Raters React to White Mountains/Sirius Deal

December 10, 2003

All four rating agencies registered a generally positive response to the announcement that Bermuda-based White Mountains (WTM) would acquire the Sirius International Insurance group from its parent, ABB Ltd., the Swiss-Swedish global engineering firm.(See IJ Website Dec. 9)

Standard & Poor’s, Fitch and Moody’s Investors Service affirmed their ratings on all the entities involved, while A.M Best placed them “under review with developing indications” pending completion of the transaction. The companies involved are: Sirius International Insurance Corporation; its U.S. subsidiary, Sirius America Insurance Company; and Fund American Reinsurance Company (FARe) Ltd., which is ultimately owned by WTM through OneBeacon, and another subsidiary, Folksamerica Re.

Best said the deal would “remove the negative uncertainty” stemming from Sirius’ ownership by ABB Ltd. and indicated it “expects to most likely affirm the rating at the current [‘A-‘ (Excellent)] level.”

Best also inoted that it has taken into account White Mountain’s intention “to fully integrate FARe’s underwriting activities, transacted through branch offices in Stockholm and Singapore, within Sirius International. In this case, FARe’s rating procedure would become inapplicable and A.M. Best would most likely withdraw the existing financial strength rating and assign a rating of NR-3.”

S&P affirmed White Mountains’ ‘BBB-‘ counterparty credit and senior debt ratings, its ‘A-‘ counterparty credit and financial strength ratings on Folksamerica Re and its ‘A-‘ counterparty credit and financial strength ratings on Sirius International – all with stable outlooks.

It noted that acquiring Sirius was potentially a long-term benefit to WTM, “in terms of both its business position (international scale) and earnings diversification.” S&P added: “due to the near-term integration risks and the runoff operations of Scandinavian Reinsurance Co. Ltd. (Scandinavian Re), this acquisition is neutral for the ratings at this time. WTM’s very strong financial flexibility, strong capitalization, and improving earnings also support the ratings.”

Moody’s explained in detail the various relationships of the companies that make up the White Mountains Group, noting that its strength is mainly concentrated in its principal operating entities, OneBeacon and Folksamerica.

The rating agency said its rating rationale for OneBeacon is “its solid franchise and market position, strong agency relationships, balanced mix of personal, commercial and specialty lines business as well as improved market and business prospects going forward. Factors countering these strengths include the poor historic underwriting performance and large reserve charges stemming from the quality of the old CGU book, along with the general uncertainty that accompanies business expansion, following its recently announced acquisition of the commercial lines operations of Atlantic Mutual Insurance Group.”

On Folksamerica Moody’s noted that its “strengths are its sound underwriting discipline, high quality investment portfolio and expanded capital base in the current firm reinsurance market.” It added, however, that “Folksamerica’s success in profitably deploying its capital may be challenged longer term by a number of factors, such as competition from much larger global reinsurers and by the impact of new flows of capital into the market on capacity and price, and in the near term by operational risks following the company’s recent acquisition of renewal rights from CNA Re.”

Fitch said it “views this most recent acquisition as consistent with White Mountains’ strategy to purchase fundamentally sound companies or operating businesses from sellers that are seeking to exit the insurance business.” It also noted WTM’s recent acquisition, through Folksamerica of CNA Re’s renewal rights, the Sierra Insurance Group, and OneBeacon’s acquisition of Atlantic Mutual’s commercial insurance renewal rights.

The rating agency “expects White Mountains’ financial leverage to remain unchanged following these acquisitions, and in line with a debt-to-capital ratio target of approximately 20 percent. The capital mix at September 30, 2003 consisted of 20 percent debt, 7 percent mandatory redeemable preferred, and 73 percent common equity.”

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