White Mountains' Chairman Jack Byrne offered reassuring words toshareholders yesterday concerning the wipeout of original investorsin a reinsurance sidecar as a “sorry chapter” in the history ofsuch vehicles.

During a conference call, Mr. Byrne responded to concerns ofanalysts and investors in Bermuda-based White Mountains InsuranceGroup that bubbled up after a series of announcements last weekregarding reinsurance subsidiary Folksamerica Reinsurance Companyand its sidecar, Olympus Reinsurance.

A sidecar is essentially a special-purpose vehicle in whichthird-party investors, such as hedge funds or private equity funds,collaborate with an underwriter to provide additional capacity toexisting reinsurers for short-tail lines of business.

Of particular concern was Friday's announcement thatFolksamerica had boosted gross loss estimates for last year'sstorms by $203 million–an action that should have contractuallybound the Olympus sidecar to pay $143 million of the losses underthe terms of a quota-share reinsurance treaty withFolksamerica.

But in the same announcement, White Mountains revealed that itagreed to reimburse Olympus for up to $137 million of the cededlosses, which would otherwise destroy most of Olympus' capitalbase.

Mr. Byrne, who is chairman of White Mountains and one of theoriginal investors in Olympus, began his remarks by saying thatWhite Mountains had “a long history of treating [its] ownerswell.”

Asked directly how the board of the public company reached itsdecision to reimburse the sidecar, which he and other members ofmanagement once had an economic interest in (along with otherprivate investors), he distinguished between “the first Olympus”and the newly recapitalized Olympus.

Mr. Byrne said he raised capital for “the first Olympus” in 2001from “a collection of institutions and people,” including himselfand White Mountains President and Chief Executive Officer SteveFass–”all of those were friends of the company in one way oranother.” The idea was to be able to participate in an excitingproperty market when Folksamerica didn't have enough capital to doso on its own.

“The theory is still sound, but it's been a sorry chapter in ourlife here,” he said.

In 2005, “we wiped out all of the original investors. None ofthe original investors have a pot to —- in here. They do not have afinancial stake in anything going forward,” he said, counting hiswife among those who lost significant investment dollars.

He continued, “When management decided to reimburse the newinvestors in Olympus, their decision process was 100 percent in theinterests of the White Mountains shareholders.”

Mr. Byrne's reference to “new investors” refers to the fact thatOlympus raised $156 million to recapitalize after an early round ofloss estimates dealt the first serious blow to the sidecar.

“New investors came into Olympus based on year-end estimatesthat have proven to be inaccurate very quickly,” Mr. Fass said,adding that an impetus for reimbursing these investors was “protectand reinforce” White Mountains “reputation with co-investors.”

“We believe that taking this action now maintains financialstrength and market position of Folksamerica,” Mr. Fass said,noting that the reputation with private investors has been“carefully nurtured over the years to the great benefit of [WhiteMountains'] owners, who have made a lot of money through [the]ability to quickly access capital.”

The executives began their review of recent events by explainingthe revised loss estimates which set the reimbursement deal inmotion, noting that new claims information on offshore energyexposures prompted management to reserve all energy contracts tofull policy limits.

That action pushed A.M. Best to downgrade Folksamerica to“A-minus” last Friday, and to issue an announcement that includedsome biting remarks about “the timing of this most recentdisclosure in relation to A.M. Best's most recent discussions withcompany management.”

The Oldwick, N.J.-based rating agency had clearly beenblindsided, because just three days earlier it had affirmed itsratings on Folksamerica.