Best Lowers Folksamerica Re Ratings

A.M. Best Co. has downgraded the financial strength rating (FSR) to “A-” (Excellent) from “A” (Excellent) and the issuer credit rating (ICR) to “a-“from “a” of Folksamerica Reinsurance Company. The New York-based company is a member of White Mountains Insurance Group Ltd. Best placed the ratings under review with negative implications last week.

Best took the action following the announcement by White Mountains that Folksamerica Re has increased its gross loss estimates for hurricanes Katrina, Rita and Wilma by $203 million, net of reinstatement premiums (See related article in “International”).

“$143 million of the loss is ceded to the company’s Bermuda-based sidecar reinsurer, Olympus Reinsurance Company Ltd.,” Best explained. “As stated in the White Mountains’ announcement, this most recent cession from Folksamerica Re has eroded the bulk of Olympus’ capital. In order for Olympus to provide Folksamerica Re with ongoing capacity, White Mountains intends to reimburse Olympus for these most recent losses on a paid loss basis.”

Best said it had originally put the ratings under review over concerns about earnings and risk management capability, and that the “recent development further confirms these concerns.” Best also said it “calls into question management’s controls given the timing of this most recent disclosure in relation to A.M. Best’s most recent discussions with the company’s management.”

In addition Best indicated that the “current ratings will remain under review with negative implications pending further discussion with management regarding the reimbursement mechanism to Olympus by White Mountains for up to $137 million of the ceded losses and Folksamerica Re’s accounting treatment for the reimbursement and the associated capital impact if any.”

Best also reiterated its concerns with “management’s overall risk management capability and the future viability of its current reinsurance structures should material catastrophe-related property losses continue to ensue.”