A.M. Best Assigns Debt Rating to Fund American’s $700M Senior Notes

A.M. Best Co. has assigned a “bbb” senior unsecured debt rating to Fund American Companies, Inc.’s (Delaware) issuance of $700 million senior notes. The notes carry an interest rate of 5.875 % and will mature in 2013. The notes will be fully guaranteed by White Mountains Insurance Group, Ltd. (Bermuda).

Proceeds from this debt offering will be fully used to re-pay term loans
under the company’s credit facility and partially re-pay the outstandings under its bank revolving credit facility. Therefore, the consolidated financial leverage of White Mountains will remain unchanged. The debt wasinitially incurred to partially finance the acquisition of OneBeaconInsurance Group (Pennsylvania) in 2001.

The rating reflects White Mountains’ overall financial stability and
operating performance, which has met both management’s and A.M. Best’s expectations. OneBeacon’s management has progressed well in its turn-around strategy and has dramatically cut premium volume of unprofitable business segments, promoting a culture of underwriting excellence and the maintenance of a stable balance sheet. The reduction of premium was mainly the result of transferring OneBeacon’s regional agency business, representing just under 50 percent of total premium, to Liberty Mutual through a renewal rights agreement.

In the first quarter of 2003, OneBeacon’s overall GAAP combined ratio was 97 percent compared with 109 percent for the same period in 2002. While A.M. Best recognizes the strides management has taken in improving operating fundamentals, underwriting and earnings sustainability have yet to manifest themselves.

The three main holding companies within the White Mountains’
enterprise currently maintain just over $300 million of cash and liquid
assets, which is more than sufficient to cover debt services, preferred and common shareholder dividends and debt maturities for the next three years.

Furthermore, management intends to upstream sizable dividends from
OneBeacon in 2003 – and perhaps beyond – as it shrinks volume and exposures while continuing to ensure it maintains sufficient surplus to support its overall Excellent ratings.

Financial leverage of 26 percent (debt plus non-convertible preferred/capital) is in line for White Mountains’ debt ratings, although A.M. Best expects this ratio to decline as continuous improvements in operating fundamentals result in earnings and equity building momentum.