Best Announces Rating Actions on White Mountains Subsidiaries

A.M. Best Co. announced several actions affecting the ratings of the Bermuda-based White Mountains Insurance Group, Ltd., affirming the financial strength ratings (FSR) and issuer credit ratings (ICR) of selected subsidiaries, including the FSRs of ‘A’ (Excellent) and the ICRs of “a” of the U.S. operating companies comprising the OneBeacon Insurance Group. Best also affirmed the ICR of “bbb” of White Mountains and assigned an ICR of “bbb” to OneBeacon Insurance Group, Ltd., which is also based in Bermuda.

In addition, Best withdrew the FSR of ‘A’ (Excellent) and the ICRs of “a” of Farmers and Merchants Insurance Company and Midwestern Insurance Company, both of Tulsa, Okla. and assigned a category of NR-3 (Rating Procedure Inapplicable) to both companies. “The ratings were withdrawn following the execution of their respective reinsurance and assumption agreements, wherein all liabilities were transferred to OneBeacon Insurance Company of Philadelphia, PA,” Best explained.

Concurrently, Best affirmed the ICR of “bbb” and the various debt ratings of Fund American Companies, Inc., based in Wilmington, Del. “Fund American’s preferred stock was defeased in November 2006 as part of OneBeacon, Ltd.’s initial public offering,” Best noted. “OneBeacon, Ltd. is the ultimate parent of Fund American and is 72 percent owned by White Mountains.”

The outlook for all ratings is stable.

“White Mountains’ ratings reflect its conservative financial leverage of 22 percent (debt plus preferred stock-to-total tangible capital) and its strong financial flexibility, as well as the steps taken to improve earnings sustainability at its various operating entities,” Best explained. “On a consolidated basis, the group’s operating earnings have improved over a five-year period leading to generally favorable return measures, particularly when considering realized capital gains.”

However Best also indicated that “the inherent risks associated with White Mountains’ aggressive growth strategy at Esurance Insurance Group and the negative impact of storm losses in 2004 and 2005 from White Mountains Re, Ltd.’s reinsurance operations,” should be taken into account as offsetting factors.

Best also noted: “OneBeacon, Ltd.’s consolidated financial leverage of 28 percent is higher than that of White Mountains but still within A.M. Best’s parameters for the current rating level. In addition, the risk-adjusted capitalization (as measured by Best’s Capital Adequacy Ratio) of its principal operating unit, OneBeacon, continues to adequately support the current rating level.

“Furthermore, OneBeacon’s balance sheet is enhanced by virtue of significant reinsurance protection on asbestos and environmental (A&E) and other mass tort liabilities. OneBeacon has historically incurred adverse loss reserve development on prior accident years, which largely reflects its run-off books of business. However, its more recent accident years (2002 and forward) have generally developed favorably, reflective of current management’s shedding of underperforming business written prior to OneBeacon’s 2001 acquisition by White Mountains, as well as the underwriting initiatives put into place since that time.

“Since its acquisition by White Mountains, OneBeacon’s returns have improved, driven by expansion into specialty niches, improved pricing prior to 2007 and reduced storm losses in recent years,” Best concluded.

For a complete list of White Mountains’ FSRs, ICRs and debt ratings,
go to: www.ambest.com/press/111905whitemountains.pdf.
Source: A.M. Best