CORRECTION TO 3/29 RELEASE: MOODY'S REVIEWS RATINGS OF FUND AMERICAN AND SOURCE ONE FOR POSSIBLE UPGRADE; RATES FOLKSAMERICA FOR INSURANCE FINANCIAL STRENGTH. CORRECTION TO FIRST PARAGRAPH: SOURCE ONE RATING Ba1 NOT Baa1 AND FOLKSAMERICA REINSURANCE
New York, March 31, 1999 -- Moody's Investors Service has placed on review for possible upgrade the Baa3 senior debt rating of Fund American Enterprise Holdings, Inc. following an announcement that it has signed a definitive agreement to sell the principal operating assets of its mortgage lending subsidiary, Source One Mortgage Services Corporation, to Citibank Mortgage. The Ba1 senior debt rating for Source One was also placed on review for possible upgrade. Additionally, Moody's assigned a Baa1 insurance financial strength rating to Folksamerica Reinsurance Company, Fund American's largest wholly-owned insurance subsidiary, and placed this rating on review for possible upgrade.
According to Moody's, the rating review of the senior debt of Fund American reflects the anticipated reduced leverage position, improved financial flexibility and more focused operating strategy. The review will also focus on the remaining exposures of certain other mortgage-related assets and liabilities retained by Fund American after the sale. This transaction, along with the definitive agreement to sell Valley Insurance Group to Unitrin Inc. on February 11, 1999, will significantly enhance the holding company's cash position. Therefore, future operational strategy as it relates to the redeployment of this capital will also be considered in Moody's review.
Moody's indicated that its rating review of Source One's senior and subordinated debt rating reflects Citibank Mortgage's agreement to assume those debt obligations. Citibank Mortgage is a wholly-owned subsidiary of Citibank (Aa2). The rating agency cited anticipated changes in the financial profile of Source One and in Source One's future role in the Fund American organization as the key focus of its review of Source One's preferred stock rating.
The assignment of an initial insurance financial strength rating of Baa1 to Folksamerica Reinsurance Company reflects the company's good profitability, its disciplined underwriting practices, and its high quality investment portfolio. Somewhat offsetting these positive factors are its limited size within the highly competitive and capital intensive broker reinsurance market, and its moderate financial leverage. Moody's noted that the company has historically grown primarily through acquisitions, rather than organically; although this strategy has been successful to-date, the company's risk profile is increased due to challenges associated with integration and re-underwriting of acquired books of business.
Folksamerica is among the top 20 largest broker market reinsurers in the US, with a book of business evenly split between property and casualty business predominantly in the US. It is the largest wholly-owned insurance operating subsidiary of Fund American, which acquired the remaining 50% interest in Folksamerica that it did not own in August 1998, from four European insurance companies.
Folksamerica's most recent acquisitions include Christiana Corp. in June 1996 and Great Lakes American Re in July 1997. The company plans to continue its growth strategy through acquisitions, which is evidenced by the recent announcement that it has signed a letter of intent to purchase USF Reinsurance Company from the Centris Group. This acquisition would add approximately $85 million, or approximately 30%, to its estimated premium volume for 1999. Folksamerica's acquisition strategy reflects management's view that organic growth in the current market environment is difficult to achieve without compromising underwriting discipline. Moody's believes that Folksamerica may pursue additional acquisitions in order to increase the size of its franchise, which has become increasingly important in the rapidly consolidating reinsurance market place.
Ratings placed on review for possible upgrade include the following:
Fund American Enterprise Holdings Inc. - senior debt at Baa3;
Source One Mortgage Service Corporation - senior debt at Ba1, subordinated debt at Ba3, preferred stock at "ba3";
Folksamerica Reinsurance Company - insurance financial strength rating at Baa1
Fund American, located in Hanover, New Hampshire, is an insurance and financial-services holding company which, for the full year ending December 31, 1998 reported consolidated GAAP total revenue of $578.1 million and net income of $82.2 million. Source One, based in Farmington Hills, Michigan, reported total assets of $1.5 billion and total equity of $413 million as of December 31, 1998. Folksamerica Reinsurance Company, based in New York, reported statutory net premium written of $212.6 million, net income of $33.9 million and policyholders' surplus of $328.5 million as of December 31, 1998
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