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A.M. Best Downgrades Rating of CGU to A.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Sept. 26, 2000

A.M. Best Co. has downgraded the financial strength rating of the CGU Insurance Companies, Boston, from A+ (Superior) to A (Excellent) and removed it from under review.

The rating action follows the recent announcement by CGNU plc, United Kingdom - the group's ultimate parent - that a definitive agreement has been reached for the sale of its U.S. property/casualty operations to White Mountains Insurance Group, Bermuda.

The downgrade reflects the decoupling of the group's rating from its former parent, which had historically provided the organization with significant financial flexibility, global reach and strategic backing. In addition, the action considers material charges related to anticipated reserve strengthening within the group's continuing operations. These factors combined with the less robust financial flexibility afforded by White Mountains has resulted in the group's lower rating. The strategic link with a top-ranking global financial services concern and the perceived strength of the group's balance sheet, considering prior reserving actions, had been the basis for the assignment of the A+ rating to the CGU pool in February 1999.

The transaction, valued at $2.6 billion, including the repayment of intercompany debt, will be financed through a combination of cash, equity partnerships, bank debt, and convertible preferred stock. Debt is expected to approximate $1 billion and will be represented by short-term bank financing. Upon completion of the transaction, White Mountains Insurance Group will own 82% of the newly formed holding company created to make the CGU acquisition with the remainder held by various equity partners. CGNU plc will retain a seller's note in the amount of $.2 billion, payable six months from the closing date in cash or stock at White Mountains option. The transaction contemplates a series of actions, including anticipated reserve strengthening, investment portfolio restructuring, and shareholder dividend payments that will result in a sizable reduction to the group's surplus. White Mountains will recapitalize a portion of this lost surplus through a contribution of most of its existing operating subsidiaries. Nevertheless, CGU's consolidated operating leverage will increase and remain high relative to its peers. Financial leverage, with a debt to capital ratio of 35%, will also be modestly elevated and associated dividend demands for servicing these obligations will constrain surplus growth. The replacement of intercompany debt with a five-year bank facility places further earnings pressure on the organization. Management, however, intends to refinance this credit facility at a later date with longer-term public debt to provide a more favorable capital structure.

Despite the downgrade, the group's current rating reflects CGU's excellent capitalization, strong agency franchise, and stable earnings trends. These positive attributes are derived from CGU's leading market position, ranking among the top 20 property/casualty groups within the U.S., where it maintains a diverse portfolio of personal, commercial and specialty products. The rating also considers the positive long-term implications associated with its change in ownership, which alleviates market uncertainties, strengthens its management team, and improves the quality of its balance sheet. Upon close of the transaction, substantial liabilities relating to the group's discontinued operations will be transferred to a third party via a loss portfolio transaction which provides additional limits of $1.5 billion above the $1 billion of ceded reserves. These liabilities, largely involving mass tort claims emergence, have plagued the group with continued prior period loss development. Accordingly, A.M. Best expects that this action in combination with anticipated reserve additions, reunderwriting initiatives and improving commercial lines pricing will prompt greater earnings potential for the group enabling it to generate surplus and reduce operating leverage while managing parental debt obligations.

Concurrent with this action, A.M. Best has affirmed the A- (Excellent) rating of the National Farmers Union Casualty Group companies, which are strategic subsidiaries of the CGU Insurance Companies, and removed the rating from under review.

A. M. Best has also affirmed the A (Excellent) rating of Folksamerica Reinsurance Company. As part of the acquisition and prior to its contribution to CGU, outstanding debt at the company's immediate parent holding company will be repaid and Folksamerica Re will receive a capital infusion of $100 million from White Mountain Insurance Group. This action will address operating leverage concerns that resulted from recent acquisitions of several blocks of business.

Finally, the balance of the White Mountains Insurance Group operating companies remain unaffected by this announcement.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com .
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Publication:Business Wire
Date:Sep 26, 2000
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