S&P Affirms White Mountains ‘BBB-‘ Ratings

March 17, 2004

Standard & Poor’s Ratings Services announced that it has affirmed its “BBB-” counterparty credit and senior debt ratings on the Bermuda-based White Mountains Insurance Group Ltd. (WTM), with a stable outlook.

“The affirmation follows WTM’s announcement that it intends to invest $200 million with an investor group that plans to acquire SAFECO Corp.’s life and investments businesses (collectively referred to as SAFECO Life),” said S&P. “The $200 million investment will result in WTM owning 24 percent of SAFECO Life on a fully converted basis.”

More generally S&P confirmed that the “ratings reflect WTM’s strong consolidated capitalization, strong business position, conservative investments, and strong financial flexibility. In addition, WTM’s earnings improved dramatically in 2002 and further in 2003.”

The bulletin noted that “Offsetting these positive factors are reserve deficiencies at OneBeacon and Folksamerica Reinsurance Co., WTM’s operating companies; limited use of reinsurance at Folksamerica; and an aggressive acquisition strategy.”

S&P said it viewed the SAFECO Life transaction is “as a modest negative factor to WTM but not of sufficient size to warrant a revision to the rating or outlook. The negative concerns are based on WTM’s large investment in SAFECO Life and SAFECO Life’s underlying stand-alone rating characteristics, which are below those of WTM’s insurance operations. Standard & Poor’s views the SAFECO Life transaction as purely an investment for WTM and not as a long-term addition to WTM’s business model. WTM is a company focused on acquisitions, and while the corporate strategy doesn’t change, the investments within often do. WTM is focused on providing an after-tax ROE of more than 13 percent to investors and employs a total return strategy to achieve that.”

The rating agency went on to note that “WTM is expected to pay $200 million in cash for its investment in SAFECO Life and will make the investment from the investment portfolios of its various insurance operations. The transaction is expected to close in the third quarter of 2004. Related to this transaction, the investor group will form a new holding company with equity of about $1 billion, and it has secured committed bank financing of up to $350 million.”

Commenting on the “stable” outlook S&P indicated that it is based on the assumption that “earnings will improve further in 2004 and that capitalization will remain strong despite reserve deficiencies. WTM is expected to maintain capital adequacy at least in the high end of the ‘A’ range (145 percent) in 2004 while operating performance continues to improve. If operating performance deteriorates, then additional capital should be maintained (a capital adequacy ratio of at least 150 percent) to compensate for reserve deficiencies and potential catastrophe losses.”

S&P also noted that “WTM’s business position is becoming more diversified with its acquisitions of Sirius International Group, CNA Re’s renewal rights, and Atlantic Mutual’s renewal rights. These various platforms are expected to increase scale and diversification. However, as these transactions will need roughly two to three years before their true merits are known and issues surrounding execution and integration are lessened, Standard & Poor’s is neutral on these transactions at this time. WTM’s financial flexibility is expected to remain strong in support of the current ratings.”

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