S&P: Outlook on White Mountains Primary is Negative; Reinsurers Stable

December 18, 2008

Standard & Poor’s Ratings Services has revised its outlook on White Mountains Insurance Group Ltd. (WTM), OneBeacon Insurance Group Ltd. (OB), and the members of OneBeacon Insurance Group (OneBeacon) to negative from stable.

S&P also affirmed its ‘BBB’ counterparty credit ratings on WTM and OB and its ‘A’ counterparty credit and financial strength ratings on OneBeacon. WTM irrevocably and unconditionally guarantees the senior debt of OB’s subsidiary, OneBeacon U.S. Holdings Inc.

In a related action S&P affirmed its ‘BBB-‘ counterparty credit rating on White Mountains Re Group Ltd. (WMRe) and its ‘A-‘ counterparty credit and financial strength ratings on White Mountains Re America (formerly Folksamerica Reinsurance Co.), Sirius International Insurance Corp. (Sirius), and White Mountains Re Bermuda Ltd. The outlook on these companies remains stable. S&P said it “views these reinsurance subsidiaries as core to WMRe, and the ratings on all of them move in tandem with one another.”

Credit analyst Siddhartha Ghosh explained: “The negative outlook on OneBeacon reflects our expectation that its earnings prospects have diminished from their historical levels.” In addition, its statutory capital could decline by a significant amount from its Sept. 30, 2008, level of $1.47 billion.” (This is a 24 percent decline from $1.9 billion at year-end 2007).

“We affirmed the ratings because of OneBeacon’s strong competitive position (especially in its niche specialty business), continued underwriting profitability, and very strong capital adequacy. Mitigating these favorable factors are significantly increased volatility in the investment portfolio, a relatively high expense ratio, and a geographic concentration in the Northeast U.S.”

S&P said the “ratings on WMRe reflect the group’s strong competitive position in the global reinsurance market, very strong capital adequacy at each operating subsidiary, conservative financial leverage, and some progress in strategic risk-management initiatives.

“Partially offsetting these factors are our concern about the group’s decline in prospective earnings and the potential for further adverse reserve developments at WMRe America as well as risks associated with some prior acquisitions.”

S&P also indicated that it “expects that OneBeacon’s capital adequacy will remain strong throughout next year. In addition, we expect OneBeacon to continue to demonstrate strong underwriting results in all business segments (specialty, personal, and commercial) and return to strong profitability, with a GAAP ROR of 8 percent-10 percent over the next 12 months. If the company meets or exceeds these expectations, we could revise the outlook back to stable. However, failure to meet these expectations will put downward pressure on the ratings.”

The stable outlook on WMRe reflects S&P’s “expectation that the group will continue to exercise strong cycle management, its GAAP combined ratio should be less than 100 percent assuming normal catastrophe losses, its capital adequacy will remain very strong at each of its operating subsidiaries, and there will be no further material adverse reserve developments at WMRe America during the next couple of years,” said the announcement.

S&P added that it is “unlikely that there will be any favorable rating actions on the WMRe Group in the near future without clear evidence of stability in WMRe America’s reserve adequacy. Negative rating actions could result if further material adverse reserve developments occur or if any of the key strengths of the group–such as capital adequacy and parental commitment–diminish materially.”

Source: Standard & Poor’s – www.standardandpoors.com

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