A.M. Best Affirms Rating of OneBeacon’s Subsidiaries

August 1, 2002

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of the insurance subsidiaries of OneBeacon Insurance Group, Boston.

A.M. Best also affirmed the indicative shelf registration ratings for Fund American Companies Inc. These affirmations follow the completion of A.M. Best’s annual rating review of the group’s balance sheet and operating results.

These ratings reflect OneBeacon’s excellent capitalization, strong agency franchise and prospective earnings capacity, which is enhanced by the availability of significant reinsurance protection on the group’s asbestos and environmental (A&E) losses as well as other significant mass tort liabilities and improved operating fundamentals. Additionally, the ratings recognize the positive implications of OneBeacon’s ownership by White Mountains Insurance Group Ltd. its strengthened management team, as well as the refocused business strategy and improved balance sheet quality. A major step toward fulfillment of this new strategy was accomplished in Nov. 2001 when the group agreed to transfer all of its non-core insurance businesses, including related infrastructure, to Liberty Mutual. Furthermore, OneBeacon’s balance sheet was significantly strengthened at the end of 2001 through a sizable reserve addition, which was fully supported by stop-loss reinsurance protection from General Reinsurance Corp. on non-A&E loss reserves. This protection has now been exhausted.

In addition, the group’s A&E reserves and related remaining exposures have essentially been removed from the balance sheet through a reinsurance contract with National Indemnity Insurance Company. As of year-end 2001, over $700 million of net protection remains in place under this contract. As part of OneBeacon’s balance sheet restructuring, it liquidated nearly all its unaffiliated common equity holdings before the end of 2001, thus missing the recent bear market that has damaged many of its peer commercial casualty companies.

These positive rating factors are offset by OneBeacon’s sub par historical earnings, stemming largely from loss development on business acquired with its 1998 merger with General Accident. The extraordinary reserving actions taken at the time of the 1998 merger and again in 2000 and 2001—along with restructuring charges and World Trade Center losses in 2001—have served to generate sizable operating losses, which have contributed to a reduction in statutory policyholders’ surplus of 36% during the past two years. Moreover, the financial leverage (debt plus preferred stock to total capital) of White Mountains is relatively high at 38 percent. However, management intends to refinance $260 million of the company’s debt during the latter half of 2002 with funds raised either through a public offering of White Mountains’ common stock or by exercising an option to issue common stock directly to the holder of the debt, thus providing for reduced financial leverage and additional flexibility in the parent’s capital structure.

A.M. Best believes the series of actions taken by the new management team to minimize prior year loss development, stabilize investment earnings and improve underwriting performance will result in greater earnings potential for OneBeacon. This will enable it to enhance its strong capitalization while managing parental debt obligations. As a result, A.M. Best views OneBeacon’s rating outlook as stable.

The financial strength rating of A (Excellent) has been affirmed for the following insurance subsidiaries of OneBeacon Insurance Group:

• United Security Insurance Company
• American Central Insurance Company
• Massachusetts Homeland Insurance Company
• Esurance Property & Casualty Insurance Company
• Potomac Insurance Company of Illinois
• Farmers and Merchants Insurance Company
• York Insurance Company of Maine
• Tri-State Insurance Company
• American Employers’ Insurance Company
• CU Lloyds of Texas
• OneBeacon Midwest Insurance Company
• OneBeacon Insurance Company
• The Employers’ Fire Insurance Company
• Homeland Central Insurance Company
• Homeland Insurance Company of New York
• General Assurance Company
• Midwestern Insurance Company
• The Camden Fire Insurance Association
• Western States Insurance Company
• The Northern Assurance Company of America
• OneBeacon America Insurance Company
• Pennsylvania General Insurance Company
• PG Insurance Company of New York

The following indicative shelf registration ratings have been affirmed: Fund American Companies Inc.—

• “bbb” on senior debt
• “bbb-” on subordinated debt and preferred securities
• “bb+” on preferred stock

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