Fitch Affirms White Mountains’ ‘BBB+’ Ratings; Lowers Folksamerica

June 26, 2006

Fitch Ratings has affirmed the “BBB+” issuer default ratings (IDR) of White Mountains Insurance Group, Ltd. and its wholly owned intermediate holding company subsidiary, Fund American Companies, Inc., as well as the “BBB” senior debt rating of Fund American.

Fitch also affirmed the “A” insurer financial strength (IFS) rating of the OneBeacon Insurance Group, but revised downward the IFS rating of Folksamerica Reinsurance Company to “A-” from “A”. Fitch also assigned an “A-” IFS rating to Sirius International Insurance Corporation. The rating out look is considered stable.

Fitch explained: “The downward revision of Folksamerica’s rating reflects the implementation of Fitch’s notching methodology that was introduced globally earlier this year, but was delayed for Folksamerica pending an updated analysis to determine the applicable ratings under the new group IDR methodology. Fitch considers White Mountains to have two separate core businesses, primary property/casualty insurance, through OneBeacon and Esurance, and reinsurance, through White Mountains Re. As a result, Fitch applies a group IDR approach separately to each core business. In the case of Folksamerica, a core insurer within the White Mountains Re group, the downward revision reflects that in the U.S., reinsurance obligations in a liquidation rank at the same level as other unsecured creditors, and are thus not afforded priority status similar to primary policyholders. While this does not increase the risk of default, it does result in a lower recovery rating assumption for Folksamerica, and thus a lower IFS rating.

“The assignment of the Sirius International rating reflects Fitch’s view of the company as a core insurer within the White Mountains Re group. Sirius International, based in Sweden, was acquired by White Mountains from ABB Ltd. in April 2004, at which time White Mountains Re was formed to manage White Mountains’ global reinsurance operations.

“The ratings of White Mountains and its insurance subsidiaries reflect the company’s reasonable financial leverage, disciplined underwriting and operating strategy, strong management team and high quality investment portfolio.” However, Fitch noted that “weighted against these positives are significant reserves in discontinued/run-off lines, recent catastrophe related losses and the recent concerns surrounding its relationship with Olympus Reinsurance Company, Ltd. (Olympus), its ‘sidecar’ reinsurance vehicle” (See IJ Website June 19, 20).

Fitch further indicated: “White Mountains’ strategy has involved purchasing fundamentally sound companies or operating businesses/renewal rights at less than fair or intrinsic value from sellers that are seeking to exit the insurance business. The company’s focus is on the economics of the deal, regardless of the future accounting impact (i.e. adverse loss reserve development, negative operating cash flow). The company will also sell at a profit those businesses that do not fit within the core operations of the company, but still have value to other companies/buyers as entities or renewal rights. Fitch believes that management has overall been successful with its strategy, generating almost $900 million of total after-tax net gains (including deferred credits recognized) on its transactions since the beginning of 2001.

“White Mountains suffered significant losses related to the 2005 gulf coast storms through both its reinsurance operations and its investment in Montpelier Re Holdings, Ltd. In addition, the company entered into an indemnification agreement earlier this week under which White Mountains will reimburse Olympus for up to $137 million of the $143 million in second quarter 2006 adverse loss reserve development on the 2005 gulf coast storms that was ceded to Olympus by Folksamerica.”

Fitch indicated that it “has concerns about the potential for additional adverse development on the 2005 storm losses, although the offshore energy and marine exposures are now set at full policy limits, as well as concerns about the ability of Olympus to serve as a viable reinsurance vehicle going forward.

“Nevertheless, White Mountains has continued to demonstrate its support of Folksamerica, including $250 million in capital contributions in 2005. White Mountains Re has also recently implemented a more conservative approach to underwriting and pricing catastrophe exposed reinsurance contracts, incorporating maximum foreseeable loss (MFL) analysis, reducing occurrence limits and increasing retentions, and exiting the gulf coast offshore energy and marine market. While Fitch recognizes that there is still some uncertainty regarding Olympus, Fitch expects any impact to be at a manageable level that is already reflected in the revised ‘A-‘ IFS rating of Folksamerica.”

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