Best Removes Folksamerica from Review; Affirms ‘A-‘ Rating

August 18, 2006

A.M. Best Co. has removed from under review and affirmed the financial strength rating (FSR) of “A-” (Excellent) and the issuer credit rating (ICR) of “a-“of New York-based Folksamerica Reinsurance Company, a member of the Bermuda-based White Mountains Insurance Group Ltd. The outlook for both ratings is stable.

Best said the rating action follows its “review of Folksamerica Re’s overall risk management. This review included an evaluation of the company’s Bermuda-based sidecar reinsurers, Olympus Reinsurance Company Ltd. (Olympus) and Helicon Reinsurance Company Ltd.”

Best put the ratings under review on June 16, 2006 following White Mountains’ announcement that Folksamerica Re increased its gross loss estimates for hurricanes Katrina, Rita and Wilma by $203 million, net of reinstatement premiums, and that White Mountains would reimburse Olympus for up to $137 million of the related losses ceded to Olympus under Folksamerica Re’s quota share reinsurance treaty with Olympus (See also IJ Website June 19).

Best noted that “White Mountains’ reimbursement of Olympus maintained Olympus’ viability as the cession from Folksamerica Re to Olympus would have eroded the bulk of Olympus’ capital. This occurrence raised concern over Folksamerica Re’s risk management controls and Olympus’ and Helicon’s current capacity for the business ceded to each vehicle.”

Accordingly, Best explained that it “undertook a more detailed review of each sidecar to assess the future potential for “over the top risk” (tail risk) back to Folksamerica Re in certain loss scenarios using updated third party software models with near-term view.

“The review of the sidecars included a determination of the minimum required capitalization based on A.M. Best’s insurance company impairment probability data and stress scenarios on the sidecars’ aggregate exceedance curves. Specifically, A.M. Best calculated the amount of collateral necessary for the sidecars to withstand losses within an acceptable confidence level.”

Best also indicated that Folksamerica Re had provided it with “aggregate exceedance curves based on stress scenarios on total insured value of the covered property. These stress scenarios also produced losses considered in the analyses of the sidecars. In addition, A.M. Best reviewed the general structure of each sidecar. The outcome of this due diligence, which resulted in level of tail risk back to Folksamerica Re, was factored into the analytical assessment for the rating affirmation.

“The rating affirmation of Folksamerica Re recognizes its excellent level of risk-adjusted capitalization on a stressed basis, recent changes to its risk management strategy and historical support received from White Mountains. Nonetheless, A.M. Best remains concerned with the company’s catastrophe exposure and the availability of additional retrocession capacity should material catastrophe-related property losses continue to ensue or the property market begins to soften.”

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