Best Affirms Sirius ‘A’ Rating

April 23, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) of Sweden’s Sirius International Insurance Corporation, and removed the rating from under review where it was placed following the proposed acquisition by White Mountains Insurance Group, Ltd. (WTM). The rating outlook is stable.

“The affirmation of the rating is based on the superior level of consolidated risk-based capitalisation and Sirius’ leading market profile in Scandinavia,” said best. “An offsetting factor is the potential for additional losses from Scandinavian Re (Scan Re), a finite reinsurer in run-off, which continues to negatively affect Sirius’ operating performance.”

Best’s report noted that Sirius “maintains a superior level of consolidated risk-adjusted capitalisation, despite a 12.7 percent reduction in 2003 to SEK 6.2 billion (USD 850 million) due principally to dividend payments. Sirius’ risk-adjusted capitalisation is not expected to materially change following its acquisition by WTM. A significant reduction in gross premiums of up to 30 percent in 2004—due to the transfer of Sirius America Insurance Company to Folksamerica, WTM’s U.S. reinsurance unit, and the run-off of the financial risk portfolio, including the non- renewal of a large surplus relief contract—will be partially offset by the addition of Fund American Re’s portfolio and an increase in net retentions anticipated for 2005. Prospectively, if Sirius includes WTM’s planned USD 200 million investment in U.S.-based Safeco Life in its investment portfolio as expected, net available capital will be marginally reduced due to the higher risk charge applied to affiliated assets.”

Best also said it considers Sirius to have an “excellent business profile” as it is “a leading reinsurer in the Scandinavian market and provides WTM with a complementary international book of business and prospectively a strong platform for growth outside the United States.”

The bulletin indicated however, that Best expects Sirius consolidated earnings to “remain relatively weak due to the potential for additional run-off losses from Scan Re’s finite U.S. casualty portfolio. Although net income increased strongly to SEK 192.7 million (USD 26.6 million) in 2003—supported by a 35 percent return on Sirius’ Swedish equity portfolio and 96.3 percent combined ratio at Sirius International—Scan Re reported a USD 50 million loss following significant deterioration in several stop loss contracts underwritten prior to 2000. Due to the severe under-pricing of the assumed business and adverse trends in the U.S. casualty market with regard to underwriting years 1997-1999, further deterioration in prior-year loss reserves is considered likely.”

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