AM Best has withdrawn the financial strength ratings of Bermudian property excess reinsurer Olympus Re at the company’s request. The rating agency had previously downgraded the firm twice – to B- from B+ on March 24 this year, and to B+ from A- in September 2005 – because of the scale of its 2005 hurricane losses.
John Andre, v.p. at AM Best, says Olympus Re had insufficient capital to support its former rating. “Because of the losses, its capital base, on a risk-adjusted basis, slid enough to cause us to move the financial strength rating by two rating levels,” he says. “At that point the company no longer wanted to participate in our interactive rating process.”
Andre adds that the reinsurer was unable to absorb its third-quarter 2005 losses into its earnings. “Surplus declined significantly as a result of these losses, and that is what contributed to the downgrade,” he says. Olympus was capitalized with $500 million at its launch in December 2001, and had capital of about $188 million as of Jan. 1.
Sheila Nicoll, president and chief underwriting officer of Olympus, was not available for comment. The reinsurer is not required to release loss estimates because it is a privately-held company.
The damaging effects of AM Best’s rating action may not be limited to Olympus Re. The reinsurer provides retrocessional cover to fellow Bermudian insurance and reinsurance group White Mountains under a quota-share arrangement.
Olympus pays White Mountains an override commission for all business referred to it. It is also required to pay White Mountains a portion of underwriting profits from all business referred by the group’s Folksamerica Reinsurance and Sirius International subsidiaries. Fee income from these arrangements netted White Mountains a profit commission of $12.6 million in 2004, according to the group’s 2005 results filing.
But the losses Olympus sustained from U.S. windstorms last year were so big that there were no underwriting profits, so the company was not required to pay White Mountains its profit commission. Effective Jan. 1, Sirius stopped ceding business to the reinsurer, and Folksamerica lowered its cessions to up to 35% from up to 75% of almost all of its short-tail excess-of-loss business.
“White Mountains Re did not record a profit commission from Olympus during 2005 and does not expect to record profit commissions from Olympus for the foreseeable future,” the group said in its filing, dated March 7.
The $871.8 million of reinsurance recoverables that Olympus owes White Mountains are fully collateralized. About $640 million of this relates to hurricanes Katrina, Rita and Wilma.