Highlands Insurance Group Inc. Announces

April 20, 2001

Highlands Insurance Group Inc., a New Jersey-based property and casualty insurer, reported a pre-tax loss of $38.5 million and a net loss of $106.6 million, in 2000. This is compared with the company’s net loss of $13.5 million in 1999.

The pre-tax loss is a result of the increase in loss and loss adjustment expense reserves of approximately $48 million at the end of 2000. During the fourth quarter of 2000, Highlands Insurance Group determined there had been adverse developments in the commercial multiple peril and workers’ compensation lines.

The reserve increase covered these two lines as well as increases and decreases in other lines. The increase affected current business as well as business written in prior years and added approximately 12.1 points to the 2000 calendar year loss ratio of 89.1percent. In addition, the company re-estimated premiums due under retrospective policies, reducing such assets by $11.0 million.

During 2000, Highland Insurance Group increased its valuation allowance for deferred tax assets by $82.8 million, due to the doubtful recoverability of these assets. Total tax expense for 2000 of $67.7 million includes the increase in the valuation allowance.

The book value per share at December 31, 2000 was $12.77.

Highland Insurance Group and its bank lenders have entered into an amendment and waiver to the company’s credit agreement pursuant to which the banks waived the company’s non-compliance with certain covenants, and the parties amended certain terms, in the credit agreement.

In connection with the amendment and waiver of the credit agreement, the company and holders of the company’s convertible subordinated debentures agreed that, in lieu of payment of cash interest under the debentures on June 30, 2001 and December 31, 2001,

Highland Insurance Group will issue the debenture holders new 12.5 percent convertible subordinated debentures in an aggregate amount equal to the cash interest otherwise payable on June 30, 2001 and December 31, 2001. As previously announced, Highland Insurance Group has formed a Special Committee of its Board of Directors to consider possible strategic and other alternatives.

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