourable development but notes that a Rating Outlook encompasses a 12 - 18 month time period.

OneBeacon's current ratings reflect an expectation that future reserve development will be neutral to modestly favorable over the next 6 to 12 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's IFS ratings by one notch.

For first half 2015 OneBeacon reported a GAAP calendar year combined ratio of 95%, slightly worse than prior period of 94% but better than full year 2014 of 102%. 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.

The affirmation of White Mountain's ratings reflects an improved proforma financial leverage position and additional capital from the monetization of the Sirius investment. The $2.2 billion announced purchase price will result in a gain of approximately $65 per share. Consistent with White Mountains' historical investment and operating strategy, Fitch expects the company will eventually deploy this capital in new investment opportunities or return it to shareholders.

White Mountains' financial leverage ratio continues to be modest at 15% at June 30, 2015, modestly up from year-end 2014. 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 2.3x from 2010 - 2014 as operating earnings at OneBeacon and Sirius 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. Fixed charge coverage was 2.8x as of June 30, 2015.

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 as of June 30, 2015. Total GAAP shareholders' equity declined 2% for year-end 2014 to $4.5 billion as net income did not offset unrealized investment losses and dividends and share repurchases.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade of OneBeacon and White Mountains rating include:

--Further adverse loss reserve development of 5% or greater of prior year equity;

--A calendar year combined ratio of 100% or higher;

--Financial leverage of 30% or higher;

--Run-rate operating fixed charge coverage ratio of less than 5.0x.

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%.

Key rating triggers that could lead to a downgrade or change to a Negative Outlook to Sirius' ratings are:

--Further perspective by Fitch that CMI's credit quality is sufficiently lower than Sirius current ratings following additional analysis of CMI.

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

--Sizable deterioration in reinsurance subsidiary capitalization that causes net written premiums to reinsurance GAAP equity to exceed 1.0x;

--Financial leverage maintained above 30%.

Key rating triggers that could lead to an affirmation of Sirius' ratings include:

--Further analysis by Fitch that demonstrates CMI's credit quality is supportive of Sirius' current ratings and that CMI would offer reasonable support to Sirius.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

OneBeacon U.S. Holdings, Inc.

--IDR at 'BBB+';

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

OneBeacon insurance subsidiaries:

Atlantic Specialty Insurance Company

Homeland Insurance Company of New York

Homeland Insurance Company of Delaware

OBI National Insurance Company

--IFS at 'A'.

The Rating Outlook is Negative.

Fitch has revised the Rating Watch for the following to Negative from Evolving:

Sirius International Group, Ltd.

--IDR 'BBB+';

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

--$250 million perpetual non-cumulative preference shares

'BBB-'.

Sirius International Insurance Corporation

Sirius America Insurance Company

--IFS 'A'.

The Rating Outlook is Negative.

Fitch has affirmed the following ratings:

White Mountains Insurance Group, Ltd.

--IDR at 'BBB+'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

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