S&P Raises White Mountains Group Outlook to Positive

November 22, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on White Mountains Insurance Group Ltd. (WTM), Fund American Cos. Inc., Folksamerica Reinsurance Co. and Sirius International Insurance Corp. to positive from stable.

S&P also affirmed its “BBB”‘ counterparty credit ratings on WTM and Fund American as well as its “A-” counterparty credit and financial strength ratings on Folksamerica and Sirius.

“The ratings reflect the extremely strong capitalization, strong competitive position, and conservative investments of WTM’s consolidated insurance operations as well as WTM’s overall strong financial flexibility,” S&P said. “In addition, WTM’s consolidated insurance operations have dramatically improved earnings.”

The bulletin noted that, “offsetting these positive factors are reserve deficiencies, limited reinsurance protection for Folksamerica, and integration risks related to acquired companies and books of business, though this is decreasing. On a statutory basis, Folksamerica’s surplus was $913 million at year-end 2003, of which $70 million was because of surplus gains from a retroactive reinsurance contract with Imagine Insurance Co. Ltd., which was purchased in 2000 in conjunction with acquisitions made during that year.” S&P indicated that it “does not expect earnings to be affected significantly by this retroactive reinsurance contract.”

The rating agency cited “substantial improvements in operating performance, competitive position, and financial flexibility and the view that these improvements will continue through year-end 2005,” as supporting the upgrade.

In the report S&P said it “expects Folksamerica’s GAAP combined ratio to be close to 104 percent in 2004 and about 95 to 96 percent in 2005, excluding catastrophe losses.” It also “expects Sirius to have a GAAP combined ratio of 96 percent or less for year-end 2004, with a similar measure in 2005. For 2004, the combined ratio of WTM’s reinsurance operations (often referred to as White Mountain Re) is expected to be near 101 percent.

“WTM’s capital is expected to remain a strength to the rating, even when factoring in dividend payments, reserve deficiencies, and large event losses. Lastly, WTM’s debt leverage is expected to remain less than 30 percent, with interest coverage near 5x and fixed-charge coverage (which includes preferred stock dividends) near 3x (excluding realized capital gains for both figures).”

S&P indicated: “If these expectations are met, an upgrade is possible. However, if significant reserve deficiencies, large loss events, or a significant change in competitive position occur or if Scandinavian Re significantly affects operating performance, the outlook could be revised.”

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