A.M. Best Affirms OneBeacon’s ‘A’ Rating

April 14, 2004

A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) of the OneBeacon Insurance Group (Boston, Mass.) and Folksamerica Reinsurance Company (New York, N.Y.).

OneBeacon’s rating is based on its strong capitalization and improved earnings prospects, which are enhanced by the availability of significant reinsurance protection on asbestos and environmental (A&E) and other mass tort liabilities. These positive rating factors are somewhat offset by OneBeacon’s historically sub par earnings and adverse loss reserve development from prior years, principally in the workers’ compensation and commercial multiple peril lines, the latter due to construction defect claims. Management has improved its control over loss costs through the in-house administration of claims previously managed by Liberty Mutual Insurance Company. As of March 31, 2004, Atlantic Specialty Insurance Company (New York, N.Y.) became a member of OneBeacon and now carries the same group financial strength rating of A (Excellent). Effective January 1, 2004, Atlantic Specialty was added to the OneBeacon intercompany pool.

The rating affirmation of Folksamerica Re is based on the reinsurer’s solid capitalization and significant improvement in both its business profile and earnings posture since 2002. Partially offsetting these positive attributes is the historically poor operating performance during most of the late 1990s and early 2000s due to soft market conditions, adverse loss reserve development and a sub par business profile that precluded Folksamerica Re’s presence as a leading market reinsurer.
Additionally, A.M. Best has affirmed the debt rating of “bbb” on $700 million 5.875 percent existing senior unsecured notes due 2013 issued by Fund American Companies, Inc. Fund American is a wholly-owned intermediate holding company of White Mountains Insurance Group, Ltd. (NYSE:WTM) (Hamilton, Bermuda). A.M. Best has assigned stable rating outlooks to all the ratings listed above and has affirmed the debt ratings of the registered shelf securities.

These rating affirmations reflect White Mountains’ conservative financial leverage, broadened business scope, improved earnings and strong overall financial flexibility, which are offset by the inherent challenges associated with the group’s aggressive acquisition strategy. The ratings also recognize White Mountains’ cash flow and fixed coverage. The existing senior unsecured notes of Fund American are fully and unconditionally guaranteed by White Mountains.

The consolidated financial leverage (debt plus preferred stock-to-total capital) of White Mountains has improved to 24 percent as of year end 2003, primarily due to increased shareholders’ equity resulting from growth in retained earnings, and refinancing of subordinated debt with equity, which has reduced White Mountains’ cost of capital and lessened the demand for subsidiary dividends to service the group’s obligations. A series of actions taken to strengthen White Mountains’ balance sheet, stabilize investment earnings and improve underwriting performance has resulted in greater earnings potential, thus enabling the group to further enhance its strong capitalization while managing parental debt obligations.

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