Best Affirms White Mountains Operating Subsidiaries Ratings

July 1, 2005

A.M. Best Co. announced that it has affirmed the financial strength ratings (FSR) and the issuer credit ratings (ICR) of the major operating companies of the Bermuda-based White Mountains Insurance Group Ltd.

Best rated OneBeacon Insurance Group (Boston, MA), Folksamerica Reinsurance Company (New York, NY), Sirius America Insurance Company (New York, NY) and Sirius International Insurance Corporation (Stockholm, Sweden) as “A” (Excellent) and “a” respectively.

In addition, Best affirmed the FSR of “B++” (Very Good) and assigned an ICR of “bbb+” to Potomac Insurance Company (Philadelphia, PA), which is currently in run-off. Best also noted that on May 19 and May 9, 2005 it had affirmed the FSR of “A-” (Excellent) and assigned an ICR of “a-” to National Farmers Union P&C Insurance Company (Aurora, CO) and United Security Insurance Company (Boston, MA), respectively.

Concurrently, Best affirmed the debt rating of “bbb” on Fund American Companies, Inc.’s $700 million 5.875 percent existing senior unsecured notes due 2013. Fund American is a wholly-owned intermediate holding company of White Mountains. The rating agency also affirmed the various debt ratings assigned to White Mountains and Fund American’s existing shelf registration statement, and announced that the outlook for all of the ratings remains stable.

“These rating affirmations reflect White Mountains’ conservative financial leverage, improved business profile and earnings trend, as well as demonstrated overall financial flexibility,” said Best. “Somewhat offsetting factors include the ongoing inherent challenges associated with the group’s aggressive acquisition strategy and dependence upon investment earnings and capital gains to generate sustainable earnings, notwithstanding the significant improvement in underwriting results in recent years.

“Fund American’s ratings recognize its stand-alone financial leverage, cash flow and fixed coverage, as well as its role as White Mountains’ intermediate holding company. Most of White Mountains’ outstanding debt is issued by Fund American but is guaranteed by White Mountains.”

Best also noted: “The consolidated financial leverage (debt plus preferred stock-to-total capital) of White Mountains, including Fund American, has improved to 20 percent as of year-end 2004, primarily due to increased shareholder equity resulting from growth in retained earnings, the exercise of warrants to purchase additional White Mountains’ common stock by Berkshire Hathaway Inc. and unrealized capital gains on White Mountains’ investment portfolio.”

The rating agency indicated that its rating for OneBeacon “is based on its improving capitalization and earnings, which are anticipated to further improve in the medium term, and enhanced balance sheet protection by virtue 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, including losses due to, but not limited to, construction defect claims. Management has strengthened its claims-handling and other infrastructure capabilities in recent years and expects reserve development to stabilize in the medium term.

“The rating affirmation of Folksamerica Re is based on the reinsurer’s improved business profile and earnings trends since 2002 and the support it receives from White Mountains. Partially offsetting these positive attributes is the company’s exposure to property catastrophe events. In 2004, Folksamerica Re recognized $88 million in net losses due to the southeast windstorms in the third quarter of the year. These losses, combined with the company’s acquisition of Sirius America Insurance Company in 2004, have resulted in Folksamerica Re’s risk-adjusted capital declining from its 2003 level. Nonetheless, capital continues to support the current rating, and the company continues to benefit from its affiliation with White Mountains, who contributed over $400 million to Folksamerica Re in 2001 and strategically provides affiliated reinsurance support for the company.”

For a complete list of White Mountains Insurance Group Ltd.’s financial strength, issuer credit and debt ratings, consult Best’s Website at:

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