Fitch Affirms White Mountains' Ratings; Assigns 'A' IFS Rating to WM Re Bermuda

Business Wire, March 17, 2008

NEW YORK -- Fitch Ratings has affirmed the 'BBB ' Issuer Default Ratings (IDRs) of White Mountains Insurance Group, Ltd. (White Mountains), its wholly owned intermediate holding company, White Mountains Re Group, Ltd. (White Mountains Re), and its 73% owned intermediate holding company, Fund American Companies, Inc. (Fund American). In addition, Fitch has affirmed the 'BBB' senior debt ratings of White Mountains Re and Fund American. Fitch has also affirmed the 'A' insurer financial strength (IFS) rating of the OneBeacon Insurance Group (see member list below), and the 'A-' IFS ratings of Folksamerica Reinsurance Company (Folksamerica) and Sirius International Insurance Corporation (Sirius International). In addition, Fitch has assigned an 'A' IFS rating to White Mountains Re Bermuda Ltd. (WM Re Bermuda), White Mountains Re's recently capitalized Bermuda operating platform. The Rating Outlook is Stable. Fitch has also withdrawn the IFS ratings of several companies that are no longer part of the OneBeacon Insurance Group.

The ratings reflect the company's reasonable financial leverage, disciplined underwriting and operating strategy, strong management team and high quality investment portfolio. Weighted against these positives are adverse loss reserve development prior to 2007 for catastrophe losses and run-off business and sizable asbestos and environmental (A&E) reserves.

Fitch considers White Mountains to have two separate core businesses: primary property/casualty insurance, through OneBeacon, and reinsurance, through White Mountains Re that includes the operations of Folksamerica, Sirius International and WM Re Bermuda. Fitch applies a group IDR approach separately to each core business of OneBeacon and White Mountains Re. The 'A' IFS rating assigned to WM Re Bermuda reflects a good recovery rating assumption (RR3) in notching from the White Mountains Re group IDR given the policyholder priority status in Bermuda. This compares to Folksamerica's and Sirius International's regulatory environments that have average recovery rating (RR4) assumptions given that reinsurance obligations in liquidation rank the same as other unsecured creditors and are thus not afforded priority status.

White Mountains' management continually evaluates the best use of its financial resources, and actively manages and deploys its capital with an opportunistic approach. Fitch believes that management has overall been successful with its disciplined operating and investing strategy. The company has generated over $1.1 billion of total after-tax net gains (including deferred credits recognized) on its transactions since the beginning of 2001. Fitch expects operating results will continue to be favorable as the company maintains its disciplined underwriting approach, with no additional significant adverse reserve development, particularly in core lines.

Fitch believes that White Mountains' reserve risk exposure is well managed as run-off net loss and LAE reserves at OneBeacon are down significantly from 2002 levels as the majority of losses have been settled. In 2007, OneBeacon posted $48 million of GAAP favorable reserve development due to lower than expected frequency for professional liability and lower than expected severity for automobile liability. This follows $366 million of GAAP adverse loss reserve development posted over the previous four year period (2003-2006), primarily relating to 2002 and prior accident years, and mostly in its run-off business.

White Mountains Re posted $9 million of GAAP unfavorable reserve development in 2007, including $63 million for A&E ($52 million asbestos and $11 million environmental) following a detailed ground-up asbestos exposure study and review of environmental losses in the fourth quarter of 2007, and $28 million of strengthening for US casualty reserves, offset by $91 million of favorable development, primarily from property lines. This compares to $218 million of unfavorable prior year loss reserve development in 2006, including $86 million for hurricanes Katrina, Rita and Wilma and $137 million for reimbursements to Olympus Reinsurance Company, Ltd. (Olympus) for adverse development on the 2005 Gulf Coast storm losses that were ceded to Olympus by Folksamerica.

OneBeacon has a reinsurance cover from National Indemnity Company (NICO) for up to $2.5 billion in asbestos (pre-1992) and environmental (pre-1987) claims. OneBeacon's best estimate of claims for A&E and other exposures is $2.1 billion, with an estimated range of $1.7 billion to $2.4 billion, which is within the $2.5 billion limit of the NICO cover. OneBeacon's A&E three-year survival ratio at year-end 2007 was favorable at 14.2 times (x) including the remaining $404 million protection under the NICO cover (10.2x excluding NICO cover). Fitch expects that the remaining available limit under the NICO cover will be sufficient to absorb any potential future additional adverse A&E loss development at OneBeacon. OneBeacon expects to complete its next ground-up A&E review in 2008.