White Mountains Raises Hurricane Loss Claims by $203 Million

Bermuda-based White Mountains Insurance Group, Ltd. said that new claims information from its Folksamerica Reinsurance Company subsidiary “has increased its gross loss estimates for hurricanes Katrina, Rita and Wilma (‘KRW’) by $203 million (net of reinstatement premiums). In taking this action, Folksamerica has set its reserves for offshore energy and marine exposures for hurricanes Katrina and Rita at full policy limits and has also increased reserves on other exposures affected by KRW.”

A.M. Best, which had revised its rating outlook on Folksamerica to negative last week, reacted by downgrading its financial strength rating to “A-” (Excellent) from “A” (Excellent) and keeping the ratings under review with negative implications (see related article in “National”).

White Mountains explained that under the terms of Folksamerica’s quota share reinsurance treaty from 2005 with Olympus Reinsurance Company [a sidecar vehicle set up by White Mountains with outside investors] $143 million of the loss is ceded to Olympus. “Without other action, this cession would exhaust the bulk of Olympus’ capital,” said the a bulletin. “However, White Mountains is in advanced discussions with Olympus and its two largest shareholders regarding an arrangement to reimburse Olympus for up to $137 million of the ceded losses. In addition, White Mountains would waive override commissions due from Olympus after March 31, 2006 for reinsurance contracts with an effective date of December 31, 2005 and prior. White Mountains expects the commission waivers would total approximately $8 million.”

When these adjustments are completed, the announcement continued, “Olympus’ capital would be approximately $140 million, which is roughly in line with its level prior to this adverse development. Olympus would continue to receive cessions from Folksamerica under the quota share agreement as revised at the beginning of 2006 and would continue to be responsible to Folksamerica for losses on exposures that have been ceded to it. In addition, Olympus and its two largest shareholders would agree, at Folksamerica’s option, to continue the quota share treaty with Folksamerica through the end of 2007.”

White Mountains explained that, if this arrangement is consummated, the total effect on the Company in the second quarter of 2006 from the adverse development and the arrangement “would be $197 million pre-tax ($128 million after tax or $12 per common share).”

However, it said, “if the arrangement is not consummated, the second quarter effect on White Mountains would be reduced, but due to Olympus’ financial position, in the future Folksamerica would not expect to be able to recover significant amounts (beyond amounts collateralized) arising from losses on exposures that have been ceded to Olympus.”