OneBeacon Insurance Group has been dealt a ratings outlook warning from Fitch Ratings and an outright downgrade from Moody’s Investors Service, stemming from substantial adverse reserve development in the 20914 fourth quarter and fiscal year.
Moody’s downgraded OneBeacon’s U.S. Holdings senior unsecured debt rating to Baa3 from Baa2. It also knocked the insurance financial strength rating for OneBeacon’s U.S. Group’ to A3 from A2. However, its ratings outlook remains stable.
The reason? Moody’s cited OneBeacon’s announcement of $109 million in pre-tax adverse reserve development ($71 million after-tax) in Q4, due to its professional liability and management liability operations. Because of this, OneBeacon faced a pre-tax operating loss of $65 million for Q4 and pre-tax operating income of just $200,000 for the 2014 calendar year, compared to $132 million in pre-tax operating income in 2013, Moody’s noted.
“We view the magnitude of the fourth quarter 2014 reserve charge as both unexpected and outsized relative to the size of the underlying business and the group’s annual core earnings capacity,” Alan Murray, Moody’s lead analyst for OneBeacon, said in prepared remarks. “The charge also highlights underwriting and reserving risks associated with specialty lines businesses, especially casualty lines, for which the latency of claims development raises pricing and reserve risk.”
Murray added that while Moody’s sees OneBeacon’s broader specialty operations as being well managed, its expansion into new specialty lines has added “incremental risk.”
Fitch, meanwhile revised the rating out look to negative from stable for OneBeacon’s BBB+ issuer default rating, and ‘A’ insurer financial strength ratings.
Fitch said it switch to a “negative” outlook for OneBeacon because of the company’s $90 million in adverse reserve development reported for 2014, “which represents 8.5 percent of prior year equity.”
Fitch said the current ratings reflect the belief that OneBeacon’s future reserve development will be neutral to modestly favorable over the next year to 8 months. But adverse reserve development in 2015 that lands 5 percent or higher from 2014 year-end equity could lead to a one-notch ratings dip for all OneBeacon insurer financial strength ratings.
Another trouble spot – OneBeacon’s combined ratio for 2014 came in at 101.7, much worse than the 92.4 combined ratio in 2013. But Fitch points out that OneBeacon still made a small profit in 2014 “due to realized and unrealized gains.” It also sold off its asbestos and environmental reserve legacy run-off business to Armour Group Holdings, which could help it longer-term, Fitch said.
At the same time, Fitch affirmed with a stable outlook the issuer default ratings, debt and insurer financial strength ratings for OneBeacon Parent White Mountains Insurance Group and White Mountains subsidiary Sirius International Insurance Group. (All ratings are similar to OneBeacon).
Sources: Fitch Ratings and Moody’s Investors Service