CHICAGO--(BUSINESS WIRE)--Fitch Ratings has maintained the 'A' Insurer Financial Strength (IFS) ratings of the runoff operating subsidiaries of OneBeacon Insurance Group, Ltd. (OneBeacon; 75.2% ownership by White Mountains) on Rating Watch Negative pending the close of the previously announced sale of OneBeacon's runoff business and several entities to Armour Group Holdings Limited (Armour).
Fitch has also affirmed with a Stable Rating Outlook the Issuer Default Ratings (IDRs), debt and IFS ratings for White Mountains Insurance Group, Ltd. (White Mountains) and its holding company subsidiaries and property/casualty insurance and reinsurance subsidiaries, including OneBeacon's ongoing subsidiaries and Sirius International Insurance Group, Ltd.'s subsidiaries (Sirius Group; 100% ownership by White Mountains). A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS
Fitch's Rating Negative Watch reflects the planned reduction in capital levels of the targeted runoff companies at the time of closing to just above regulatory minimums, at an NAIC risk-based capital (RBC) ratio (company action level) of 100%. Assuming the acquisition is completed as currently envisioned, Fitch would expect to downgrade the IFS ratings of the runoff entities to no higher than 'BB+' upon the sale to Armour, based on such weakened capital levels. Fitch does not rate Armour. The close is currently targeted for the second half of 2013, and is subject to regulatory approvals.
Fitch expects that OneBeacon will retain a willingness and ability to provide reasonable support to the runoff entities up until the close of the sale. As such, Fitch will continue to review the progress of the transaction during the closing period and could downgrade the ratings, even before close, if it is determined that the capitalization and management of the runoff entities are no longer consistent with the expectations for the existing ratings. However, assuming no material changes to the credit of the entities being sold, Fitch may not take any additional rating action prior to the closing.
As of year-end 2012, OneBeacon Insurance Company, the lead insurance company being sold to Armour, had an NAIC RBC ratio (company action level) of 211%. This is down from 330% at year-end 2011, reflecting various internal restructuring activities anticipated in advance of the sale. Fitch expects the runoff entities to maintain an NAIC RBC ratio (company action level) of at least 200% prior to the planned capital reduction at the time of closing.
Fitch's rating rationale for the affirmation of White Mountains' ratings reflects the company's low financial and operating leverage, opportunistic business approach and favorable financial flexibility. The ratings also reflect anticipated challenges in the overall competitive, but generally improving property/casualty market rate environment.
White Mountains posted net income attributed to common shareholders of $207 million in 2012, down from the sizable net income attributed to common shareholders of $768 million for full year 2011, which included a $678 million gain on the sale of Esurance and Answer Financial to The Allstate Corporation. OneBeacon and Sirius Group posted favorable GAAP combined ratios in 2012 of 98% and 90%, respectively.
White Mountains' financial leverage ratio continues to be modest at 15.2% at Dec. 31, 2012, up from 12.7% at Dec. 31, 2011, as the company had $75 million outstanding under its bank facility at year-end 2012 that was repaid in January 2013. Total GAAP shareholders' equity declined almost 9% in 2012 to $4.3 billion at Dec. 31, 2012, as net income was more than offset by increased common share repurchases of $669 million in 2012. GAAP operating earnings-based interest expense and preferred dividend coverage (excluding net gains and losses on investments) improved to 3.4 times (x) in 2012 from negative coverage in 2011.
White Mountains' sale transactions over the last several years have freed up capital that previously supported the business writings and reserves. This provides financial flexibility that the company can use to support additional business writings, investment and acquisition opportunities or capital management alternatives. However, Fitch expects that White Mountains will continue to maintain a level of insurance company capitalization that is consistent with the current ratings.
RATING SENSITIVITIES
Key rating triggers that could lead to an upgrade include improvement in operating results in line with higher rated peers, overall flat to favorable loss reserve development, debt-to-total capital maintained below 20%, run rate operating earnings-based interest and preferred dividend coverage of at least 8x, continued strong capitalization of the insurance subsidiaries and increased stability in longer term strategic operations and results.
Key rating triggers that could lead to a downgrade include significant adverse loss reserve development, future earnings that are significantly below industry levels, sizable deterioration in insurance subsidiary capitalization, debt-to-total capital maintained above 30%, run rate operating earnings-based interest and preferred dividend coverage of less than 5x and additional A&E losses for OneBeacon significantly above the remaining $198 million available limit under the $2.5 billion National Indemnity Company cover.
Fitch has maintained its Rating Watch Negative on the following ratings:
OneBeacon Insurance Company
Camden Fire Insurance Association (The)
Employers' Fire Insurance Company (The)
Northern Assurance Company of America (The)
OneBeacon America Insurance Company
OneBeacon Midwest Insurance Company
Traders & General Insurance Company
--IFS 'A'.
Fitch affirms the following ratings with a Stable Outlook:
White Mountains Insurance Group, Ltd.
--IDR at 'BBB+'.
OneBeacon U.S. Holdings, Inc.
--IDR at 'BBB+';
--$275 million 4.6% due Nov. 9, 2022 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+'.
OneBeacon ongoing insurance subsidiaries:
Atlantic Specialty Insurance Company
Homeland Insurance Company of New York
Homeland Insurance Company of Delaware
OBI National Insurance Company
--IFS at 'A'.
Sirius International Insurance Corporation
Sirius America Insurance Company
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Insurance Rating Methodology (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
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