AM Best has downgraded U.S. reinsurer Folksamerica Re’s financial strength rating to A- from A following the announcement that it will not cede the bulk of its additional loss from the 2005 storm season to Olympus Re, its Bermudian sidecar. The rating remains under review with negative implications, where it was placed on June 13.
On June 16, Folksamerica increased its gross loss estimates from hurricanes Katrina, Rita and Wilma by $203 million net of reinstatement premiums. Olympus was on the hook for $143 million of this amount. Ceding this loss to Olympus would have put the sidecar out of business. But on June 15, Folksamerica’s parent, White Mountains, agreed to pay back to Olympus $137 million of that $143 million, leaving it to bear just $6 million. It also agreed to waive $8 million of override commissions due from premiums earned by Olympus after March 31, 2006.
John Andre, v.p. at AM Best, says White Mountains’ decision to keep Olympus afloat for the sake of Folksamerica – though it benefits its customers – is disappointing. “Basically Olympus has run out of capital twice,” he says. “The loss development over the past few months, as well as this most recent action, has pretty much depleted the Olympus reload that happened around the first of the year,” adds Andre, referring to Olympus’s capital raising initiative before Jan.1.
At Jan. 1, Folksamerica had access to $330 million of capital through its two sidecars, Olympus and the newly-formed Helicon, neither of which it owns. The company did not disclose how much of the $330m came from Olympus and how much from Helicon. Unlike Olympus, Helicon is not exposed to losses from previous years, says David Foy, CFO of White Mountains.
Following the reimbursement, Olympus will hold about $140 million in capital. This will enable it to continue to meet its payment obligations to Folksamerica until its agreement terminates at the end of 2007.
The combination of the increased losses and the reimbursement to Olympus will cost White Mountains $197 million before tax, or $128 million after tax, in the second quarter.
AM Best has challenged Folksamerica’s management team to demonstrate the viability of its continuing reinsurance protection and explain any accumulation of catastrophe risk in target zones. Analysts will meet with executives of the company and its parent over the next three weeks with a view to resolving its ratings status as quickly as possible.
The rater has also decided to start publishing issuer credit and debt ratings for all sidecars. Andre says that despite appearances, this announcement was not a response to Folksamerica’s announcement about Olympus.
“We’ve been telling sponsors who have been setting up sidecars that our position on them has been a work in progress. It may look like it was a reaction to Olympus, but in our view it wasn’t at all,” he says. “We have been tightening up our view of them for a few months. Our analysis will be stricter going forward.”
Previously, AM Best provided guidance to interactively-rated carriers wishing to use unrated sidecars to provide their customers with more capacity. But, with the exception of Olympus, whose ratings it withdrew in March at company’s request, it had not formally rated sidecars.
