WHITE MOUNTAINS INSURANCE GROUP LTD - 10-K Annual Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____
Commission file number 1-8993

WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)

BERMUDA 94-2708455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

28 GATES STREET, WHITE RIVER JUNCTION, VERMONT 05001-7066
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (802) 295-4500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Shares, par value $1.00 New York Stock Exchange
per share

Securities registered pursuant to section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

The aggregate market value of voting shares (based on the closing price of
those shares listed on the New York Stock Exchange and the consideration
received for those shares not listed on a national or regional exchange) held by
non-affiliates of the Registrant as of March 31, 2002, was $2,861,356,117.

As of March 31, 2002, 8,284,181 common shares, par value of $1.00 per share
("Common Shares"), were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Notice of 2002 Annual General Meeting of Members
and Proxy Statement dated March 22, 2002 (Part III)

TABLE OF CONTENTS

PART I

ITEM 1. Business................................................................................. 1

a. General............................................................................. 1

b. OneBeacon........................................................................... 2

c. Folksamerica........................................................................ 11

d. Fund American Reinsurance Company Ltd............................................... 17

e. Investments in Unconsolidated Insurance Affiliates.................................. 18

f. Former Operations................................................................... 18

g. Regulation.......................................................................... 19

h. Ratings............................................................................. 21

i. Investing Operations................................................................ 21

j. Employees........................................................................... 22

ITEM 2. Properties............................................................................... 22

ITEM 3. Legal Proceedings........................................................................ 22

ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 22

PART II

ITEM 5. Market for the Company's Common Equity and Related Shareholder Matters.................. 23

ITEM 6. Selected Financial Data.................................................................. 24

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 25

Liquidity and Capital Resources.......................................................... 35

Critical Accounting Policies and Estimates............................................... 39

Market Risk.............................................................................. 40

Forward-Looking Statements............................................................... 42

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................... 42

ITEM 8. Financial Statements and Supplementary Data.............................................. 43

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 43

PART III

ITEM 10. Directors and Executive Officers......................................................... 43

ITEM 11. Executive Compensation................................................................... 44

ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 44

ITEM 13. Certain Relationships and Related Transactions........................................... 44

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 44

PART I

ITEM 1. BUSINESS

GENERAL

White Mountains Insurance Group, Ltd. (the "Company") was originally formed
as a Delaware corporation in 1980 and became a Bermuda limited liability company
during 1999. In October 1999, the Company completed a corporate reorganization
that changed its domicile from Delaware to Bermuda (the "Redomestication").
The Company's principal businesses are conducted through its subsidiaries and
affiliates in the business of property and casualty insurance and reinsurance.
Within this report, the consolidated organization is referred to as "White
Mountains". The Company's headquarters are located at Crawford House, 23 Church
Street, Hamilton, Bermuda HM 11, its principal executive office is located at
28 Gates Street, White River Junction, Vermont 05001-7066 and its registered
office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM DX.

On June 1, 2001, White Mountains acquired OneBeacon Insurance Group LLC
(together with its subsidiaries, "OneBeacon") from London-based CGNU plc
("CGNU") for $2.1 billion, of which $260.0 million consisted of a convertible
note payable (the "Seller Note") with the balance paid in cash (the
"Acquisition"). OneBeacon owns several property and casualty insurance and
reinsurance companies throughout the United States. These include OneBeacon
Insurance Company, National Farmers Union Property and Casualty Company ("NFU"),
Houston General Insurance Company ("HG"), Folksamerica Reinsurance Company
(together with Folksamerica Holding Company, Inc. and subsidiaries,
"Folksamerica") and Peninsula Insurance Company ("PIC"). Folksamerica and PIC
are owned by OneBeacon but are run as separate entities, with distinct
operations, management and business strategies. Folksamerica and PIC were
contributed to OneBeacon immediately subsequent to the Acquisition. The
Company's consolidated results include OneBeacon's financial results for the
seven month period since the Acquisition.

On November 1, 2001, OneBeacon transferred its regional agency business,
agents and operations in 42 states and the District of Columbia to Liberty
Mutual Insurance Group ("Liberty Mutual") pursuant to a renewal rights agreement
(the "Renewal Rights Agreement"). This transfer amounted to approximately
$1.5 billion in written premiums, or approximately 45% of OneBeacon's total
business. Service agreements are in place to ensure a smooth transition. Over
the next two years, the underwriting results and cash flows of the renewed
policies will be shared between OneBeacon and Liberty Mutual. A reinsurance
agreement pro-rates results so that OneBeacon assumes approximately two-thirds
and one-third of the underwriting results corresponding to renewals in the first
and second years, respectively. OneBeacon is now focused on becoming a
profitable independent agency property and casualty insurance company in the
Northeast and for select specialty business on a national basis.

WHITE MOUNTAINS' OPERATING PRINCIPLES

Each employee of White Mountains is expected to operate within the spirit
of its four operating principles. These are:

UNDERWRITING COMES FIRST. We must respect the fundamentals of insurance.
There must be a realistic expectation of profit on all business written, and
demonstrated fulfillment of that expectation over time, with focused attention
to the loss ratio and to all the professional insurance disciplines of pricing,
underwriting, and claims management.

MAINTAIN A DISCIPLINED BALANCE SHEET. Insurance liabilities must always be
fully recognized. Loss reserves must be solid before any other aspect of the
business can be solid. Pricing, marketing, and underwriting all depend on
informed judgement of ultimate loss costs and that can be managed effectively
only with a disciplined balance sheet.

INVEST FOR TOTAL RETURN. White Mountains invests for the best growth in
after tax value over time whether reported as income or not and without regard
to any need to report a smooth earnings stream. In addition to investing our
bond portfolios for total after tax return, that will also mean prudent
investment in equities consistent with leverage and insurance risk
considerations.

THINK LIKE OWNERS. By taking accountability for one's actions and behaving
with a sense of urgency, all employees demonstrate their stake in the business
by working smarter and understanding that actions influence results. Thinking
like an owner embraces all that without losing the touchstone of a capitalist
enterprise.

1

ONEBEACON

Headquartered in Boston, Massachusetts, OneBeacon is one of the oldest
property and casualty insurers in the United States, tracing its roots to 1831
and the Potomac Fire Insurance Company. OneBeacon's legacy includes being among
the first to issue automobile policies, honoring claims arising from the great
San Francisco earthquake and the sinking of the Titanic and insuring several
U.S. presidents. During 1998, Commercial Union plc and General Accident plc,
both UK corporations, were merged to form CGU plc. The U.S. operations of these
companies, General Accident Corporation of America ("General Accident") and
Commercial Union Corporation ("Commercial Union"), were merged to form CGU
Corporation (the "Merger"). White Mountains agreed to purchase CGU Corporation
in September of 2000, with the transaction closing on June 1, 2001. The name
OneBeacon was introduced at the time of the purchase. OneBeacon is rated as A
(Excellent) by A.M. Best.

On June 1 2001, White Mountains significantly strengthened OneBeacon's
balance sheet. In connection with the Acquisition, CGNU caused OneBeacon to
purchase reinsurance contracts with two reinsurance companies rated AAA
(Extremely Strong) by Standard & Poor's and A++ (Superior) by A.M. Best: a
full risk-transfer cover from National Indemnity Company ("NICO") for up to
$2.5 billion in old asbestos and environmental claims (the "NICO Cover") and an
adverse development cover from General Reinsurance Corporation ("GRC") for up to
$400.0 million on losses occurring in years 2000 and prior (the "GRC Cover").
Additionally, White Mountains' purchase accounting adjustments resulted in a
strengthening of OneBeacon's acquired balance sheet in the form of adjustments
to OneBeacon's insurance and non-insurance liabilities and assets.

Immediately subsequent to the Acquisition, a new management team was
appointed and new performance expectations established through ongoing
communication of White Mountains' operating principles and long-term
incentive compensation based on results. Since the Acquisition, substantial
actions have been taken to improve OneBeacon's business, including increased
pricing and re-underwriting. Certain unprofitable lines of business, accounts
and agents have been eliminated. Management has also been seeking to improve
the claim function by increasing staffing levels in many areas and
introducing programs and tools geared towards controlling indemnity costs.
Credit terms have been changed to accelerate the receipt of cash and
collection of old receivables is a high priority. Spending on major systems
initiatives has been substantially scaled back to focus on delivering
meaningful improvements to existing systems while eliminating the multitude
of redundant systems left over from the Merger. Significant efforts are
underway to rebuild coherent management information that has been lacking
since the Merger.

OneBeacon conducts its primary personal and commercial business through
independent agents in four regional operations - Northern New England, Southern
New England, Upstate New York and the Metro New York/New Jersey area. Agents add
value to their customers through personal attention, coverage expertise and an
understanding of local market conditions. The regional operations target
personal and commercial customers, focusing on the family account and small to
mid-sized businesses. OneBeacon's objective is to underwrite only profitable
business without regard to market share, premium volume or growth. In addition
to these regional operations, OneBeacon is also committed to nurturing its
select specialty businesses that focus on providing custom coverages to certain
niche markets, including ocean marine, agricultural insurance ("Agri"),
professional liability and tuition reimbursement. Each specialty business has
its own operations and appointed agents that target specific customer groups.

PROPERTY AND CASUALTY INSURANCE OVERVIEW

As a property and casualty insurance company, OneBeacon writes insurance
policies in exchange for premiums paid by its customers (the insured). An
insurance policy is a contract between OneBeacon and the insured where OneBeacon
agrees to pay for losses suffered by the insured that are covered under the
contract. Such contracts often are subject to subsequent legal interpretation by
courts, legislative action and arbitration. Property insurance covers the
financial consequences of accidental losses to the insured's property, such as a
house and the personal property in it, or a business' building, inventory and
equipment. Casualty insurance (often referred to as liability insurance)
generally covers the financial consequences of a legal liability of an
individual or an organization resulting from negligent acts and omissions
causing bodily injury and/or property damage to a third party. Claims on
property coverage generally are reported and settled in a relatively short
period of time, whereas those on casualty coverage can take years, even decades,
to settle.

2

OneBeacon provides property and casualty insurance on a wide variety of
coverages, including the following:

- Automobile: consists of physical damage and liability coverage. Auto
physical damage insurance covers loss or damage to vehicles from
collision, vandalism, fire, theft or other causes. Auto liability
insurance covers bodily injury of others, damage to their property and
costs of legal defense resulting from a collision caused by the
insured.
- Commercial property: covers losses to a business' premises, inventory
and equipment as a result of weather, fire, theft and other causes.
- Homeowners: covers losses to an insured's home, including its contents,
as a result of weather, fire, theft and other causes, and losses
resulting from liability for acts of negligence by the insured or the
insured's immediate family.
- Inland marine: covers property that may be in transit or held by a
bailee at a fixed location, movable goods that are often stored at
different locations or property with an unusual antique or collector's
value.
- General liability: covers businesses for any liability resulting from
bodily injury and property damage arising from its general business
operations, accidents on its premises and its products manufactured or
sold.
- Umbrella: supplements existing insurance policies by covering losses
from a broad range of insurance risks in excess of coverage provided by
the primary insurance policy up to a specified limit.
- Workers compensation: covers an employer's liability for injuries,
disability or death of employees, without regard to fault, as
prescribed by state workers compensation law and other statutes.
- Ocean marine: covers losses to an insured's vessel and/or its cargo as
a result of collision, fire, piracy and other perils.

OneBeacon derives substantially all of its revenues from earned premiums,
investment income and net gains and losses from sales of investment securities.
Earned premiums represent premiums received from insureds, which are recognized
as revenue over the period of time during which insurance coverage is provided
(i.e., ratably over the life of the policy). A significant period of time
normally elapses between the receipt of insurance premiums and the disbursement
of insurance claims. During this time, investment income is generated,
consisting primarily of interest earned on fixed maturity investments and
dividends earned on equity securities. Net realized investment gains and losses
result from sales of securities from OneBeacon's investment portfolio.

OneBeacon incurs a significant amount of its total expenses from
policyholder losses, which are commonly referred to as "claims". In settling
policyholder losses, various loss adjustment expenses ("LAE") are incurred, such
as insurance adjusters' fees and litigation expenses. In addition, OneBeacon
incurs policy acquisition expenses such as commissions paid to agents and
premium taxes, and other expenses related to the underwriting process, including
salaries for professional and clerical staff.

Underwriting profit or loss is determined by subtracting losses, loss
adjustment expenses, policy acquisition expenses and other underwriting expenses
from earned premiums. A key measure of relative underwriting performance is the
combined ratio. An insurance company's statutory combined ratio is calculated by
adding the ratio of incurred loss and loss adjustment expenses to premiums
earned (the "loss ratio") and the ratio of commissions, premium taxes and other
underwriting expenses to premiums written (the "expense ratio"). For management
purposes, OneBeacon uses a modified statutory combined ratio ("trade ratio")
that divides general and administrative expenses by earned premiums rather than
written premiums. Management believes the trade ratio to be the best measure of
the current profitability of OneBeacon's businesses because it relates the cost
of producing the business to premiums written and the cost of operating the
business to premiums earned. A trade ratio of 100% or less indicates an
underwriting profit, while a ratio greater than 100% indicates an underwriting
loss. When considering investment income and investment gains or losses,
insurance companies operating at a combined ratio of greater than 100% can be
profitable despite incurring an underwriting loss.

LINES OF BUSINESS

OneBeacon writes three core lines of business consisting of personal and
commercial lines in the Northeast and certain specialty lines. Premiums from
other "non-core" lines, including business assumed from Liberty Mutual in
connection with the Renewal Rights Agreement and certain non-core or runoff
operations will diminish significantly over the next two years as OneBeacon's
obligations under the Renewal Rights Agreement decrease and policies in

3

run-off expire. For the twelve months ended December 31, 2001, OneBeacon's net
written premiums and accident year trade ratios (after removing the effects of
the NICO Cover, GRC Cover and certain other non-recurring transactions related
to the Acquisition) by line of business were as follows:

OneBeacon's personal lines include auto, homeowners and Custom-Pac products
(combination policies offering home and auto coverage with optional umbrella,
boatowners and other coverages), which for the twelve months ended December 31,
2001 represented 61%, 16% and 15%, respectively, of personal lines net written
premium. OneBeacon's commercial lines include package (combination policies
offering property and liability coverage), commercial auto and workers
compensation, which for the twelve months ended December 31, 2001 represented
46%, 22% and 20%, respectively, of OneBeacon's commercial lines net written
premium. Specialty products principally include ocean marine, Agri, professional
liability and tuition reimbursement. Other non-core products include business
assumed from Liberty Mutual in connection with the Renewal Rights Agreement
($124.4 million), business in territories subject to the Renewal Rights
Agreement written prior to November 1, 2001 ($1,230.5 million), premiums
generated from NFU ($171.9 million), national programs and national accounts and
certain other insurance products in run-off ($168.7 million).

NEW YORK AUTOMOBILE INSURANCE PLAN ("NYAIP")

The NYAIP is a residual insurance market that obtains personal automobile
insurance for those individuals who cannot otherwise obtain it in the voluntary
insurance market. The NYAIP assigns such individuals to insurers to underwrite
and service policies based on the proportion of the automobile insurance
premiums each company voluntarily wrote in New York two years ago. The NYAIP
allows insurers to either provide insurance coverage to these individuals or to
transfer their NYAIP obligation to certain other insurance companies approved by
the New York State Insurance Department. This latter process is referred to as a
Limited Assigned Distribution ("LAD") and the companies that assume this
obligation are referred to as "LAD servicing carriers". Companies who transfer
their NYAIP business pay a fee to LAD servicing carriers in addition to the
policy premium.

Several of OneBeacon's insurance subsidiaries write voluntary automobile
insurance in the state of New York. In doing so, they are obligated to accept
NYAIP assignments during the next two years for their market share of voluntary
premiums written two years ago. In connection with the Acquisition, White
Mountains estimated the cost of discharging its obligations associated with
NYAIP assignments resulting from voluntary business written by OneBeacon in the
two year period prior to the Acquisition and recorded a liability of
$110.0 million. Management will periodically review and adjust this liability in
accordance with accounting principles generally accepted in the United States
("GAAP") as circumstances change within the New York automobile insurance
marketplace.

AUTOONE. In the last few years, the number of individuals requiring NYAIP
assignments and LAD fees have both increased significantly. In order to mitigate
its own exposure to the cost of future NYAIP assignments and to take advantage
of rapidly rising LAD servicing fees, in October of 2001 OneBeacon established
its wholly-owned subsidiary, General Assurance Company ("GAC"), to act as a LAD
servicing carrier. This company, which does business as "AutoOne", has written
17 LAD contracts that are expected to result in approximately $100 million of
assigned written premium and approximately $118 million of LAD fees in 2002.
OneBeacon believes that AutoOne's current business strategy will enable it to
capitalize on the significant demands for LAD services resulting from

4

increased NYAIP assignments and improve the results of OneBeacon's overall New
York automobile business by reducing its cost of obtaining LAD services. AutoOne
is operated as a separate division of OneBeacon.

LAD servicing contracts between AutoOne and other insurers are for a period
of one year. Once an assigned risk policy has been written, AutoOne is obligated
to provide insurance for two more years unless the insured departs from the
NYAIP, regardless of whether the LAD contract is renewed. This risk can be
somewhat mitigated through (i) renewal of the LAD contract in the subsequent
year; (ii) through "disengagement" fees due to AutoOne upon non-renewal of the
LAD servicing contract; and (iii) through utilization of various credits offered
by New York to those insurers who voluntarily provide coverage to individuals in
the NYAIP. To the extent that assigned risk rates are increased by New York, the
resulting additional premium, along with the LAD fee, provides for a significant
profit opportunity.

ONEBEACON PROFESSIONAL PARTNERS

In February 2002, OneBeacon announced that it is entering the directors
and officers ("D&O") and professional liability markets under the name
OneBeacon Professional Partners. D&O coverage protects directors and officers
against personal liability that may arise from omissions or misstatements in
the course of running their business. OneBeacon's target for D&O cover will
be mid-sized public and private companies outside of the technology sector.
Professional liability insurance protects against liability that may result
from negligence or misconduct related to business operations. OneBeacon's
emphasis will be medical professional liability business for small and
mid-size institutions and provider groups that require excess coverage and
low limits.

OneBeacon Professional Partners' liability coverages are expected to be
issued on a "claims made" basis, which means insurance that covers losses
reported during the time period when a liability policy is in effect, regardless
of when the event causing the claim actually occurred. OneBeacon Professional
Partners operates as a separate division of OneBeacon, and is staffed with a
team of experienced liability insurance professionals who recently joined
OneBeacon in Avon, CT.

GEOGRAPHIC CONCENTRATION

OneBeacon's gross written premiums are derived solely from business
produced in the United States. The various specialty businesses generate
premiums from risks written in markets across the country. Personal and
commercial lines business was produced in the following states:

(1) Adjusted to exclude premiums assumed in connection with the Renewal Rights
Agreement and premiums in territories subject to the Renewal Rights
Agreement written prior to November 1, 2001.

MARKETING

OneBeacon sells its personal and commercial lines products through
select independent insurance agents. OneBeacon believes that independent
agents provide complete assessments of their clients' needs, which results in
appropriate coverages and true risk management. Additionally, this
independent agent distribution channel will continue to be a significant
force in overall industry premium production.

In connection with the Renewal Rights Agreement, OneBeacon reduced the
number of its branch offices from 38 to 13, and its total agents from
approximately 3,970 in 50 states to approximately 1,850 agents in 8 states.
OneBeacon's operations are located close to its agent partners and customers
throughout the Northeast.

5

OneBeacon's specialty businesses are located in separate locations,
logistically appropriate to their target markets. International Marine
Underwriters ("IMU") is headquartered in New York City and has nine branch
locations located throughout the United States. Its products are distributed
through a network of select agents that specialize in the ocean marine business.
Agri has centralized operations in Lenexa, Kansas and distributes its products
through independent agencies that focus on the farm and ranch marketplace. For
both of these specialty businesses, OneBeacon leverages its knowledge about
these markets to provide products and services tailored to meet customer needs.

UNDERWRITING AND PRICING

OneBeacon believes that there must be a realistic expectation of
underwriting profit on all business written, and a demonstrated fulfillment of
that expectation over time. Pricing pressures can be caused by many factors such
as: (1) insurance companies selling their products at less than adequate rates,
because they either underestimate ultimate claim costs or overestimate the
amount of investment income they will earn on premiums before the claims are
paid; (2) insurance companies utilizing direct-response marketing methods versus
marketing their products through independent agents; (3) competitors seeking to
increase revenues and market share by reducing the price of their products
beneath levels acceptable to OneBeacon; and (4) mutual insurance companies and
other insurance companies who are willing to accept a lower return on equity on
their insurance operations than White Mountains' management and its
shareholders. Pricing levels can also be influenced by state regulation,
legislation and judicial decisions.

Following the Merger, the integration of underwriting and claims functions
focused on expense savings brought about numerous changes in business practices
and philosophy, as well as in processes and systems. These changes, along with a
complicated conversion of policies and claims, led to weak pricing and
underwriting and confused claims management and reserving. The reserve
uncertainties contributed significantly to the inadequacy (as further discussed
herein) of 1999 and prior year reserves, which was corrected in 2000 and 2001.

Since the Acquisition, OneBeacon has focused significant attention on
pricing and underwriting. Commercial lines prices increased 16% in 2001 with
further increases of 25% targeted for 2002. Personal lines pricing increased 5%
with a goal of rate, reclassification and coverage actions to produce a 16%
increase in 2002. In addition, OneBeacon has ceased writing policies on certain
historically unprofitable product lines such as its national programs and
national accounts and has reduced or eliminated writings through historically
unprofitable agents. Further, as a result of the Renewal Rights Agreement,
OneBeacon is focusing its efforts on improving the ongoing operations in the
Northeast, where it believes historical results were closer to profit targets.

On November 1, 2001, Liberty Mutual assumed control over the
underwriting and pricing of business subject to the Renewal Rights Agreement.
Through the related reinsurance agreement, OneBeacon assumes approximately
two-thirds and one-third of Liberty Mutual's underwriting results corresponding
to renewals in the first and second years, respectively. Failure of Liberty
Mutual to adequately control the renewal underwriting and pricing of the
transferred business could adversely impact the financial results of OneBeacon,
as well as those of Liberty Mutual, during the transitional reinsurance period.

COMPETITION

Property and casualty insurance is highly competitive and extensively
regulated by state insurance departments. It is often difficult for insurance
companies to differentiate their products to consumers. The more significant
competitive factors for most insurance products offered by OneBeacon are
price, product terms and claims service. OneBeacon's underwriting principles
and dedication to agency distribution are unlikely to make OneBeacon the "low
cost" provider in most markets. OneBeacon believes that most property and
casualty insurance customers value the counsel of a professional independent
agent, and that its use of independent agents is a competitive advantage over
direct-response writers. As a result, OneBeacon has nurtured close
relationships with its agents, thereby reinforcing doing business on a
personal level. OneBeacon is able to offer its independent agents products
with terms desired by the insureds and greater financial strength than many
smaller Northeast regional carriers, and with more personalized service than
larger national carriers.

6

CLAIMS

Effective claims management is a critical factor in achieving satisfactory
underwriting results. Additionally, claims service is the most important product
differentiation that OneBeacon brings to its agents and insureds. OneBeacon's
near term staffing and systems plans will cause OneBeacon to spend more on
administrative claims costs to reduce overall loss costs.

Claims handling is located in various regional and local branch offices
under the supervision of the Chief Claims Officer. OneBeacon maintains an
experienced staff of appraisers, medical specialists, managers, attorneys and
field adjusters strategically located throughout its operating territories.
OneBeacon also maintains a special investigative unit designed to detect
insurance fraud and abuse, and supports efforts by regulatory bodies and trade
associations to curtail the cost of fraud.

Pursuant to the Renewal Rights Agreement, Liberty Mutual assumed control of
OneBeacon's claims offices in the regions subject to the Renewal Rights
Agreement, and will service claims from OneBeacon policies written prior to
November 1, 2001 in those regions. Service agreements were put in place in
connection with the Renewal Rights Agreement through which Liberty Mutual has
become a third party administrator ("TPA") for those claims. OneBeacon also uses
TPA's for certain other claims, especially in the national accounts and national
programs now in run-off. Additionally, NICO is handling the claims processing
for claims ceded under the NICO Cover under a TPA agreement. OneBeacon's claims
staff performs on-site claim audits of its TPA's to ensure the propriety of the
controls and processes over claims serviced by the TPA on behalf of OneBeacon.

EMPLOYEES

White Mountains has brought a new management team to OneBeacon to
improve operating results in the short term and establish practices for
sustaining acceptable underwriting results going forward. To encourage staff
to evolve toward a results-oriented culture, all OneBeacon employees were
awarded two Common Shares and a new performance-based compensation program
was introduced for managers and key employees. Managers now see greater
emphasis on incentive compensation with payouts based on corporate and
individual goal achievements. OneBeacon supports continuous learning to
achieve effectiveness and flexibility and encourages its staff to think like
owners and take accountability to effect change. In connection with the
Renewal Rights Agreement and other actions, OneBeacon reduced its workforce
from approximately 7,300 to 4,200 during the past year.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

OneBeacon establishes loss and loss adjustment expense reserves that are
estimates of amounts needed to pay claims and related expenses in the future for
insured events that have already occurred. Loss and loss adjustment expense
reserves have two components: case reserves, which are reserves for claims that
have been reported to OneBeacon, and incurred but not reported ("IBNR") reserves
for claims that have occurred but not yet reported to OneBeacon. Case reserves
are estimated based on the experience and knowledge of claims staff regarding
the nature and potential cost of each claim. OneBeacon periodically adjusts case
reserves as additional information becomes known or payments are made. OneBeacon
determines its IBNR reserves by considering all available information including
historical patterns of paid and reported claim experience, industry data, and
changes in exposures to claims by line of business, type of insurance, limits of
coverage, reinsurance protections and other factors affecting the business.

The process of estimating loss and loss adjustment expense reserves
involves a considerable degree of judgement by management. During the claims
settlement period, which may extend over a long period of time, additional facts
regarding claims and trends become known which may cause OneBeacon to adjust its
estimates of the ultimate liability. Also, as noted previously, the Merger
combined the claims staff of the two companies. Subsequent to the Merger, it
became evident that General Accident had systematically depressed case reserves
under the belief that lower case reserves lead to lower settlements. In fact, it
resulted in ineffective claims management and higher costs. The more
conservative, and management believes, more appropriate, Commercial Union
philosophy of establishing case reserves at expected settlement amounts was
adopted in 1999. This has led to significant case reserve increases which has
made the estimation of IBNR reserves challenging. The challenge is

7

compounded by the lack of reliable historical data for much of the claims
converted from legacy General Accident systems. Management is working diligently
to reconstruct such data. In 2001, adjusters were asked to review all large
cases and attest to the case reserve adequacy. As a result of this process,
overall reserves have been increased significantly and the GRC Cover has been
exhausted. Management is reasonably confident that known cases can be ultimately
settled within established reserves. However, as a result of the factors noted
above, actual loss and loss adjustment expenses may deviate, perhaps
substantially, from estimates reflected in White Mountains' consolidated
financial statements. Changes to prior year reserves are booked in the current
accounting period.

The following table presents the development of OneBeacon's year-end
property and casualty losses for the ten-year period from 1991 to 2001. Section
I of the table shows the gross and net (of reinsurance) estimated liabilities
that were recorded at the end of each of the indicated years for all current and
prior year unpaid loss and loss adjustment expenses. Section II shows the
re-estimate of the net liabilities made in each succeeding year. Section III
shows the cumulative net (deficiency)/redundancy representing the aggregate
change in the liability from the original balance sheet dates. Section IV shows
the cumulative net liabilities paid of such previously recorded liabilities.

(1) In 1998, OneBeacon was formed as a result of a pooling of interests
between Commercial Union and General Accident. All historical balances
have been restated as though the companies had been merged throughout
the periods presented.

(2) For 1991 liabilities are shown net of reinsurance recoverables, as was the
accounting practice prior to the implementation of Statement of Financial
Accounting Standard ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts".

(3) In 1998, OneBeacon acquired HG and NFU. All liabilities related to these
entities have been shown from the acquisition date forward in this table.

8

The cumulative net (deficiency)/redundancy in the table above reflects
reinsurance recoverables recorded in connection with the Acquisition under
the NICO Cover. This cover applies to losses incurred in 2000 and prior
years. As a result, it has the effect of significantly increasing OneBeacon's
reinsurance recoverables in 2001 and reducing its reserve deficiency for each
of the years presented prior to the Acquisition, by the amount of reserves
ceded at the time their cover was purchased. See "Asbestos and Environmental
Liabilities" for a discussion of the impact of this reinsurance contract on
OneBeacon's net loss and loss adjustment expense reserve position. The table
presented below represents OneBeacon's cumulative net deficiency without
regard to the NICO Cover.

ASBESTOS AND ENVIRONMENTAL LIABILITIES

OneBeacon estimates its asbestos and environmental loss and loss adjustment
expense liabilities based upon several factors, including facts surrounding
reported cases and exposures to claims (such as policy limits and deductibles),
current law, past and projected claim activity and past settlement values for
similar claims.

Immediately prior to the Acquisition, CGNU caused OneBeacon to purchase
a reinsurance contract with NICO for a premium of $1.3 billion under which
OneBeacon is entitled to recover from NICO up to $2.5 billion for asbestos
claims arising from business written by OneBeacon prior to 1992,
environmental claims arising from business written by OneBeacon prior to 1987
and certain other exposures, all net of other third party reinsurance
recoveries. The NICO Cover, which was contingent on, and occurred
contemporaneously with the Acquisition, qualifies for prospective reinsurance
accounting treatment under the Emerging Issues Task Force Technical Matter
Document No. D-54 ("EITF Topic D-54") which characterizes the protection as
an indemnification by the seller for increases in the liabilities for losses
and loss adjustment expenses that existed at the acquisition date.

Under the terms of the NICO Cover, in addition to the reinsurance premium,
NICO received the benefit of reinsurance recoverables from certain of
OneBeacon's third party reinsurers in existence at the time the NICO Cover was
executed. Collections received from third party reinsurance on the claims
covered by the NICO Cover serve to protect the $2.5 billion limit of NICO
coverage for OneBeacon's benefit.

During the fourth quarter of 2001, OneBeacon increased its estimate of
gross asbestos and environmental loss reserves to more conservatively reflect
the ultimate cost of settling these exposures. As a result of the NICO Cover,
there was no change in the net reserve balance. OneBeacon estimates that it has
exhausted approximately $1,771 million of the $2.5 billion coverage provided by
the NICO Cover at December 31, 2001. To the extent OneBeacon's estimate of
ultimate asbestos and environmental losses and NICO's third-party recoverables
differs from actual experience, the amount of coverage remaining under the NICO
Cover could be higher or lower than $729 million. OneBeacon believes that as a
result the NICO Cover and the reserve increase, OneBeacon should not experience
financial loss from old asbestos and environmental exposures under current
coverage interpretations and has a survival ratio in line with industry survival
ratios. A survival ratio is a company's reserves divided by its historical
yearly loss payments for such claims. This ratio measures how many more years of
payments the reserves can support, assuming future yearly payments are equal to
historical yearly payments. OneBeacon's survival ratio for gross asbestos and
environmental reserves, based on its average loss payments for the last three
years, was approximately 7.7 at December 31, 2001. The Company's reserves for
asbestos and environmental losses at December 31, 2001 represent management's
best estimate of the Company's ultimate liability based on information currently
available. However, as case law expands, OneBeacon may be subject to asbestos
and environmental losses beyond amounts intended by policy coverage. Loss
reserve additions arising from any such future unfavorable case law
interpretations cannot be reasonably estimated at the present time.

9

CONSTRUCTION DEFECT AND MOLD CLAIMS

Construction defect claims are claims that arise from coverage provided by
general liability insurance. Construction defect claims typically arise from
alleged defective work performed by contractors and subcontractors in the
construction of apartments, condominiums and large developments of single family
dwellings. In addition to damages arising directly from the alleged defective
work, construction defect claims often allege that the economic value of the
structure has been diminished. Mold claims are claims that arise from general
liability insurance and homeowners insurance. The existence of certain airborne
mold spores, resulting from moisture trapped in confined areas, has been alleged
to cause severe health and environmental hazards. OneBeacon has sought to limit
its potential future exposure to construction defect and mold claims by
including exclusionary language in its insurance policies or ceasing to write
business in jurisdictions where the exposure to such claims is large. As a
result, OneBeacon believes that its reserves for such liabilities are adequate.
However, as case law expands, OneBeacon may be subject to construction defect
and mold loss and loss adjustment expense liabilities beyond those intended by
policy coverage. OneBeacon believes that it is unlikely that any such
liabilities would have a material adverse effect on its financial condition or
its cash flows.

REINSURANCE PROTECTION

In the ordinary course of its business, OneBeacon purchases reinsurance
from high quality, highly rated third party reinsurers in order to provide
greater diversification of its business and minimize the financial impact of
large risks or catastrophic events.

The timing and size of catastrophe losses are unpredictable and the level
of losses experienced in any year could potentially be material to OneBeacon's
operating results and financial position. Examples of catastrophes include
losses caused by earthquakes, wildfires, hurricanes and other types of storms
and terrorist acts. The extent of losses caused by catastrophes is both a
function of the total amount of insured exposure in an area affected by the
event and the severity of the event.

OneBeacon continually assesses and develops strategies to manage its
exposure to catastrophe losses through individual risk selection, by limiting
its concentration of insurance written in catastrophe-prone areas (such as
coastal regions) and through the purchase of catastrophe reinsurance.
OneBeacon has entered into a property catastrophe reinsurance program for the
2002 calendar year through a group of reinsurers, with a $125.0 million
retention for losses resulting from any single catastrophe. Property
catastrophe losses from a single event in excess of $125.0 million and up to
$200.0 million are reinsured for 75% of the loss. Property catastrophe losses
from a single event in excess of $200.0 million and up to $750.0 million are
reinsured for 95% of the loss. Although the $750.0 million reinsurance limit
exceeds OneBeacon's expected maximum loss from a one in 250 year Northeast
windstorm, which management considers to be the largest single catastrophe
risk based on the coverage and geographic location of its insureds, the
nature of storm activity and destruction can not be estimated with certainty.
OneBeacon's 2002 catastrophe reinsurance program has a reinstatement
provision whereby, in the event of one loss, the coverage used can be
reinstated for an additional premium. OneBeacon also purchases reinsurance
coverage for certain specific risks below $125.0 million, on either a
facultative or treaty basis, where appropriate.

In connection with the Acquisition, OneBeacon obtained the GRC Cover
which provides for $570.0 million of reinsurance protection consisting of
$400.0 million of adverse development coverage on losses occurring in years
2000 and prior, and $170.0 million on losses incurred as of the date of the
Acquisition. The GRC Cover, which was contingent on, and occurred
contemporaneously with the Acquisition, qualifies for prospective reinsurance
accounting treatment under EITF Topic D-54 which characterizes the protection
as an indemnification by the seller for increases in the liabilities for
losses and loss adjustment expenses that existed at the acquisition date.
During the fourth quarter of 2001, OneBeacon increased losses and loss
adjustment expense reserves for years 1999 and prior in the workers
compensation, general liability, commercial multi-peril and personal and
commercial automobile lines of business. These actions exhausted the
remaining protection under the GRC Cover and resulted in a $50.0 million
pretax charge in the 2001 fourth quarter to loss and loss adjustment expense.

10

At December 31, 2001, OneBeacon had $106.3 million of reinsurance
currently recoverable on paid losses and $3,609.7 million that will become
recoverable if claims are paid in accordance with current loss reserves
estimates. Reinsurance recoverables from Berkshire Hathaway, Inc.
("Berkshire") (NICO and GRC's ultimate parent) under the NICO Cover and the
GRC Cover together represented 62.0% of White Mountains' total reinsurance
recoverables at December 31, 2001. Because reinsurance contracts do not
relieve OneBeacon of its primary obligation to its policyholders, the
financial position and solvency of OneBeacon's reinsurers is critical to the
collectibility of its reinsurance coverages. OneBeacon is selective with
regard to its reinsurers, placing reinsurance with only those reinsurers
having strong financial strength ratings. OneBeacon monitors the financial
strength of its reinsurers on an ongoing basis. As a result, uncollectible
amounts have not historically been significant.

TERRORISM

As a result of the terrorist attacks of September 11, 2001 (the "Attacks"),
OneBeacon incurred approximately $105.0 million of pretax net losses on gross
losses of approximately $248.0 million in the third quarter of 2001. A
significant portion of the gross loss resulted from damage to property in the
vicinity of the World Trade Center. Our customer with the largest loss value has
reopened for business.

The Attacks have had a profound impact on the United States property and
casualty insurance marketplace. Prior to the Attacks, most United States
insurance companies had not explicitly contemplated the risk of substantive
terrorist attacks when underwriting their policies. In light of the Attacks,
OneBeacon and other property and casualty insurance companies have sought to
mitigate the risk associated with any future terrorist attacks by seeking to
exclude coverage for such losses from their policies.

Nearly all states (New York and California are two major exceptions) have
approved or conditionally approved a clause in commercial lines policies which
excludes coverage for most losses resulting from biological, chemical or nuclear
terrorist attacks. This clause also excludes coverage for commercial property
losses resulting from all other types of terrorist attacks exceeding $25 million
and excludes coverage for commercial liability losses if the terrorist event
involves the death or serious injury of 50 or more people. In 29 states,
however, the terrorist exclusion clause does not apply to losses on commercial
property arising from fire subsequent to a terrorist attack. Workers
compensation insurance and automobile insurance coverages do not currently
contain terrorist exclusion clauses.

OneBeacon's 2002 property catastrophe reinsurance program does not cover
personal or commercial property losses resulting from nuclear, biological or
chemical terrorist attacks and its property catastrophe program only covers
30% of commercial property losses resulting from other types of terrorist
attacks from $125.0 million to $650.0 million and 95% of such losses from
$650 million to $750 million. Therefore, OneBeacon is exposed to the extent
exclusion clauses for such losses are not obtained in the direct policies it
writes.

OneBeacon closely monitors its concentration of risk by geographic area and
primarily writes small commercial and personal lines business, which are
unlikely to be direct targets of terrorism. As a result, OneBeacon believes its
exposure to losses from future terrorist attacks to be limited. Nonetheless,
risks insured by OneBeacon remain exposed to future terrorist attacks and the
possibility remains that any future terrorist losses could prove to be material
to the Company's financial position and cash flows.

In the months following the Attacks, legislative proposals calling for the
United States government to assume losses arising from future terrorist attacks
over a certain limit have been discussed in Congress but no proposals have been
enacted. White Mountains strongly supports the enactment of responsible
legislation.

FOLKSAMERICA

Folksamerica, through its wholly owned subsidiary, Folksamerica
Reinsurance Company (a New York-domiciled reinsurance company), is a
multi-line broker-market reinsurer which provides reinsurance to insurers of
property and casualty and accident and health risks in the United States,
Canada, Continental Europe (in 2002), Latin America and the Caribbean.
Folksamerica Reinsurance Company is rated "A-" (Excellent) by A.M. Best.
Folksamerica became a consolidated subsidiary of the Company during 1998.
During the 2000 fourth quarter and the 2001 second quarter, certain insurance
operating subsidiaries of White Mountains were contributed to Folksamerica.
These operations, which are described separately under "Other Insurance and
Reinsurance Operations of Folksamerica", are excluded from the following
discussion of Folksamerica unless otherwise noted.

11

In December 2001 Folksamerica received a $400.0 million capital
contribution from OneBeacon, in the form of cash, which was provided to increase
Folksamerica's capacity to capitalize on improved pricing trends which
accelerated after the Attacks. As a result, Folksamerica is now among the
largest U.S. domiciled property and casualty reinsurers as measured by statutory
surplus. At December 31, 2001, Folksamerica had total assets of $3.2 billion and
shareholder's equity of $910.5 million.

Folksamerica commenced writing business in 1980 as one of a host of newly
formed, foreign-owned reinsurers capitalized with minimal surplus. In 1991,
recognizing that surplus size would become an increasingly important business
issue, Folksamerica launched an aggressive strategy to increase its resources
and capacity through the acquisition of select broker-market reinsurance and
property and casualty insurance companies.

Since 1991, Folksamerica has acquired several other reinsurers which has
served to raise Folksamerica's surplus and asset base, broaden its skill set and
contribute a number of important business relationships.

Folksamerica's acquisition strategy is to seek fundamentally sound
companies whose owners are no longer committed to the business. In these cases,
the owner's lack of interest in the operations available for sale have had more
to do with difficulties experienced by the owner in its core business than
problems with the operations being sold. Folksamerica's more recent acquisitions
included USF Re Insurance Co. ("USF Re") in 1999, PCA Property & Casualty
Insurance Company ("PCA") in 2000, substantially all the reinsurance operations
of Risk Capital Reinsurance Company (the "Risk Capital Operations") in 2000 and
C-F Insurance Company ("C-F") in 2001. Folksamerica will continue to seek
additional insurance and reinsurance acquisitions in the future.

REINSURANCE OVERVIEW

Reinsurance is an arrangement in which a reinsurance company (the
"reinsurer") agrees to indemnify an insurance company (the "ceding company") for
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance policies. Reinsurance can benefit a ceding company in a
number of ways, including reducing net liability exposure on individual risks,
providing catastrophe protections from large or multiple losses, stabilizing
financial results and assisting in maintaining acceptable operating leverage
ratios. Reinsurance can also provide a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital or
surplus. Reinsurers may also purchase reinsurance, known as retrocessional
reinsurance, to cover their own risks assumed from primary ceding companies.
Reinsurance companies often enter into retrocessional agreements for many of the
same reasons that ceding companies enter into reinsurance agreements.

A significant period of time normally elapses between the receipt of
reinsurance premiums and the payment of reinsurance claims. The claims process
generally begins upon the occurrence of an event causing an insured loss
followed by: (1) the reporting of the loss by the insured to the ceding company;
(2) the reporting of the loss by the ceding company to the reinsurer; (3) the
ceding company's adjustment and payment of the loss; and (4) the payment to the
ceding company by the reinsurer. During this time, reinsurance companies
generate investment income, consisting primarily of interest earned on fixed
maturity investments and dividends earned on equity securities. The period of
time between the receipt of premiums and the payment of claims is typically
longer for a reinsurer than for a direct insurer.

Folksamerica writes both treaty and facultative reinsurance. Treaty
reinsurance is an agreement whereby the reinsurer assumes a specified portion or
category of risk under all qualifying policies issued by the ceding company
during the term of the agreement, usually one year. In the underwriting of
treaty reinsurance, the reinsurer does not evaluate each individual risk and
generally accepts the original underwriting decisions made by the ceding
insurer. Folksamerica performs a comprehensive review of the underwriting,
pricing, claims handling and general business controls of all potential treaty
clients prior to quoting on such arrangements. Facultative reinsurance is
underwritten on a risk-by-risk basis, which allows the reinsurer to apply its
own pricing to an individual exposure. Facultative reinsurance is normally
purchased by insurance companies for individual risks not covered under
reinsurance treaties or for amounts in excess of limits on risks covered under
reinsurance treaties. The majority of Folksamerica's premiums are derived from
treaty reinsurance contracts both on an excess of loss and quota share basis,
which in 2001 amounted to 37.3% and 55.5% of its total gross earned premiums,
respectively.

Folksamerica derives its business from a spectrum of ceding insurers
including national, regional, specialty and excess and surplus lines writers.
Folksamerica determines which risks it accepts based on the anticipated
underwriting results of the transaction, which are evaluated on a variety of
factors including the quality of the

12

reinsured, the attractiveness of the reinsured's insurance rates, policy
conditions and the adequacy of the proposed reinsurance terms.

NEW AFFILIATIONS

OLYMPUS REINSURANCE LTD. ("OLYMPUS"). In December 2001 Folksamerica
negotiated a quota share retrocessional arrangement with Olympus which is
designed to increase Folksamerica's capacity to capitalize on the enhanced
reinsurance fundamentals during 2002 and beyond. Folksamerica anticipates
writing additional property excess of loss business in the future as a result
of increasing prices and improving conditions. Under the quota share treaty
with Olympus, effective January 1, 2002, Folksamerica will cede 75% of its
short-tailed excess of loss business, mainly property and marine, to Olympus.
Folksamerica receives an override commission on premiums ceded to Olympus and
expects such fees to be significant. Olympus is a Bermuda domiciled insurance
and reinsurance company that was recently formed with an initial
capitalization of more than $500.0 million to respond to the current
favorable underwriting and pricing environment in the reinsurance industry.
White Mountains does not have an ownership stake in Olympus.

WHITE MOUNTAINS UNDERWRITING LIMITED ("WMU"). In December 2001, the
Company formed WMU, an underwriting management company domiciled in Ireland.
WMU, a wholly owned subsidiary of the Company, is expected to expand
Folksamerica's access to international property excess of loss reinsurance
business and will provide professional insurance services to both
Folksamerica and Olympus. WMU receives management fees and a profit
commission on business placed with Folksamerica and Olympus; such fees are
expected to be significant.

CLASSES OF BUSINESS

BUSINESS CLASSES. Folksamerica writes three main classes of reinsurance:
liability reinsurance, property reinsurance and accident and health reinsurance,
which for the year ended December 31, 2001 represented 68%, 20% and 6% of its
net written premiums, respectively.

Folksamerica's net written premiums by line of business for the years ended
December 31, 2001, 2000 and 1999 were as follows:

GEOGRAPHIC CONCENTRATION

Folksamerica's net written premiums by geographic region for the years
ended December 31, 2001, 2000 and 1999 were as follows:

13

MARKETING

Folksamerica obtains most of its reinsurance business through brokers and
reinsurance intermediaries that represent the ceding company. Folksamerica
considers both the intermediary and the ceding company as its clients in any
placement. Much of Folksamerica's business is conducted with ceding companies
and their management, with whom Folksamerica has developed strong business
relationships over a long period of time. The process of placing a brokered
reinsurance program typically begins when a ceding company enlists the aid of a
reinsurance broker in structuring a reinsurance program. Often the ceding
company and the broker will consult with one or more lead reinsurers as to the
pricing and contract terms for the reinsurance protection being sought. Once the
ceding company has approved the terms quoted by the lead reinsurer, the broker
will offer participation to qualified reinsurers until the program is fully
subscribed by reinsurers at terms agreed to by all parties.

Folksamerica generally pays ceding companies a ceding commission under
quota share reinsurance treaties. The ceding commission is generally based on
the ceding company's cost of acquiring the business being reinsured
(commissions, premium taxes and certain miscellaneous expenses). During the
years ended December 31, 2001 and 2000, Folksamerica received no more than 10%
of its gross reinsurance premiums from any individual ceding company.
Additionally, Folksamerica pays reinsurance brokers' commissions based on
negotiated percentages of the premium it writes. These commissions, which
average approximately 5% of premium, constitute a significant portion of
Folksamerica's total acquisition costs and are included in its underwriting
expenses. During the years ended December 31, 2001 and 2000, Folksamerica
received approximately 54.4% and 56.4%, respectively, of its gross reinsurance
premiums written from three major reinsurance brokers as follows: (1) AON Re,
Inc. - 21.3% and 17.2%, respectively; (2) Benfield Blanch - 17.2% and 21.6%,
respectively; and (3) Guy Carpenter - 15.9% and 17.6%, respectively.

UNDERWRITING AND PRICING

Folksamerica's underwriters and pricing actuaries evaluate each
underwriting submission in order to determine price. Folksamerica prices its
products by assessing the desired return on the capital needed to write a given
contract and by estimating future loss and loss adjustment expenses and
investment income to be earned on net cash flow from the contract. Folksamerica
will only accept contracts with a high likelihood of generating acceptable
returns on equity. Folksamerica's pricing indications are based on a number of
underwriting factors including historical results, analysis of exposure and
estimates of future loss costs, a review of other programs displaying similar
exposure characteristics, the primary insurer's underwriting and claims
experience and the primary insurer's financial condition. Folksamerica's
underwriters perform regular underwriting audits to monitor the ceding company's
pricing discipline. Such reviews provide important input to support renewal
discussions.

Folksamerica and other reinsurance companies have sought to mitigate the
risk associated with future terrorist attacks in a similar manner as direct
insurers. Since the Attacks, reinsurers have attained significant price
increases across all lines of reinsurance in response to greater perceived
policy exposures. Regulations regarding permitted policy exclusions applicable
to reinsurance contracts are often less stringent than those imposed upon direct
insurers. As a result, exclusions are more often dictated by the marketplace
than by regulation. Folksamerica's reinsurance contracts on commercial risks
written subsequent to the Attacks contain clauses which exclude terrorist
exposure. Reinsurance contracts on personal risks written subsequent to the
Attacks do not contain such exclusions.

COMPETITION

In general, poor market conditions for primary companies in recent years
have caused insurers to reduce their own premium writings or restructure their
reinsurance programs, thereby reducing the amount of reinsurance they purchase.
As a result of consolidation within the industry, many ceding companies are now
larger and financially stronger, thereby enabling them to retain more risk. In
addition, increasingly intense competition in the reinsurance markets, primarily
as a result of excess industry capital, has historically driven reinsurance
prices on many programs below levels which Folksamerica will accept. The
significant insured losses resulting from the Attacks have reduced the capacity
of several reinsurers resulting in marked improvements in reinsurance pricing,
terms and conditions. However, due to recent capital raising activities by
several Bermuda-based and other reinsurers, there is no

14

assurance that such improved conditions will continue over an extended period.
Folksamerica's management believes that the reinsurance industry, including the
intermediary market, will continue to undergo further consolidation. Management
further believes that size and financial strength will become increasingly
important factors in selecting reliable reinsurance partners, particularly in
light of the weakening of several reinsurers in the wake of the Attacks.

CLAIMS

Folksamerica maintains a staff of experienced reinsurance claim specialists
that work closely with reinsurance intermediaries to obtain specific claims
information from its customers. Folksamerica's claims staff also regularly
perform on-site claim reviews to assess and improve the reinsured's
claim-handling ability and reserving techniques. In addition, Folksamerica's
claim specialists review loss information provided by the reinsured for
adequacy. The results of Folksamerica's on-site claim reviews are shared with
its actuaries and underwriters to ensure that they are making the correct
assumptions in pricing its products and that all relevant information is used in
establishing loss reserves.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Folksamerica establishes loss and loss adjustment expense reserves that are
estimates of future amounts needed to pay claims and related expenses for
insured events that have already occurred. Loss and loss adjustment expense
reserves have two components: case reserves and IBNR reserves. Reserve estimates
reflect the judgement of both the ceding company and Folksamerica, based on the
experience and knowledge of their respective claims personnel, regarding the
nature and value of the claim. The ceding company may periodically adjust the
amount of the case reserves as additional information becomes known or partial
payments are made. Upon notification of a loss from a ceding company,
Folksamerica establishes case reserves, including loss adjustment expense
reserves, based upon Folksamerica's share of the amount of reserves established
by the ceding company and Folksamerica's independent evaluation of the loss. In
cases where available information indicates that reserves established by the
ceding company are inadequate, Folksamerica establishes case reserves in excess
of its share of the reserves established by the ceding company.

Folksamerica uses a combination of actuarial methods to determine its IBNR
reserves. These methods fall into two general categories: (1) methods by which
ultimate claims are estimated based upon historical patterns of paid and
reported claim development experienced by Folksamerica, as supplemented by
reported industry patterns, and (2) methods in which the level of Folksamerica's
IBNR claim reserves are established based upon the application of expected loss
ratios relative to earned premium by accident year, line of business and type of
reinsurance written by Folksamerica.

The process of estimating loss and loss adjustment expense reserves
involves a considerable degree of judgement by management. During the claims
settlement period, which may extend over a long period of time, additional facts
regarding claims and trends may become evident which may cause Folksamerica to
adjust its estimates of the ultimate liability. As a result, actual loss and
loss adjustment expenses may deviate, perhaps substantially, from estimates
reflected in the Company's consolidated financial statements. Changes to prior
year reserves are booked in the current accounting period.

The following table presents the subsequent development of the year-end
loss reserves of Folksamerica and its subsidiaries for the ten-year period from
1991 to 2001. Section I of the table shows the gross and net (of reinsurance)
estimated liabilities that were recorded at the end of each of the indicated
years for all current and prior year unpaid loss and loss adjustment expenses.
Section II shows the re-estimate of the net liabilities made in each succeeding
year. Section III shows the cumulative net (deficiency)/redundancy representing
the aggregate change in the liability from the original balance sheet dates.
Section IV shows the cumulative net liabilities paid of such previously recorded
liabilities.

15

(1) The table includes the complete loss development history for all periods
presented for all companies acquired by Folksamerica through an instrument
of Transfer and Assumption approved by the appropriate insurance regulators.
Under the instrument, insurance regulators require that Folksamerica report
reserve development on loss and loss adjustment expense reserve liabilities
as if the companies had been combined from their inception.
(2) The table excludes Fund American Reinsurance Company Ltd. whose liability
for unpaid losses and LAE totalled $25.8 million as of December 31, 2001.
(3) For 1991 liabilities are shown net of reinsurance recoverables on paid
and unpaid losses and LAE, as was the accounting practice prior to the
implementation of SFAS 113.
(4) Folksamerica became a consolidated subsidiary of the Company during 1998.
Reserve development for the years ended 1991 through 1997 reflects
development on reserves established before the Company consolidated
Folksamerica's results.

REINSURANCE PROTECTION

Folksamerica has exposure to losses caused by hurricanes, earthquakes,
winter storms, windstorms, terrorist acts and other catastrophic events. In
the normal course of business, Folksamerica seeks to reduce the risk of loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance and reinsurance enterprises and by closely
monitoring aggregate property exposures and related probable maximum losses
("PML", which is a model based estimate of the maximum dollar amount that can
be lost if a catastrophe occurs). To manage and analyze aggregate exposures
and PML, Folksamerica utilizes a variety of tools and analyses, including
catastrophe modeling software packages. Folksamerica's catastrophe management
strategy is to limit its PML to less than 10% of surplus for a 1 in 250 year
event. Folksamerica continually assesses its concentration of underwriting
exposures in catastrophe prone areas and develops strategies to manage this
exposure, primarily through limiting accumulation of exposure to acceptable
levels and the purchase of catastrophe reinsurance. Folksamerica's current
catastrophe protection program includes 85% of $35.0 million of protection in
excess of a $25.0 million retention for the first loss and additional
coverage for a second loss. The current program also includes coverage of
$10.0 million in excess of a $5.0 million retention for Folksamerica's
proportional property portfolio. Both of the above contracts are 100% placed
with a single, top quality reinsurer, and have reinstatement provisions
whereby,

16

in the event of one loss, the coverage is reinstated for additional premium.

Folksamerica recorded gross and net of reinsurance losses from the
Attacks of approximately $104.0 million and $25.0 million, respectively,
during 2001. Folksamerica has evaluated each of its significant reinsurers
and believes its provision for uncollectible reinsurance, with respect to
reinsurance relating to the Attacks and otherwise, to be adequate.

OTHER INSURANCE AND REINSURANCE OPERATIONS OF FOLKSAMERICA

In October 1999 White Mountains completed its acquisition of International
American Group ("IAG"), a collection of insurance companies, for $86.7 million
in cash. White Mountains acquired Peninsula Insurance Company ("PIC"), American
Centennial Insurance Company ("ACIC") and British Insurance Company of Cayman
("BICC") through its acquisition of IAG, all of which were owned by Folksamerica
at December 31, 2001.

PIC. PIC, which was established in 1960, is a Maryland-domiciled property and
casualty insurer which writes both personal and commercial lines, primarily
private passenger auto, homeowners, commercial auto and commercial
multi-peril. Most of PIC's insurance products are sold in Maryland, Delaware
and Virginia. PIC is rated "A" (Excellent) by A.M. Best. PIC markets
insurance products principally through independent agents. PIC's primary
business focus is to establish strong long-term relationships with its agents
and insured customers by focusing on providing quality insurance products to
families and small private businesses. PIC pays their independent agents
commissions representing negotiated percentages of the premium they write.
These commissions, which currently range from 5.0% to 20.0% of premium,
depending on the line of business, constitute a significant portion of total
acquisition costs and are included in underwriting expenses. At December 31,
2001 and 2000 and for the years then ended, PIC had $55.9 million and $56.3
million of total assets, $28.3 million and $22.7 million in net written
premiums and $22.5 million and $23.7 million of shareholder's equity,
respectively.

ACIC AND BICC. ACIC and BICC are Delaware-domiciled and Cayman Island-domiciled,
respectively, property and casualty insurance companies in run-off. At
December 31, 2001 and 2000, ACIC had $66.2 million and $66.0 million of total
assets and $37.0 million and $43.9 million of shareholder's equity,
respectively. At December 31, 2001 and 2000, BICC had $22.4 million and $22.1
million of total assets and $4.4 million and $4.5 million of shareholder's
equity, respectively.

ESURANCE, INC. ("ESURANCE"). Esurance, which was established in 1998, is a
personal lines property and casualty insurance provider that currently sells
personal auto insurance in 27 states. Esurance leverages technology to remove
excess costs from the marketing, sales and servicing of personal lines
insurance products. Esurance focuses on the Internet as its main sales and
service channel, while maintaining its customer service center on a 24/7
basis. In October 2000, Folksamerica purchased an 80% majority interest in
Esurance for $9.0 million. During the fourth quarter of 2001, Folksamerica
purchased the remaining 20% minority interest in Esurance for $1.5 million,
thereby making Esurance a wholly owned subsidiary as of December 31, 2001. At
and for the year ended December 31, 2001, Esurance had total assets of $9.6
million, total revenues of $3.2 million and an accumulated shareholder's
deficit of $16.1 million.

FUND AMERICAN REINSURANCE COMPANY LTD. ("FUND AMERICAN RE")

On December 20, 2001, Fund American Re, a subsidiary of the Company,
acquired substantially all of the international reinsurance operations of the
Folksam Group ("Folksam") of Stockholm, Sweden. With this acquisition, White
Mountains has begun the formation and growth of its internationally-based
reinsurance operations. Fund American Re is commercially domiciled in Bermuda
but maintains its executive office and an operating branch in Stockholm, Sweden,
and operates through an additional branch in Singapore. Gross annual premium
volume for the acquired operations averaged $170.0 million during the preceding
three-year period. The $64.0 million purchase price was paid in a combination of
cash, a note and Common Shares. Folksamerica will provide reinsurance support
for this international expansion. At December 31, 2001, Fund American Re had
$126.3 million of total assets and $63.9 million of shareholder's equity. Due to
the timing of the formation of Fund American Re and the related Folksam
acquisition, Fund American Re's results of operations for 2001 were not
material.

17

INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES

White Mountains' investments in unconsolidated insurance affiliates
represent operating investments in other insurers in which White Mountains has a
significant voting and economic interest but does not own more than 50.0% of the
entity.

MONTPELIER RE HOLDINGS LTD. ("MONTPELIER")

In December 2001 White Mountains, the Benfield Group plc and several
other private investors established Montpelier and its wholly owned
subsidiary Montpelier Reinsurance Ltd. ("Montpelier Re"). Montpelier Re is a
Bermuda-domiciled insurance and reinsurance company which was formed to
respond to the current favorable underwriting and pricing environment in the
reinsurance industry. Montpelier Re will initially focus on property
reinsurance business and had an initial capitalization of more than $1.0
billion, consisting of $874.0 million of common equity and $150.0 million of
bank debt. OneBeacon invested $180.0 million in Montpelier consisting of
1,800,000 common shares valued at $100 per share and the Company received
warrants to acquire an additional 797,088 common shares at $100 per share
over the next ten years for its efforts in forming Montpelier. Three of White
Mountains' directors serve on Montpelier's eleven member board of directors,
including John J. Byrne, Chairman and Chief Executive Officer of the Company,
who serves as Montpelier's non-executive Chairman. White Mountains owns
approximately 21% of the outstanding common shares of Montpelier, or
approximately 27% on a fully-converted basis, and accounts for this
investment using the equity method.

MAIN STREET AMERICA HOLDINGS, INC. ("MSA")

MSA is a subsidiary of National Grange Mutual Insurance Company ("NGM"), a
New Hampshire-domiciled property and casualty insurance company, which insures
risks located primarily in New York, Massachusetts, Connecticut, Pennsylvania,
New Hampshire, Virginia and Florida. NGM's principal lines of business and
approximate percentage of total direct written premiums are personal automobile
(41%), commercial multi-peril (20%), homeowners (13%) and commercial automobile
(15%). MSA, through its subsidiaries, participates in 60% of NGM's property and
casualty business through a quota share reinsurance agreement. MSA's net written
premiums totalled $306.8 million, $265.4 million and $242.7 million in 2001,
2000 and 1999, respectively, and its net income was $6.8 million, $3.8 million
and $25.8 million, respectively. MSA's total assets as of December 31, 2001 and
2000 were $653.8 million and $608.7 million, respectively, and its shareholders'
equity was $262.3 million and $253.8 million, respectively. White Mountains owns
50% of the outstanding common stock of MSA. White Mountains' investment in MSA
was $133.7 million and $130.6 million at December 31, 2001 and
December 31, 2000, respectively.

FORMER OPERATIONS

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. ("FSA")

FSA guarantees scheduled payments of principal and interest on municipal
bonds and asset-backed securities, including residential mortgage-backed
securities.

On July 5, 2000 White Mountains concluded the sale of its indirect, wholly
owned subsidiary, White Mountains Holdings, Inc. (which controlled a substantial
amount of its holdings of FSA) and all its other holdings of the common stock of
FSA ("FSA Common Stock") to Dexia S.A. for proceeds of $620.4 million (the
"Dexia Sale") which resulted in a pretax gain of $391.2 million.

From 1994 to 1999 White Mountains purchased 4,382,709 shares of FSA Common
Stock in a series of public and private transactions. During 1999, White
Mountains exercised various fixed price options ("FSA Options") which provided
White Mountains with 2,560,607 additional shares of FSA Common Stock. White
Mountains also held shares of convertible preferred stock ("FSA Preferred
Stock") which gave White Mountains the right to acquire up to 2,000,000
additional shares of FSA Common Stock.

Prior to the Dexia Sale, White Mountains' accounted for its investment in
FSA Common Stock using the equity method. White Mountains' accounted for its
investment in FSA Preferred Stock and FSA Options under the provisions of
SFAS No. 115 whereby the investment was reported at fair value as of the
balance sheet date, with related unrealized investment gains and losses,
after tax, reported as a net amount in a separate component of common
shareholders' equity and reported on the income statement as a component of
other comprehensive net income.

18

WATERFORD INSURANCE COMPANY ("WATERFORD")

Waterford is a small Kansas-domiciled property and casualty insurance
company that was purchased by White Mountains in 1996. Waterford was sold to a
third party on January 5, 2001 for cash proceeds of $23.6 million (net of
transaction related expenses), which resulted in a pretax gain of $12.4 million.

VALLEY GROUP, INC. ("VGI")

VGI is a collection of property and casualty insurance companies acquired by
White Mountains in 1995 which included Valley Insurance Companies ("Valley") of
Albany, Oregon and Charter Group, Inc. ("CGI") of Richardson, Texas. White
Mountains subsequently formed White Mountains Insurance Company ("WMIC"), a
small property and casualty company. Valley, CGI and WMIC are collectively
referred to herein as "VGI".

In June 1999 White Mountains completed the sale of VGI to Unitrin, Inc. (the
"VGI Sale") and received net proceeds of $139.0 million in cash after receiving
a special dividend prior to the closing of $76.6 million (net of related tax
liabilities) consisting of cash, investment securities and the common stock of
Waterford. The VGI Sale resulted in a pretax gain of $88.1 million. As part of
the VGI Sale, White Mountains has provided Unitrin, Inc. with certain adverse
loss development protections that will be settled as of December 31, 2002.
During 2001 and 2000 White Mountains provided $5.9 million and $5.4 million in
reserves for such adverse loss development protections, respectively.

OTHER OPERATIONS

In 1991 White Mountains sold Fireman's Fund Insurance Company ("Fireman's
Fund"), a large property and casualty insurance company, to Allianz of America,
Inc. Since 1991 the Company carried a reserve related to various outstanding tax
issues involving the sale. In 2000, the Company was informed that the Internal
Revenue Service agreed with its position taken in its 1991
tax return and, accordingly, released a $95.0 million reserve during 2000 to
income which is presented as a gain from discontinued operations.

In 1999 White Mountains concluded the sale of substantially all the mortgage
banking assets (the "Mortgage Banking Sale") of White Mountains Services
Corporation (formerly Source One Mortgage Services Corporation) and received net
proceeds totaling $180.6 million. White Mountains recorded a $19.4 million
pretax ($12.6 million after tax) gain on the sale of its mortgage banking net
assets that is shown as discontinued operations herein.

REGULATION

White Mountains' insurance and reinsurance operations are subject to
regulation and supervision in each of the jurisdictions where they are domiciled
and licensed to conduct business. Generally, regulatory authorities have broad
supervisory and administrative powers over such matters as licenses, standards
of solvency, premium rates, policy forms, investments, security deposits,
methods of accounting, form and content of financial statements, reserves for
unpaid loss and loss adjustment expenses, reinsurance, minimum capital and
surplus requirements, dividends and other distributions to shareholders,
periodic examinations and annual and other report filings. In general, such
regulation is for the protection of policyholders rather than shareholders.
White Mountains believes that it is in compliance with all applicable laws and
regulations pertaining to its business that would have a material effect on its
financial position in the event of non-compliance.

Over the last several years most states have implemented laws that establish
standards for current, as well as continued, state accreditation. In addition,
the National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital ("RBC") standards for property and casualty companies as a
means of monitoring certain aspects affecting the overall financial condition of
insurance companies. The current RBC ratios of White Mountains' active insurance
and reinsurance subsidiaries are satisfactory and such ratios are not expected
to result in any adverse regulatory action. White Mountains is not aware of any
current recommendations by regulatory authorities that would be expected to have
a material effect on its results of operations or liquidity.

As a condition of its license to do business in certain states, White
Mountains' insurance operations are required to participate in mandatory shared
market mechanisms. Each state dictates the types of insurance and the level of
coverage that must be provided. The most common type of shared market mechanism
in which White Mountains is required to participate is an assigned risk plan.
Many states operate assigned risk plans. The NYAIP and New Jersey automobile
insurance plans are two such shared market mechanisms in which OneBeacon is

19

compelled to participate. These plans require insurers licensed within the
applicable state to accept the applications for insurance policies of
individuals who are unable to obtain insurance in the voluntary market. The
total number of such policies an insurer is required to accept is based on its
market share of voluntary business in the state. Underwriting results related to
assigned risk plans are typically adverse. Accordingly, OneBeacon may be
required to underwrite policies with a higher risk of loss than it would
otherwise accept.

Reinsurance facilities are another type of shared market mechanism.
Reinsurance facilities require an insurance company to accept all applications
submitted by certain state designated agents. The reinsurance facility then
allows the insurer to cede some of its business to the reinsurance facility so
that the facility will reimburse the insurer for claims paid on ceded business.
Typically, however, reinsurance facilities operate at a deficit, which is funded
through assessments against the same insurers. The Massachusetts Commonwealth
Automobile Reinsurers ("MassCAR") is one such reinsurance facility in which
OneBeacon is compelled to participate. As a result, OneBeacon could be required
to underwrite policies with a higher risk of loss than it would otherwise
accept.

The insurance laws of many states generally provide that property and
casualty insurers doing business in those states belong to a statutory property
and casualty guaranty association. The purpose of these guaranty associations is
to protect policyholders by requiring that solvent property and casualty
insurers pay certain insurance claims of insolvent insurers. These guaranty
associations generally pay these claims by assessing solvent insurers
proportionately based on the insurer's share of voluntary premiums written in
the state. While most guaranty associations provide for recovery of assessments
through rate increases, surcharges or premium tax credits, there is no assurance
that insurers will ultimately recover these assessments. During 2001, OneBeacon
incurred approximately $30.6 million in charges related to the Reliance
Insurance Company insolvency.

Many states have laws and regulations that limit an insurer's ability to
exit a market. For example, certain states limit a private passenger auto
insurer's ability to cancel and non-renew policies. Furthermore, certain states
prohibit an insurer from withdrawing from one or more lines of insurance
business in the state, unless the state regulators approve the company's
withdrawal plans. State regulators may refuse to approve such plans on the
grounds that they could lead to market disruption. Such laws and regulations may
restrict White Mountains' ability to exit unprofitable markets.

Nearly all states have insurance laws requiring personal property and
casualty insurers to file price schedules, policy or coverage forms, and other
information with the state's regulatory authority. In most cases, such price
schedules and/or policy forms must be approved prior to use. While pricing laws
vary from state to state, their objectives are generally to ensure that prices
are adequate, not excessive and not discriminatory. For example Massachusetts, a
state where OneBeacon has a sizable presence, sets virtually all aspects of
automobile insurance rates, including agent commissions. Such regulations often
challenge an insurers ability to adequately price its product, which often leads
to unsatisfactory underwriting results.

White Mountains' insurance subsidiaries are subject to state laws and
regulations that require investment portfolio diversification and that limit the
amount of investment in certain categories. Non-compliance may cause
non-conforming investments to be non-admitted in measuring statutory surplus
and, in some instances, may require divestiture. White Mountains investment
portfolio at December 31, 2001 complied with such laws and regulations in all
material respects.

One of the primary sources of cash inflows for the Company and certain of
its intermediary holding companies is dividends received from its operating
subsidiaries. Under the insurance laws of the states and countries under which
White Mountains' insurance subsidiaries are domiciled, an insurer is restricted
with respect to the timing or the amount of dividends it may pay without prior
approval by regulatory authorities. In a given calendar year, the insurance
subsidiaries can generally dividend up to the greater of 10% of their statutory
surplus at the beginning of the year or the prior year's statutory net income
without prior regulatory approval, subject to the availability of unassigned
funds (the statutory accounting equivalent of retained earnings). Larger
dividends can be paid only upon regulatory approval. Accordingly, there is no
assurance regarding the amount of such dividends that may be paid by such
subsidiaries in the future.

White Mountains is subject to regulation under certain state insurance
holding company acts. These regulations contain reporting requirements relating
to the capital structure, ownership, financial condition and general business
operations of White Mountains' insurance and reinsurance subsidiaries. These
regulations also contain special reporting and prior approval requirements with
respect to certain transactions among affiliates.

20

While the federal government does not directly regulate the insurance
business, federal legislation and administrative policies affect the insurance
industry. In addition, legislation has been introduced from time to time in
recent years that, if enacted, could result in the federal government assuming a
more direct role in the regulation of the insurance industry. A number of
enacted and pending legislative measures could lead to increased consolidation
and increased competition for business and for capital in the financial services
industry. White Mountains cannot predict whether any state or federal measures
will be adopted to change the nature or scope of the regulation of the insurance
business or what effect such measures may have on its insurance and reinsurance
operations.

Environmental cleanup of polluted waste sites is subject to both federal and
state regulation. The Comprehensive Environmental Response Compensation and
Liability Act of 1980 ("Superfund") and comparable state statutes
("mini-Superfund") govern the cleanup and restoration of waste sites by
Potentially Responsible Parties ("PRPs"). Superfund and the mini-Superfunds
establish a mechanism to pay for cleanup of waste sites if PRPs fail to do so,
and to assign liability to PRPs. The extent of liability allocated to a PRP is
dependent on a variety of factors, including the extent of cleanup necessary and
the process of assigning liability. The insurance industry in general is
involved in extensive litigation regarding coverage issues arising out of the
cleanup of waste sites by insured PRPs and as a result has disputed many such
claims. Superfund reform proposals have been introduced in Congress, but none
has yet been enacted. At this time, it remains unclear as to whether Superfund
reform legislation will be enacted or that any such legislation will provide for
a fair, effective and cost-efficient system for settlement of Superfund related
claims. The NICO Cover includes coverage for such exposures; however, there can
be no assurance that the coverage provided under the NICO Cover will ultimately
prove to be adequate.

RATINGS

Insurance and reinsurance companies are evaluated by various rating agencies
in order to provide a basis for measuring the financial strength of individual
insurance companies. Higher ratings generally indicate financial stability and a
stronger ability to pay claims. A.M. Best, a rating agency which
specializes in the insurance and reinsurance industry, currently rates
OneBeacon's principal operating insurance subsidiaries "A" (Excellent) and
Folksamerica's principal reinsurance operating subsidiary "A-" (Excellent).
White Mountains believes that strong ratings are important factors in the
marketing of insurance products to agents and consumers.

INVESTING OPERATIONS

The investment portfolios of White Mountains' insurance and reinsurance
operations consist primarily of fixed maturity investments but also consist, in
part, of short term investments, common equity securities and other investments.
White Mountains' management believes that modest investments of common equity
securities and other investments within its investment portfolio are likely to
enhance after tax total returns without significantly increasing the risk
profile of the portfolio when considered over long periods of time.

The fixed maturity portfolios of White Mountains are comprised primarily of
investment grade corporate debt securities, U.S. government and agency
securities and mortgage-backed securities (e.g., greater than 99% of such
securities received a rating from the National Association of Insurance
Commissioners of 1 or 2). Nearly all the fixed income securities currently held
by White Mountains are publicly traded. White Mountains expects to continue to
invest primarily in high quality fixed maturity investments.

At December 31, 2001, White Mountains' investment portfolio consisted of
$6,128.3 million (68%) of fixed maturity investments, $2,545.8 million (28%) of
short-term investments and $331.6 million (4%) of common equity securities and
other investments. White Mountains' fixed maturity portfolio at
December 31, 2001 consisted principally of corporate debt securities (57%),
U.S. government and agency securities (30%), mortgage-backed securities (8%) and
preferred equity securities, foreign government obligations and municipal
bonds (5%).

White Mountains' investment philosophy is to invest all assets with a
view towards maximizing its after-tax total return over extended periods of
time. Under this approach, each dollar of after-tax investment income,
realized gains and losses and unrealized gains and losses is valued equally.
White Mountains' overall fixed maturity investment strategy is to purchase
securities that are attractively priced in relation to perceived credit
risks. White Mountains generally manages the interest rate risk associated
with holding fixed maturity investments by actively monitoring and
maintaining the average duration of the portfolio with a view towards
achieving an adequate after-tax total return without subjecting the portfolio
to an unreasonable level of interest rate risk. At December 31, 2001, the
duration of White Mountains' fixed income portfolio was approximately 5.1
years.

21

Management further believes that the investment assets of its insurance and
reinsurance operations should be invested in a portfolio consisting of a mixture
of fixed income investments, equity securities and other investments (primarily
investments in limited partnership interests that invest in common equity
securities) in order to maximize returns over extended periods of time.
OneBeacon's Investment Committee, comprised of certain officers and key managers
of OneBeacon and other investment professionals, oversees White Mountains'
investment activities. The Investment Committee regularly monitors the overall
investment results of White Mountains, reviews the results of each of White
Mountains' various investment managers, reviews compliance with established
investment guidelines, approves all purchases and sales of investment securities
and ultimately reports the overall investment results to the Company's Board of
Directors.

EMPLOYEES

As of December 31, 2001, White Mountains employed 6,893 persons
(consisting of eight persons at the Company, approximately 60 persons at Fund
American Re and approximately 6,825 persons at OneBeacon and its subsidiaries
including Folksamerica). Management believes that White Mountains has
satisfactory relations with its employees and with its agents. On January 1,
2002, OneBeacon transferred approximately 2,400 of its employees to Liberty
Mutual pursuant to the Renewal Rights Agreement.

ITEM 2. PROPERTIES

The Company maintains two professional offices in Hamilton, Bermuda which
serve as its headquarters and its registered office. Fund American Re
maintains a branch office in Stockholm, Sweden. The home offices of OneBeacon
and Folksamerica are located in Boston, Massachusetts and New York, New York,
respectively, with branch offices in various cities throughout the United
States. In addition, the Company maintains a professional office in White
River Junction, Vermont which serves, in part, as its principal executive
office.

The Company's headquarters, registered office and principal executive
offices are leased. Fund American Re's branch office in Sweden is leased. The
home offices of OneBeacon and Folksamerica and most of its branch offices are
leased with the exception of branch offices located in Florida, Illinois,
New Jersey, New York, Tennessee and Washington, which are owned by OneBeacon.
Additionally, OneBeacon owns office facilities in Illinois, Pennsylvania and
Oregon. Certain leased and owned OneBeacon office locations have been leased or
subleased to Liberty Mutual in connection with the Renewal Rights Agreement for
a period of no more than three years. Management considers its office facilities
suitable and adequate for its current level of operations.

ITEM 3. LEGAL PROCEEDINGS

White Mountains, and the insurance and reinsurance industry in general,
are subject to litigation and arbitration in the normal course of its
business. As of December 31, 2001, White Mountains was not a party to any
material litigation or arbitration other than as routinely encountered in
claims activity, none of which is expected by management to have a material
adverse effect on its financial condition and cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's shareholders
during the fourth quarter of 2001.

22

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

As of March 22, 2002, there were 497 registered holders of Common Shares of
the Company, par value $1.00 per share.

During 2001 and 2000 the Company declared and paid cash dividends on Common
Shares totaling $1.00 and $1.20 per Common Share, respectively. During 2000 the
Company paid its cash dividends quarterly but in 2001 changed its dividend
payment policy to provide for an annual dividend payable in the first quarter of
each year, dependent on the Company's financial position and the regularity of
its cash flows.

Common Shares (symbol WTM) are listed on the New York Stock Exchange. The
quarterly range of the daily closing price for Common Shares during 2001 and
2000 is presented below:

23

ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated income statement data and ending balance sheet data
for each of the five years ended December 31, 2001, follows:

(a) Includes the acquisition of OneBeacon on June 1, 2001 and its results of
operations from that date through December 31, 2001. In connection with the
acquisition of OneBeacon, White Mountains issued $1,085 million in debt.
White Mountains also issued preferred stock of subsidiaries and warrants
to acquire Common Shares and convertible preference shares for total
proceeds of $758 million.
(b) Includes the acquisitions of PCA and the Risk Capital Operations as well as
the gain on the Dexia Sale.
(c) Includes gains resulting from the VGI Sale and the Mortgage Banking Sale.
(d) Includes the interim period income statement and ending balance sheet of
Folksamerica which was initially consolidated by the Company during 1998.
(e) Reflects a significant repayment of long-term debt by Folksamerica during
2000. See Note 6.
(f) Deferred credits added during 2001 resulted from the purchase of OneBeacon.
See Note 2.
(g) Deferred credits added during 1999 resulted principally from the purchase of
IAG. See Note 2.
(h) Deferred credits added during 1998 resulted from White Mountains' initial
consolidation of Folksamerica by the Company. See Note 2.
(i) Reflects reductions in common shareholders' equity resulting from
significant repurchases of Common Shares from 1996 to 1999 and an increase
in common shareholders' equity in 2001 resulting from capital raising
activities undertaken in connection with the Acquisition. See Note 2.
(j) As adjusted for the dilutive effects of outstanding options and warrants
to acquire Common Shares.
(k) Book value per Common Share plus unamortized deferred credits less
goodwill per Common Share.
(l) Includes outstanding options and warrants to acquire Common Shares.

24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following financial discussion should be read in conjunction with White
Mountains' Consolidated Financial Statements and Notes thereto which are
contained elsewhere in this report. White Mountains' business has undergone
significant changes during 2001, therefore, particular attention should be given
to the Company's description of its current business contained in Item 1 of this
Annual Report on Form 10-K.

The following discussion contains forward looking statements. White
Mountains intends statements which are not historical in nature to be, and
are hereby identified as "forward-looking statements" to be covered by the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. This safe harbor requires that White Mountains specify important
factors that could cause actual results to differ materially from those
contained in forward-looking statements made by or on behalf of White
Mountains. White Mountains cannot promise that its expectations in such
forward-looking statements will turn out to be correct. White Mountains'
actual results could be materially different from and worse than its
expectations. Refer to page 42 for specific important factors that could
cause actual results to differ materially from those contained in
forward-looking statements.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

White Mountains' discussion of its results of operations is presented
below under the following subheadings: I. Summary of Operations by Segment,
II. the OneBeacon Acquisition and Associated Capital Raising Activities and
III. Review of Consolidated Results.

A tabular summary of White Mountains' consolidated financial results for the
years ended December 31, 2001, 2000 and 1999 follows:

White Mountains' fully converted tangible book value per Common Share
and Common Share equivalents grew by more than 20% during 2001, principally
as a result of its acquisition of OneBeacon for $682.0 million less than the
value of the net assets acquired. The net loss of $259.3 million for 2001
resulted from net losses experienced at OneBeacon ($156.2 million), its
reinsurance operations Folksamerica ($28.1 million) and $75.0 million in
losses from other insurance and holding company operations. OneBeacon and
Folksamerica's poor 2001 underwriting results were significantly impacted by
$85.0 million in net after tax losses incurred in connection with the Attacks
and, in the case of OneBeacon, by unsatisfactory underwriting results. White
Mountains' loss per Common Share of $84.75 in 2001 resulted from the
insurance and reinsurance losses previously mentioned and a $305.1 million
reduction to net income available to common shareholders relating to its
Convertible Preference Shares during the brief period they were outstanding
during 2001.

The Company has revised its loss per share for the year ended December
31, 2001 to $84.75 from $38.95, which was the amount previously reported in
its earnings release filed on Form 8-K (Item 9) on February 28, 2002. This
revision did not change the Company's reported book value per share
($160.36), fully converted tangible book value per share ($225.81), retained
earnings ($355 million) or common shareholders' equity ($1,445 million) at
December 31, 2001, or its reported net loss ($259 million) or comprehensive
net loss ($302 million) for the year then ended. This change does not affect
the text of the Company's 2001 earnings release as its focus has always been
on growth in tangible book value per share and its comprehensive net income
or loss, neither of which have been revised.

The revision results from the manner in which the Company's Convertible
Preference Shares were considered in arriving at earnings per share during
the brief period they were outstanding. The Company, in consultation with its
independent accountants, marked its Convertible Preference Shares to market
(based on the market value of underlying Common Shares) with the excess of
market over the cash proceeds it received being charged directly to retained
earnings. In preparing this Annual Report on Form 10-K, it was determined
that this net charge should have been included in the Company's determination
of earnings or loss per share, and the related determination of net income or
loss available to common shareholders, for the interim periods ended June 30,
2001 and September 30, 2001, and certain other pro forma periods. As a
result, the Company has restated all applicable interim and pro forma
earnings per share and related disclosures in Note 19 to the Consolidated
Financial Statements contained herein. Since the Convertible Preference
Shares were converted to Common Share on August 23, 2001, the Company's
reported results for the three-months ended December 31, 2001 were not
affected.

White Mountains' fully converted tangible book value per Common Share and
Common Share equivalents at December 31, 2000 was $187.65, an increase of
$67.42 from December 31, 1999. The increase resulted primarily from the Dexia
Sale and the gain relating to the sale of Fireman's Fund.

White Mountains' net income for 2000 of $407.9 million resulted principally
from the Dexia Sale ($391.2 million pretax) and a gain related to the taxation
of the sale of Fireman's Fund in 1991 ($95.0 million). White Mountains' net
income for 1999 of $121.0 million resulted principally from the VGI Sale ($88.1
million pretax) and the Mortgage Banking Sale ($19.4 million pretax, $12.6
million after tax).

25

I. SUMMARY OF OPERATIONS BY SEGMENT

As a result of the Acquisition, White Mountains now conducts its operations
through three distinct segments consisting of OneBeacon, Folksamerica and its
Other Insurance Operations and Holding Company. White Mountains' Other Insurance
Operations and Holding Company segment is comprised of the Company, BICC, ACIC,
PIC, Esurance, Fund American Re and certain of the Company's intermediate
holding companies. White Mountains segment information is presented in Note 13.

ONEBEACON

OneBeacon is currently producing unsatisfactory underwriting results and has
done so for several years. White Mountains believes that its purchase of
OneBeacon added significant value to its shareholders, provided it can quickly,
and significantly, improve this business through successful execution of a
series of initiatives commenced in 2001.

White Mountains has already moved quickly to strengthen OneBeacon's balance
sheet with a strong view towards capital preservation. This was accomplished in
three separate ways. The first was to cause the seller to purchase reinsurance
contracts with two highly rated reinsurance companies: a full risk-transfer
cover from NICO for up to $2.5 billion in old asbestos and environmental claims
and $400 million in adverse development coverage on losses occurring in years
2000 and prior from GRC. The second action was to insist that OneBeacon's large
portfolio of common stocks ($1.7 billion) and municipal bonds ($1.4 billion) be
substantially sold-off prior to the Acquisition. Post-acquisition, White
Mountains further repositioned OneBeacon's investment portfolio, including a
substantial sell-off of its mortgage-backed securities, to achieve a highly
liquid, high-quality fixed income portfolio of an intermediate duration.
Finally, White Mountains' purchase accounting adjustments resulted in a
strengthening of OneBeacon's acquired balance sheet in the form of adjustments
to OneBeacon's insurance and non-insurance liabilities and assets. These
actions, coupled with more disciplined loss reserving practices
post-acquisition, have made OneBeacon's balance sheet considerably more solid
than the balance sheet acquired by White Mountains on June 1, 2001.

Immediately after the Acquisition a new management team was appointed and
new performance expectations established. Through ongoing communication of White
Mountains' operating principles and the introduction of long- term incentive
compensation tied closely to results, OneBeacon is building a culture dedicated
to making the significant changes necessary to improve OneBeacon's execution,
discipline, and focus upon profitability. OneBeacon's new performance-based
compensation program is based on its "trade ratio". Aggressive steps have been
taken to improve results quickly including the segregation of the book between
core and non-core businesses.

CORE OPERATIONS

White Mountains also moved quickly to start fixing OneBeacon's business
as its historical underwriting results were highly unsatisfactory. White
Mountains identified certain businesses that offer reasonable profit
improvement opportunities. These "core" operations consist of personal lines
and commercial lines sold through agents in New England, New York and New
Jersey and selected Specialty products. Specialty products consist
principally of Agri, IMU (ocean marine) and A.W.G. Dewar (tuition
reimbursement) whose distribution is not limited to the Northeast.

COMMERCIAL LINES. In ongoing commercial lines, price increases of 16% were
achieved in 2001 with a further 25% targeted for 2002. Many poor performing
classes of business, agencies and medium and large accounts have been
terminated. Further attention has been directed toward taking appropriate
underwriting actions to reduce OneBeacon's risk with respect to emerging
exposures such as terrorism, construction defect, mold and coastal exposures.

26

PERSONAL LINES. Due to a late start, personal lines prices were increased
only 5% in 2001. Through rate increases and rate equivalent actions such as
insurance to value, a 16% increase is being targeted for 2002. Rate equivalent
actions on business renewed during the first three months of 2002 have resulted
in 13% and 4% average increases across homeowners and automobile business,
respectively. In addition, base rate increases have been approved in several
states for homeowners and automobile lines. Given OneBeacon's concentration of
business in the Northeast, careful management of windstorm exposures is
critical. OneBeacon is taking steps to reduce its exposure through decreasing
the number of properties it insures in coastal territories and implementing a
windstorm deductible program. Also, because OneBeacon writes the majority of its
ongoing personal automobile insurance in three very difficult markets, New York,
New Jersey and Massachusetts, dedicated business units have been formed to
address the unique aspects of each market. For example, AutoOne, OneBeacon's LAD
operation was formed to address the particularly difficult assigned risk market
in New York.

CLAIMS. Management has been improving the claims function by making
expenditures in claims personnel, processes and systems where it is believed
that lower overall loss costs will be the result. All field claims professionals
have been realigned under a single reporting relationship to the Chief Claims
Officer in lieu of a decentralized structure. The quality of staff has been
upgraded and staff levels have been increased in certain high impact areas for
more effective case management. To better enable claims professionals to
determine appropriate indemnity settlement amounts, a state of the art tool has
been deployed. The use of appraisals, re-inspections and audits also has
increased along with the implementation of quality control and performance
metrics across the function. Workers compensation claims handling has been
centralized which, along with enhanced early intervention programs, nurse case
management and retained health care provider relationships, will help get the
injured workers back to work faster. Improved claims reporting procedures have
been implemented for automobile claims which, along with more efficient use of
vendors on physical damage claims, will help reduce loss cost and improve
service to agents and insureds. As a result of these actions, management expects
a more professional, better equipped claims organization to emerge.

OTHER INITIATIVES. Credit terms have been changed to accelerate the receipt
of cash and collection of old receivables is a high priority. Spending on major
systems initiatives has been substantially scaled back to focus on delivering
meaningful improvements to existing systems while eliminating the multitude of
redundant systems left over from the Merger. Management is working diligently to
reconstruct reliable historical data from legacy General Accident systems.

NON-CORE OPERATIONS

The underwriting results of OneBeacon's non-core operations have been
particularly unsatisfactory. The national program and national accounts business
has been placed into run-off, with OneBeacon's obligation to write new business
in most multi-year programs winding down in 2002. The largest element of
business included in this sub-segment, however, is agency produced business
written in territories outside of New England, New York and New Jersey.
OneBeacon commenced numerous actions, along the lines of those described above
for the core lines, to improve operating results in the non-core regions. In
addition, during 2001 OneBeacon formally withdrew from the personal lines
markets in 14 states.

On November 1, 2001, OneBeacon transferred its agency business, agents and
operations in 42 non-core states and the District of Columbia to Liberty Mutual.
This transfer amounted to approximately $1.5 billion in written premiums, or
approximately 45% of OneBeacon's total business. Over the next two years, the
underwriting results and cash flows of the renewed policies will be shared
between OneBeacon and Liberty Mutual. A reinsurance agreement prorates results
so that OneBeacon assumes approximately two-thirds and one-third of the
underwriting results corresponding to renewals in the first and second years,
respectively. Liberty Mutual has continued, and in some cases accelerated, the
underwriting and pricing actions initiated prior to the transactions. The
transaction enables OneBeacon's management to concentrate its efforts on
building a profitable book of agency produced personal and commercial lines
business in the Northeast and selected specialty lines throughout the country.

27

PERFORMANCE TARGETS

Management's performance goals for 2002 are based upon achieving a trade
ratio of 101-103% in the ongoing businesses and an overall OneBeacon trade ratio
of 108-110%, which includes the results of business placed in run- off and
reinsuring two-thirds of the underwriting results from business transferred to
Liberty Mutual.

SUMMARY OF OPERATIONS BY BUSINESS LINE

A summary of OneBeacon's underwriting results for the seven months ended
December 31, 2001 follows:

Personal and commercial premiums written declined during the seven month
period and further declines are expected to continue as OneBeacon repositions
its book of business for improved profitability. Declines in personal and
commercial lines written premiums were partially offset by an increase in
specialty lines premiums. The disciplined underwriting and pricing
historically demonstrated in specialty lines, coupled with favorable market
conditions, enabled OneBeacon to capitalize on price increases while
continuing to mitigate underwriting risks through policy coverage revisions
and agency terminations. During 2001, OneBeacon also established a new
business initiative through the New York LAD.

OneBeacon's 2001 trade ratios on all lines of its business, except core
specialty, were unacceptable largely as a result of premiums charged proving to
be inadequate for risks assumed. The actions previously discussed were
implemented to address this deficiency. Loss and loss adjustment expenses for
the 2001 period also included $105.0 million in losses, net of reinsurance,
associated with the Attacks. OneBeacon's gross loss associated with the Attacks
was $248.0 million.

During 2001 OneBeacon's losses and loss adjustment expenses relating to
prior years developed unfavorably, resulting primarily from an increase in
OneBeacon's 1999 and prior loss estimates in its worker's compensation, general
liability, commercial multi-peril and commercial automobile lines of
business. These actions exhausted the protection under the GRC Cover and
resulted in a $50.0 million charge in the 2001 fourth quarter to loss and loss
adjustment expense. Additionally, during 2001 OneBeacon recognized approximately
$14.6 million in prior year losses and loss adjustment expenses which were not
covered by either the NICO Cover or the GRC Cover.

As expected, and consistent with OneBeacon's decision to exit its
non-strategic operations, the underwriting results in OneBeacon's non-core
operations were unacceptable for the seven months ended December 31, 2001.
Although expected to improve in the future, OneBeacon's trade ratio associated
with this business is expected to continue to be higher than that of its core
operations as the national programs and national accounts business, along with
the business reinsured from Liberty Mutual, wind down.

Overall, OneBeacon has and will continue to incur significant costs
associated with its underwriting, claims and run-off initiatives implemented
during 2001. These costs are expected to yield future improvements to
OneBeacon's overall loss and loss adjustment expense ratios but, in the short
run, will adversely affect its expense ratios. Improving the loss ratio is
OneBeacon's number one priority.

28

FOLKSAMERICA

A summary of Folksamerica's 2001, 2000 and 1999 underwriting results
follows:

The majority of Folksamerica's premiums written during the past three years
ended 2001 cover liability risks (typically 60% to 70% of such premiums),
property risks (20% to 30%) and accident and health risks (6% to 8%).

Folksamerica's significant increase in premiums for 2001 versus 2000 is
primarily attributable to additional writings across most lines in response to
improved terms and conditions in the overall reinsurance market. Folksamerica's
significant increase in premiums for 2000 versus 1999 is primarily attributable
to its acquisition of the Risk Capital Operations which provided Folksamerica
with two new specialty underwriting units (Accident & Health and Marine) and
several new treaty clients.

During 2001, Folksamerica recorded gross losses from the Attacks of
approximately $104.0 million, or approximately $25.0 million net of reinsurance
recoverables and reinstatement costs. This loss represented approximately six
points of its 2001 combined ratio. Folksamerica also established a reserve of
$5.0 million for Enron-related surety exposures in 2001.

Folksamerica's 2001 incurred losses include $24.1 million in losses
related to prior accident years representing (i) higher than expected
reported losses in Folksamerica's property excess line and (ii) a
strengthening of reserves related to losses arising from the portfolios
acquired from the USF Re and the Risk Capital Operations. Incurred losses for
2000 and 1999 include $22.9 million and $29.3 million, respectively, related
principally to prior accident years representing losses arising from the
portfolios acquired with USF Re and the Risk Capital Operations.

Folksamerica's 2001 and 2000 statutory combined ratios do not take into
account the favorable impact of a retroactive reinsurance cover placed during
2000 which covers certain losses associated with Folksamerica's asbestos and
environmental exposures as well as losses associated with USF Re and the Risk
Capital Operations. Because this contract was written to cover losses
incurred in prior years, the reinsurance benefit recorded in its statutory
financial statements is not included in Folksamerica's statutory combined
ratio; however, adverse development on reserves covered under this contract
is required to be included in its statutory combined ratio. The reinsurance
benefits obtained from this contract totalled $20.2 million and $20.6 million
for the years ended December 31, 2001 and 2000, respectively.

Folksamerica has acquired several competitors in recent years. In cases
where the insurance or reinsurance reserves of the acquired company are expected
to develop adversely, Folksamerica generally obtains certain indemnifications
from the seller designed to mitigate the future losses that Folksamerica must
recognize. Indemnifications used by Folksamerica in some of its more recent
acquisitions consist of bargain purchases (resulting in deferred credits) and
the issuance of purchase notes with adverse loss development protection
features. These indemnifications provide revenues to Folksamerica to compensate
for the expected losses and loss adjustment expenses it may recognize in
connection with the acquired operations. These revenues, recorded as
amortization of deferred credits and other benefits, are not reflected as a
reduction to the loss development incurred by Folksamerica and therefore do not
serve to reduce Folksamerica's reported statutory combined ratio. Had the
retroactive reinsurance and acquisition benefits described above been
permitted to be recognized in Folksamerica's 2001 and 2000 statutory
combined ratios, they would have served to decrease such ratios by
approximately 12 and 10 points to 113% and 116%, respectively.

29

During 2001, 2000 and 1999, Folksamerica recognized income relating to
the amortization of its deferred credits of $14.1 million, $12.5 million and
$7.0 million, respectively, resulting from bargain purchases of insurance and
reinsurance operations. In addition, during 1999 Folksamerica issued a $20.8
million note in connection with the acquisition of USF Re which was to be
reduced to the extent that future USF Re loss and loss adjustment expenses
develop adversely (the "USF Re Seller Note"). In response to adverse
development recorded by Folksamerica, the USF Re Seller Note was reduced by
$6.8 million and $14.0 million, which was recorded in White Mountains'
financial statements, during 2000 and 1999, respectively.

The reinsurance market in general has responded to the significant industry
losses generated in 2001 with a combination of rate increases, coverage
restrictions and higher ceding company retentions. In December 2001 Folksamerica
received a $400.0 million capital contribution from its parent OneBeacon, in the
form of cash, which was made to increase Folksamerica's capacity to capitalize
on improving pricing trends which accelerated after the Attacks. In addition,
the retrocessional agreement that Folksamerica entered into with Olympus late in
2001 provides additional opportunities to leverage Folksamerica's underwriting
expertise and infrastructure to underwrite increased lines on world-wide
property excess business in a favorable market.

OTHER INSURANCE OPERATIONS AND HOLDING COMPANY

White Mountains' capital management activities are conducted through the
Company and its intermediary holding companies. In this regard, the primary
operations relating to its holding companies for 2001 consisted of the
effects of financing activities and purchase accounting undertaken in
connection the Acquisition, amortization of deferred credits arising from
White Mountains' acquisitions of OneBeacon and IAG, the gain recognized from
the sale of Waterford and net investment income on its short-term
investments. The primary operations of BICC, ACIC, PIC, Esurance and Fund
American Re during 2001 contributed revenues of $33.7 million, expenses of
$59.3 million and a net loss of $17.0 million. During 2000, the operations of
the holding company primarily included the gain recognized from the Dexia
Sale, amortization of certain deferred credits, interest expense on long-term
debt, the operations of BICC, ACIC and PIC and net investment income on
short-term investments. During 1999, the operations of the holding company
primarily included the gain recognized from the VGI Sale, interest expense on
long-term debt, amortization of certain deferred credits and net investment
income on short-term investments and its other insurance operations included
the operations of VGI through the date of the VGI Sale. See "Liquidity and
Capital Resources."

II. THE ONEBEACON ACQUISITION AND ASSOCIATED CAPITAL RAISING ACTIVITIES

On June 1, 2001, White Mountains acquired OneBeacon from CGNU for $2,114.3
million, of which $260.0 million was paid with the Seller Note and the balance
paid in cash. White Mountains undertook a series of related transactions prior
to or simultaneously with the Acquisition that had a substantial impact on its
consolidated financial statements during 2001. These transactions, coupled with
the inclusion of OneBeacon's results for the seven months ended
December 31, 2001, served to significantly affect the comparability of the
financial statement information presented herein. A summary of White Mountains'
transactions relating to its acquisition of OneBeacon follows:

DEBT TENDER AND DEBT ESCROW TRANSACTIONS. In April 2001 the Company
completed a tender offer and consent solicitation for $96.3 million in
outstanding medium-term notes (the "Debt Tender") which facilitated the
Acquisition by amending the indenture governing its medium-term notes ("the
"Notes"). Pursuant to the Debt Tender, the Company repurchased and retired $90.9
million of its Notes and subsequently prepaid, in the form of a fully-funded
irrevocable escrow arrangement (the "Debt Escrow"), the balance of the Notes.
The Company recorded a $4.8 million extraordinary loss on extinguishment of debt
in connection with the Debt Tender and the Debt Escrow during the 2001 second
quarter.

30

EQUITY FINANCING. On June 1, 2001, a small group of private investors
purchased $437.6 million of a newly- issued class of non-voting convertible
preference shares of the Company (the "Convertible Preference Shares"). On
August 23, 2001, upon approval by shareholders at the Company's 2001 Annual
Meeting of Shareholders (the "2001 Annual Meeting"), the Convertible Preference
Shares were repurchased and cancelled by the Company (the "Conversion") in
consideration of 2,184,583 Common Shares. Had shareholder approval not been
obtained by March 31, 2003, the holders of Convertible Preference Shares would
have had the right to require the Company to repurchase the Convertible
Preference Shares on an "as converted" basis at the then-current price of a
Common Share. This conversion right, coupled with the fact that the market value
of Common Shares immediately prior to shareholder approval ($340 per Share)
exceeded the private investors' cost of the Convertible Preference Shares
(approximately $200 per Share), caused this instrument to have a redemption
value in excess of cash received upon issuance. This required the Convertible
Preference Shares to be marked-to-market until August 23, 2001 when the
Convertible Preference Shares were converted to shareholders' equity, resulting
in a $305.1 million net charge to retained earnings with an offsetting
increase to paid-in surplus.

On June 1, 2001, Berkshire purchased from the Company, for $75.0 million
in cash, warrants (the "Warrants") to acquire 1,714,285 Common Shares at an
exercise price of $175.00 per Common Share. Of the total Warrants purchased
by Berkshire, Warrants to purchase 1,170,000 Common Shares (the "Series A
Warrants") were immediately exercisable and Warrants to purchase 544,285
Common Shares (the "Series B Warrants") became exercisable upon shareholder
approval at the 2001 Annual Meeting. Prior to shareholder approval, the
Series B Warrants constituted a contingent put liability (similar in nature
to a stock appreciation right) which was carried at fair value through a
periodic charge or credit to the income statement. The income statement
charge recorded by the Company during 2001 associated with the difference
between the fair value and allocated cost of the Series B Warrants totalled
$58.8 million. Upon shareholder approval at the 2001 Annual Meeting, the
Series B Warrants were converted from a liability to common shareholders'
equity. The Warrants have a term of seven years from the date of issuance
although the Company has the right to call the Warrants for $60.0 million in
cash commencing on the fourth anniversary of their issuance.

On June 1, 2001, Berkshire also purchased for $225.0 million, $300.0
million in face value of cumulative non- voting preferred stock (the
"Berkshire Preferred Stock") of a subsidiary of the Company. The Berkshire
Preferred Stock is mandatorily redeemable after seven years. The Berkshire
Preferred Stock represents subsidiary preferred stock which is considered to
be minority interest to the Company.

As previously mentioned, White Mountains received a total of $300.0 million
in cash from Berkshire in full payment for the Warrants and the Berkshire
Preferred Stock. The proceeds received were allocated to each instrument based
on their relative estimated fair values on June 1, 2001. As a result, $154.8
million of such proceeds were allocated to the Warrants and recorded to common
shareholders' equity and $145.2 million of such proceeds were allocated to the
Berkshire Preferred Stock. White Mountains is accreting the Berkshire Preferred
Stock's recorded value to its face value of $300.0 million using the interest
method of amortization over the instrument's seven-year term through an income
statement charge. During 2001, White Mountains recorded $5.1 million of
accretion charges on the Berkshire Preferred Stock.

On June 1, 2001, Zenith Insurance Company ("Zenith") purchased $20.0 million
in cumulative non-voting preferred stock (the "Zenith Preferred Stock") of a
subsidiary of the Company. The Zenith Preferred Stock is mandatorily redeemable
after ten years. The Zenith Preferred Stock represents subsidiary preferred
stock which is considered to be minority interest to the Company.

During 2001, White Mountains declared and paid cash dividends on the
Berkshire Preferred Stock and the Zenith Preferred Stock totalling $18.1
million.

BANK FINANCING. On June 1, 2001, a subsidiary of the Company borrowed $700.0
million in term loans and $125.0 million in revolving loans (of a $175.0 million
revolving loan facility) from a banking syndicate arranged by Lehman Brothers
Inc. (collectively the "Lehman Facility"). The term loans are repayable in
quarterly installments with a final maturity on March 31, 2007. The revolving
loan facility is available from the closing date until the fifth anniversary of
the closing. The loans are variable rate instruments which are currently tied to
a rate based on short- term eurodollar rates. White Mountains subsequently
entered into various interest rate swap agreements in order to achieve a fixed
interest rate on the term loans. During 2001, White Mountains recorded interest
expense relating to the Lehman Facility of $32.4 million, including $3.9 million
of expense recorded under the related interest rate swap agreements.

31

SELLER NOTE. On June 1, 2001, White Mountains issued the Seller Note to
CGNU. The Seller Note has an eighteen-month term and bears interest at a rate
equal to 50 basis points over the rate on White Mountains' revolving loan
facility described above. The Seller Note may be settled in cash, or at White
Mountains' option, with Common Shares valued at $245.00 per Share. White
Mountains has classified this obligation as debt since management believes it
has the ability to settle this obligation in a form other than pursuant to the
Note Purchase Option Agreement which governs the Seller Note. During 2001, White
Mountains recorded interest expense relating to the Seller Note of $10.3
million.

DEFERRED CREDIT. White Mountains acquired OneBeacon for total consideration
of $2,114.3 million. Because the cost of OneBeacon was less than the fair value
of its net assets acquired at that date, White Mountains recorded a $682.0
million deferred credit at acquisition which is being amortized to income
ratably over the estimated period of benefit of seven years. During 2001, White
Mountains recognized a total of $91.6 million of deferred credit amortization of
which $56.9 million related specifically to the deferred credit resulting from
the Acquisition.

III. REVIEW OF CONSOLIDATED RESULTS

Earned insurance and reinsurance premiums totalled $2,656.1 million for
2001 versus $334.4 million for 2000 and $283.2 million for 1999. The large
increase in earned premiums from 2000 to 2001 resulted primarily from the
Acquisition of OneBeacon which contributed $2,208.2 million in earned premiums
for the seven months ended December 31, 2001. The increase in earned premiums
from 1999 to 2000 is primarily attributable to the acquisition of the Risk
Capital Operations during 2000.

See "Summary of Operations by Segment" for a further discussion of earned
insurance and reinsurance premiums by White Mountains' segments and lines of
business.

White Mountains' total net pretax investment returns for the years ended
December 31, 2001, 2000 and 1999 are shown below:

White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its operating
subsidiaries and dividend income from its equity investments. The significant
increase in net investment income from 1999 to 2001 is mainly attributable to
White Mountains' growing portfolio of fixed maturity investments resulting from
the 1999 acquisition of USF Re, the 2000 acquisitions of PCA and the Risk
Capital Operations and the 2001 acquisitions of OneBeacon and C-F.

Net realized gains on investments for the year ended December 31, 2001
resulted principally from substantial sales of fixed maturities from OneBeacon
and Folksamerica's investment portfolios during the second half of 2001. Net
realized investment losses for the year ended December 31, 2000 resulted
principally from sales of fixed maturities in preparation for Folksamerica's
acquisitions of PCA and the Risk Capital Operations during the first half of
2000. Net realized investment gains of $69.6 million for 1999 included $23.9
million of pretax gains from sales of San Juan Basin Royalty Trust units and
$28.0 million of pretax gains from sales of various other common stocks and
other investments in Folksamerica's operating portfolio. In addition, $9.4
million of pretax gains on sales of common stocks and fixed maturity investments
were recorded in anticipation of or in connection with the VGI Sale.

32

White Mountains' net decrease in pretax unrealized investment gains for the
year ended December 31, 2001 of $59.9 million consisted of a net reduction in
unrealized gains of $46.3 million related to the substantial amount of fixed
maturities sold during the period and a net reduction of $13.6 million in
unrealized gains, primarily in its holdings of common stocks and other
investments. White Mountains' net increase in pretax unrealized investment gains
for the year ended December 31, 2000 of $47.6 million consisted of a net
reduction in unrealized gains of $23.7 million for investment securities sold
during the period and a net increase of $71.3 million in unrealized gains,
primarily in its holdings of fixed maturities. White Mountains' net decrease in
pretax unrealized investment gains for the year ended December 31, 1999 of
$180.2 million consisted of a net reduction in unrealized gains of $69.6 million
for investment securities sold during the period and a net reduction of $110.6
million in unrealized gains on securities held during the period, relating
primarily to an accounting write-down relating to exercises of FSA Options.
During 1999, White Mountains was required to write its investment in the FSA
Options exercised to their original cost in order to transition the investment
from fair value accounting to equity accounting.

Amortization of deferred credits and other benefits provided $91.6 million,
$41.4 million and $25.8 million in revenue during 2001, 2000 and 1999,
respectively. The increase in deferred credit amortization from 2000 to 2001
resulted from the Acquisition. The increase in deferred credit amortization from
1999 to 2000 resulted primarily from the acquisition of PCA. In accordance with
SFAS No. 141, all unamortized deferred credits at December 31, 2001 will be
recognized through the income statement on January 1, 2002 as a change in
accounting principle.

Net gains on sales of subsidiaries and other assets provided $20.2 million,
$386.2 million and $103.9 million in revenue during 2001, 2000 and 1999,
respectively. The net gains recorded during 2001 resulted from a $12.4 million
pretax gain from the sale of Waterford as well as gains on sales of various
fixed assets to Liberty Mutual. The net gains recorded during 2000 resulted
principally from the Dexia Sale. The net gains recorded during 1999 resulted
principally from the VGI Sale.

Other revenues totalled $8.1 million, $9.1 million and $34.8 million during
2001, 2000 and 1999. Other revenue consists primarily of equity in the earnings
of White Mountains unconsolidated affiliates (MSA, Montpelier and formerly FSA)
and sundry other revenues.

White Mountains' investment in MSA provided $2.2 million to its revenues
during the year ended December 31, 2001 versus $1.0 million for 2000 and $11.6
million for 1999. MSA's net income for 2001 resulted from strong underwriting
results experienced by NGM during 2001 offset partially by realized losses on
its investment portfolio. MSA's net income for 2000 was adversely impacted by
significant realized losses on its investment portfolio whereas MSA's net income
for 1999 benefitted by significant realized investment gains.

White Mountains' investment in Montpelier provided a loss of $3.0 million
during the year ended December 31, 2001. Montpelier's net loss for 2001 related
to the recognition of its startup costs.

During 2000 White Mountains' investment in FSA provided a $3.6 million loss
for the interim period though July 5, 2000 which resulted from realized
investment losses in FSA's investment portfolio and increased expenses for
employee equity-based compensation programs, which rose significantly after
FSA's announcement of its acquisition by Dexia. FSA contributed $19.5 million to
net income during the year ended December 31, 1999.

Losses and loss adjustment expenses totalled $2,493.9 million for 2001
versus $287.7 million for 2000 and $242.3 million for 1999. The large increase
in loss and loss adjustment expenses from 2000 to 2001 resulted from the
Acquisition. During 2001, White Mountains incurred $130.0 million in net losses
at OneBeacon and Folksamerica resulting from the Attacks. The increase in loss
and loss adjustment expenses from 1999 to 2000 is primarily attributable to the
acquisitions of PCA and the Risk Capital Operations during 2000.

See "Summary of Operations by Segment" for a further discussion of losses
and loss adjustment expenses by White Mountains' segments and lines of business.

33

Insurance and reinsurance acquisition expenses, which consist primarily of
insurance and reinsurance brokerage and commission expenses, totalled $584.3
million for 2001 versus $101.1 million for 2000 and $73.4 million for 1999. The
increase in these insurance expenses from 2000 to 2001 is primarily attributable
to the Acquisition. The increase in these insurance expenses from 1999 to 2000
is primarily attributable to the acquisitions of PCA and the Risk Capital
Operations during 2000.

General and administrative expenses totalled $417.1 million for 2001
versus $87.9 million for 2000 and $87.3 million for 1999. Share-based
compensation consisting of performance shares, Restricted Shares and Options
constituted $51.5 million, $25.8 million and $6.1 million of such general and
administrative expenses during 2001, 2000 and 1999, respectively. The
increase in general and administrative expenses, including the increase in
share-based compensation, from 2000 to 2001 is primarily attributable to the
Acquisition. The increase in White Mountains' share-based compensation for
2000 was higher than that of 1999 as a result of a significant increase in
the value of Common Shares during that year and the recording of additional
performance share expense in expectation of the 1999 and 2000 performance
share awards vesting at an amount greater than target due to the highly
favorable results for those award periods.

A share appreciation expense for Series B Warrants of $58.8 million was
recorded during 2001 representing an increase in the value of Common Shares
during the period in which the Series B Warrants were not exercisable by
Berkshire. Upon shareholder approval at the 2001 Annual Meeting, the Series B
Warrants were reclassified to common shareholders' equity.

In connection with purchase accounting for the Acquisition, White Mountains
was required to adjust to fair value OneBeacon's loss and loss adjustment
expense reserves and the related reinsurance recoverables by $646.9 million and
$346.9 million, respectively, on OneBeacon's acquired balance sheet. This net
reduction to loss and loss adjustment expense reserves of $300.0 million will be
accreted through an income statement charge over the period that the claims are
expected to be settled. As such, White Mountains recognized $56.0 million of
accretion of fair value adjustment to loss and loss adjustment expense reserves
during 2001. White Mountains will accrete the remaining $244.0 million over
the future periods that the claims are settled.

Interest expense totalled $45.7 million for 2001 versus $16.1 million for
2000 and $14.7 million for 1999. The increase in interest expense from 2000 to
2001 resulted from borrowings under the Lehman Facility and the Seller Note
which were undertaken on June 1, 2001, offset slightly by reduced interest
expense resulting from the Debt Tender and the Debt Escrow transactions. White
Mountains has entered into various interest rate swap agreements which were
undertaken to achieve a fixed interest rate on a portion of the Lehman Facility.
The swap program results in a weighted average fixed rate of 7.1% on $700.0
million of its total borrowings under the Lehman Facility. Interest expense for
2001 relating to the Lehman Facility totalled $28.5 million, interest expense
relating to the interest rate swap agreements totalled $3.9 million and interest
on the Seller Note totalled $10.3 million. The increase in interest expense from
1999 to 2000 reflects higher average levels of indebtedness at Folksamerica for
the period.

In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados (the "Bermuda
and Barbados Companies") while certain other subsidiaries remained domiciled in
the United States (the "US Companies"). As a result, income earned by the
Bermuda and Barbados Companies will generally be subject to an effective overall
tax rate lower than that imposed by the United States, however, no tax benefits
will be attained in the event of net losses incurred by such companies. Prior to
the Redomestication, the Company filed a consolidated United States income tax
return with its subsidiaries. The US Companies continue to file United States
tax returns but may no longer do so on a group-wide consolidated basis. As a
result, the aggregate United States Federal income tax liability of the US
Companies may be higher than it otherwise would have been if part of a
consolidated tax return. These factors may serve to increase or decrease White
Mountains' effective tax rate for 1999 and beyond, depending on the events and
circumstances occurring during such periods.

The income tax provision related to pretax earnings for 2001, 2000 and 1999
represents an effective tax rate of 41.3%, 12.0% and 32.9%, respectively. White
Mountains' effective rate of tax benefit for 2001 (resulting from a net loss
reported during the period) was greater than the statutory rate of 35% primarily
as a result of the effects of deferred credit amortization. The reduction in the
effective rate from 1999 and 2000 resulted from an increase in White Mountains'
non-United States net earnings to $395.9 million in 2000 versus $9.0 million in
1999.

34

Net income from discontinued operations of $95.0 million recorded during
2000 related to a reserve release associated with the sale of Fireman's Fund.
Net income from discontinued operations of $12.6 million recorded during 1999
related to the Mortgage Banking Sale.

Excess of fair value over cost amounts which were recorded as extraordinary
gains during 2001 related to the acquisitions of C-F and the Folksam assets,
both of which occurred after July 1, 2001. In accordance with SFAS No. 141,
White Mountains recognized a $13.6 million and a $3.0 million extraordinary gain
during 2001 representing the excess of the fair value of C-F's and Folksam's net
assets over their cost, respectively.

A loss on early extinguishment of debt of $4.8 million was recorded during
2001 in connection with the Debt Tender and the Debt Escrow.

Dividends on Convertible Preference Shares of $.3 million were declared and
paid in 2001 during the period in which the Convertible Preference Shares were
outstanding.

Upon shareholder approval at the 2001 Annual Meeting, the Convertible
Preference Shares were repurchased and cancelled in consideration of
2,184,583 Common Shares. Because the redemption value of the Convertible
Preference Shares was in excess of the cash received upon their issuance, the
Convertible Preference Shares were required to be marked-to-market until the
date they were converted to shareholders' equity, resulting in a $305.1
million reduction to net income available to common shareholders, with an
offsetting increase to paid-in surplus.

LIQUIDITY AND CAPITAL RESOURCES

The primary sources of cash inflows for the Company and certain of its
intermediary holding companies are investment income, sales and maturities of
investment securities and dividends received from its operating subsidiaries.
Under the insurance laws of the states and countries under which White
Mountains' insurance subsidiaries are domiciled, an insurer is restricted with
respect to the timing or the amount of dividends it may pay without prior
approval by regulatory authorities. Accordingly, there is no assurance regarding
the amount of such dividends that may be paid by such subsidiaries in the
future.

Detailed information concerning White Mountains' liquidity and capital
resource activities during 2001, 2000 and 1999 follows:

FOR THE YEAR ENDED DECEMBER 31, 2001

In January 2001 the Company completed the sale of Waterford to a third
party for consideration of $23.6 million in cash, net of transaction related
expenses.

In March 2001 the Company declared and paid an annual dividend of $5.9
million to its common shareholders.

In April 2001 the Company paid $100.8 million in cash to complete the Debt
Tender and to establish the Debt Escrow. Completion of the Debt Tender permitted
the Company to effect an amendment to the indenture governing the Notes which
facilitated the Acquisition.

In June 2001 White Mountains acquired OneBeacon for cash and the Seller
Note. The total consideration paid for OneBeacon was $2,114.3 million, including
related expenses. Significant assets and liabilities acquired through OneBeacon
included $7,442.6 million of cash and investments, $2,448.9 million of
reinsurance recoverable on paid and unpaid losses, $1,267.3 million of insurance
balances receivable, $6,364.2 million of loss and loss adjustment expenses and
$1,897.7 million of unearned insurance premiums.

In connection with the Acquisition, the Company issued the Convertible
Preference Shares for $437.6 million (which were retired and converted to Common
Shares in August 2001) and issued the Warrants for $75.0 million. The Warrants
have a term of seven years from the date of issuance although the Company has
the right to call the Warrants for $60.0 million in cash commencing on the
fourth anniversary of their issuance.

35

In connection with the Acquisition, White Mountains issued two separate
classes of subsidiary preferred stock. Berkshire purchased for $225.0 million,
$300.0 million in face value of cumulative non-voting subsidiary preferred
stock. The Berkshire Preferred Stock is entitled to a dividend of no less than
2.35% per quarter and is mandatorily redeemable after seven years. Zenith
Insurance Company purchased $20.0 million in cumulative non-voting subsidiary
preferred stock. The Zenith Preferred Stock is entitled to a dividend of no less
than 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5%
thereafter and is mandatorily redeemable after ten years.

In connection with the Acquisition, White Mountains borrowed $825.0 million
under the Lehman Facility. The Lehman Facility is comprised of two term loan
facilities and a revolving credit facility. The term loan facilities are
comprised of a $300.0 million Tranche A Loan with a five-year maturity and a
$400.0 million Tranche B Loan with a six-year maturity. The revolving credit
facility provides for revolving credit loans of up to $175.0 million, including
up to $25.0 million available for the issuance of letters of credit. The
revolving credit facility matures on June 1, 2006.

In connection with the Acquisition, White Mountains issued the Seller Note
to CGNU. The Seller Note has an eighteen-month term and bears interest at a rate
equal to 50 basis points over the rate on White Mountains' revolving loan
facility described above. The Seller Note may be settled in cash, or at White
Mountains' option, with Common Shares valued at $245.00 per share.

In June 2001 White Mountains forgave its intercompany note to Folksamerica
issued in December 2000 in the amount of $195.0 million.

In September 2001 OneBeacon repaid all its outstanding long-term debt of
$3.2 million.

In September 2001 Folksamerica acquired C-F, an inactive insurance
company in run-off, for total consideration of $49.2 million plus related
expenses. The purchase consideration included the issuance of a $25.0 million,
five-year note by White Mountains which may be reduced by adverse loss
development experienced by C-F post-acquisition.

In October 2001 White Mountains announced that it had signed a letter of
intent to purchase Parkway Insurance Co. ("Parkway"), a personal automobile
insurer in New Jersey, from Fireman's Fund. White Mountains was unable to come
to definitive terms with Fireman's Fund on the purchase of Parkway.

In October 2001 OneBeacon sold 2,025,680 shares of the common stock of
United Fire & Casualty Company for $54.7 million.

In December 2001 White Mountains filed a definitive Form S-3 with the
Securities and Exchange Commission ("SEC") which will permit the Company or
its wholly-owned subsidiary, Fund American Companies, Inc. (formerly TACK
Acquisition Corp.), to offer up to $1.0 billion of debt securities,
preference shares or trust preferred securities. White Mountains currently
intends to use the proceeds of any issuances of securities for general
corporate purposes, including repayment of existing borrowings.

In December 2001 OneBeacon invested $180.0 million in Montpelier
consisting of 1,800,000 common shares of Montpelier valued at $100 per share
and the Company received warrants to acquire an additional 797,088 common
shares of Montpelier at $100 per share over the next ten years.

In December 2001 White Mountains acquired the net assets of Folksam which
were valued at approximately $66.9 million on the date of purchase. The purchase
price including related expenses consisted of approximately $30.9 million in
cash, $3.0 million in a note payable to the seller and 86,385 Common Shares
(valued at approximately $30.0 million).

In December 2001 Folksamerica received a $400.0 million capital
contribution from its parent OneBeacon, in the form of cash, which was
undertaken to allow Folksamerica to further capitalize on improved pricing
trends emerging after the Attacks.

In December 2001 Folksamerica issued $7.0 million in short-term debt to
a third party.

During 2001 the Company issued a total of 2,390,566 Common Shares which
consisted of 2,184,583 Common Shares issued in connection with the Conversion,
86,385 Common Shares issued in connection the purchase of the Folksam net
assets, 94,500 Restricted Shares issued to key employees and 25,098 Common
Shares issued to employees in connection with various White Mountains employee
benefit plans.

During 2001 the Company repurchased and retired 6,000 Common Shares for
$1.9 million in cash.

36

Through December 31, 2001, White Mountains paid a total of $18.4 million in
dividends to holders of the Convertible Preference Shares, the Berkshire
Preferred Stock and the Zenith Preferred Stock. Through December 31, 2001, White
Mountains paid a total of $29.2 million in interest under the Lehman Facility
including $2.9 million paid under related interest rate swap agreements.

FOR THE YEAR ENDED DECEMBER 31, 2000

In March 2000 Folksamerica acquired PCA for consideration of $122.3
million in cash. Significant assets and liabilities acquired through PCA
included $339.8 million of cash and investments, $160.0 million of reinsurance
recoverables and $405.5 million of loss and loss adjustment expense reserves.

In May 2000 Folksamerica acquired the Risk Capital Operations for
consideration of $20.3 million in cash plus related expenses. Significant assets
and liabilities acquired with the Risk Capital Operations included $249.9
million of cash and investments, $108.6 million of premiums receivable, $312.5
million of net loss and loss adjustment expense reserves and $82.0 million of
unearned reinsurance premiums. In addition, the Risk Capital Operations provided
Folksamerica with two specialty underwriting units (Accident & Health and
Marine) and several significant new treaty clients.

In July 2000 White Mountains concluded the sale of its indirect,
wholly-owned subsidiary, White Mountains Holdings, Inc. (which controlled a
substantial amount of its holdings of FSA) and all its other holdings of FSA
Common Stock to Dexia for proceeds of $620.4 million.

In December 2000 White Mountains provided $259.6 million of capital to
Folksamerica through the contribution of ACIC and BICC and through the issuance
of a $195.0 million intercompany note which was forgiven during 2001.
Folksamerica subsequently contributed ACIC and $80.0 million of such cash to
Folksamerica Reinsurance Company in order to provide the statutory capital
needed to support its acquisitions of PCA and Risk Capital. The remaining
$115.0 million was used by Folksamerica to repay its outstanding bank
indebtedness.

During 2000 the Company repurchased and retired 65,838 Common Shares for
$8.3 million in cash.

During 2000 the Company declared and paid quarterly cash dividends
totalling $7.1 million.

As part of the Folksamerica acquisition in 1998, White Mountains refinanced
Folksamerica's existing long-term indebtedness by utilizing a six-year revolving
credit agreement whereby Folksamerica could borrow up to $120.0 million at
market interest rates. This facility was repaid and terminated by Folksamerica
during 2000 as described above.

FOR THE YEAR ENDED DECEMBER 31, 1999

In May 1999 White Mountains exercised FSA Options to acquire 666,667 shares
of FSA Common Stock for $15.7 million in cash.

In May 1999 White Mountains concluded the Mortgage Banking Sale and
received net proceeds totalling $180.6 million.

In June 1999 White Mountains concluded the VGI Sale and received net
proceeds of $139.0 million in cash after receiving a special dividend of assets
and cash prior to the closing of $76.6 million. In connection with the VGI Sale,
White Mountains repaid $15.0 million of VGI's indebtedness.

In June 1999 Folksamerica acquired USF Re for total consideration of
$92.5 million. The purchase consideration included the issuance of a $20.8
million, five-year note by Folksamerica (which was reduced to zero at
year-end 2000 due to adverse loss development at USF Re post acquisition)
with the balance paid in cash.

In September 1999 White Mountains exercised FSA Options to acquire
1,893,940 shares of FSA Common Stock in exchange for White Mountains' $50.0
million investment in MediaOne preferred stock.

In October 1999 the Company acquired IAG for $86.7 million in cash.

In December 1999 White Mountains purchased an additional 922,509 shares of
FSA Common Stock for $50.0 million.

During 1999 the Company issued a total of 1,137,495 common shares to its
Chairman and its key employees in satisfaction of the Chairman's warrant
exercise and various employee benefit plan obligations. In order to entice the
Chairman to exercise his warrants to acquire Common Shares early, the Company
paid the Chairman $6.0 million to compensate him for the estimated interest cost
of borrowing the strike price and the amounts required to prematurely pay his
income taxes.

37

During 1999 the Company repurchased 1,020,150 Common Shares for $139.5
million in cash.

During 1999 the Company declared and paid quarterly cash dividends
totalling $8.8 million.

In connection with the Redomestication, White Mountains paid $104.1 million
in certain compensation benefits to its current and former employees and
Directors in October 1999 at an incremental after tax cost of $14.9 million. In
connection with the compensation payments, White Mountains paid cash of $89.8
million (primarily to its former employees) and issued Common Shares valued at
$14.3 million (primarily to its current employees, Directors and advisors). A
significant portion of such compensation paid represented the acceleration of
expenses that would have ordinarily been incurred in future periods which
resulted in increased tax deductible expenses in 1999.

In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a United States
income tax liability upon the Redomestication of approximately $13.5 million.

SIGNIFICANT CASH FLOW ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND
1999

The following table summarizes certain information pertaining to White
Mountains' cash flows:

Cash used for operations of $300.7 million during the 2001 period is
primarily the result of claims payments and general expenses exceeding premiums
collected at OneBeacon. The net cash used for operations during the 2000 period
of $114.0 million is primarily the result of significant acquisitions of run-off
insurance portfolios during that period. Run-off transactions involved the
assumption of sizable portfolios of invested assets as well as the assumption of
insurance and reinsurance liabilities. Run-off liabilities paid are shown as
uses of operating cash whereas offsetting sales of the related assets acquired
are shown as sources of cash from investing activities. The net cash used for
operations during the 1999 period of $208.3 million is primarily the result of
dispositions of certain of White Mountains' operating subsidiaries and the
activities of its insurance and reinsurance run-off activities.

Cash used for investing activities of $1,102.6 million during 2001 resulted
primarily from the costs associated with the Acquisition, partially offset by
net sales of investment securities in anticipation of the Acquisition. Cash
provided from investing activities of $234.4 million during 2000 resulted
primarily from proceeds from the sale of a former subsidiary, partially offset
by net purchases of investment securities. Cash provided from investing
activities of $354.3 million during 1999 resulted primarily from net sales of
investment securities and proceeds from the sale of two former subsidiaries. In
addition, sales of investment securities acquired in connection with White
Mountains' insurance and reinsurance run-off activities served to provide net
cash from investing activities during each of the periods presented herein.

Cash provided from financing activities of $1,466.3 million during 2001
resulted primarily from activities undertaken to finance the Acquisition,
partially offset by cash used in connection with the Debt Tender and the Debt
Escrow. Cash used for financing activities of $119.9 million during 2000
resulted primarily from the repayment of Folksamerica's outstanding bank
indebtedness. Cash used for financing activities of $164.5 million during 1999
resulted primarily from repurchases of Common Shares.

In connection with the Renewal Rights Agreement, OneBeacon retained all of
the existing liabilities, including loss and loss adjustment expense reserves,
related to the transferred business. A large portion of the premiums associated
with the business transferred to Liberty Mutual on November 1, 2001 were
previously received and invested by OneBeacon whereas the related losses and
loss adjustment expenses associated with such business have not yet been fully
paid. As a result, OneBeacon's future payments of such losses and loss
adjustment expenses are expected to result in sizable net uses of operating
cash. However, the liquidation of OneBeacon's existing invested assets
supporting such reserves is expected to result in sizable cash sources from
investing activities.

38

CONTRACTUAL OBLIGATIONS AND COVENANTS

Set forth below is a schedule of White Mountains' material contract
obligations and commitments as of December 31, 2001:

The Lehman Facility contains various affirmative, negative and financial
covenants which are considered to be customary for such borrowings and include
meeting certain minimum net worth and financial ratio standards. Failure to meet
one or more of these covenants could result in an event of default which
ultimately could accelerate required principal repayments. At December 31, 2001,
White Mountains was in compliance with all of the covenants under the Lehman
Facility, and anticipates it will continue to meet the financial covenants under
the Lehman Facility for the foreseeable future.

There are no provisions within White Mountains' leasing agreements that
would trigger acceleration of future lease payments. (See Notes 6, 10 and 18 to
the consolidated financial statements for additional information regarding the
obligations and commitments listed above).

White Mountains does not finance its operations through the securitization
of its trade receivables, through special purpose entities or through synthetic
leases. Further, White Mountains has not entered into any arrangement requiring
it to guarantee payment of third party debt or to fund losses of an
unconsolidated special purpose entity.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with GAAP. The financial statements presented herein
include all adjustments considered necessary by management to fairly present the
financial position, results of operations and cash flows of White Mountains. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.

In the current year presentation of financial information, certain
amounts in the prior period financial statements have been reclassified to
conform with the current presentation. White Mountains has completed numerous
significant transactions during the periods presented that have affected the
comparability of the financial statement information presented herein.

On an ongoing basis, management evaluates its estimates, including those
related to loss and loss adjustment expense reserves, purchase accounting and
related deferred credits and goodwill, reinsurance transactions and its pension
benefit obligations. Management bases its estimates on historical experience and
on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying values of assets and liabilities that are not readily apparent from
other sources.

Management believes that its critical accounting policies affect its more
significant estimates used in the preparation of its consolidated financial
statements. The descriptions below are summarized and have been simplified for
clarity. A more detailed description of the significant accounting policies used
by the Company in preparing its financial statements is included in the notes to
the Consolidated Financial Statements.

39

Loss and Loss Adjustment Expenses

White Mountains must estimate insurance losses and loss adjustment expenses
incurred to provide adequate loss reserves for the payment of insurance claims.
The process of estimating loss and loss adjustment expenses involves a
considerable degree of judgement by management, including issues as to an
insured's liabilities, definitions of occurrence, scope of coverage, policy
limits and application and interpretation of policy terms and exclusions. As a
result, the ultimate amount of expense incurred could be considerably greater
than or less than the amounts currently reflected in the financial statements.

Purchase Accounting and Related Deferred Credits and Goodwill

As of December 31, 2001, White Mountains had unamortized deferred credits
and goodwill of $682.5 million and $22.3 million, respectively. Deferred credits
represent the excess of the fair value of the net assets over the purchase price
paid. Goodwill represents the excess of the purchase price over the fair value
of the net assets of companies acquired. These deferred credits and goodwill
resulted from White Mountains' pre-July 1, 2001 acquisition activities which
were accounted for in accordance with the treatment of a purchase business
combination under Accounting Principles Board ("APB") No. 16, "Business
Combinations". APB No. 16 calls for the net assets of the operations acquired to
be recorded by White Mountains at their fair values on the date of acquisition.

All acquisitions occurring subsequent to July 1, 2001 were accounted for
under the purchase method of accounting in accordance with SFAS No. 141,
"Business Combinations". Under this newly-issued accounting standard, White
Mountains recognized a $16.6 million extraordinary gain during 2001 relating to
two recent acquisitions and will fully recognize its existing unamortized
deferred credit balance of $682.5 million on January 1, 2002 as a change in
accounting principle.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
effective January 1, 2002, White Mountains will amortize its existing and
prospective goodwill only when the asset acquired is deemed to have been
impaired rather than systematically over a perceived period of benefit.

Reinsurance Transactions

White Mountains' insurance and reinsurance subsidiaries enter into
reinsurance contracts from time to time to protect their businesses from losses
due to poor risk diversification, to manage their operating leverage ratios and
to limit ultimate losses arising from catastrophic events. Amounts related to
reinsurance contracts are recorded in accordance with SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".

The collectibility of reinsurance recoverables is subject to the solvency
of the reinsurers. The Company is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with a strong financial condition,
industry ratings and underwriting ability. Management monitors the financial
condition and ratings of its reinsurers on an ongoing basis.

Pension Benefit Obligations

White Mountains has pension benefit obligations that are developed from
external actuarial valuations. Inherent in these valuations and related net
periodic costs or credits are key assumptions including discount rates, interest
rates and expected future returns on plan assets. White Mountains is required to
consider current market conditions, such as changes in relevant interest rates
and anticipated future investment returns, in selecting these assumptions.
Changes in the pension benefit obligations and the related net periodic costs or
credits may occur in the future due to any variance of actual results from our
assumptions and changes in the number of participating employees.

MARKET RISK

White Mountains' consolidated balance sheet includes a substantial amount
of assets and liabilities whose fair values are subject to market risk. The term
market risk refers to the risk of loss arising from adverse changes in interest
rates and other relevant market rates and prices. Due to White Mountains'
sizable balances of interest rate sensitive instruments, market risk can have a
significant effect on White Mountains' consolidated financial position.

40

INTEREST RATE RISK

FIXED MATURITY PORTFOLIO. In connection with the Company's consolidated
insurance and reinsurance subsidiaries, White Mountains invests in interest
rate sensitive securities, primarily debt securities. White Mountains'
strategy is to purchase fixed maturity investments that are attractively
priced in relation to perceived credit risks. White Mountains' fixed maturity
investments are held as available for sale in accordance with SFAS No. 115
whereby these investments are carried at fair value on the balance sheet with
net unrealized gains or losses reported net of tax in a separate component of
common shareholders' equity. White Mountains generally manages its interest
rate risk associated with its portfolio of fixed maturity investments by
monitoring the average duration of the portfolio which allows White Mountains
to achieve an adequate yield without subjecting the portfolio to an
unreasonable level of interest rate risk. White Mountains' fixed maturity
portfolio is comprised of primarily investment grade corporate securities,
U.S. government and agency securities, municipal obligations and mortgage-
backed securities (e.g., those receiving a rating from the National
Association of Insurance Commissioners of 1 or 2).

Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values of fixed maturity investments,
respectively. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.

INDEBTEDNESS. White Mountains utilized a significant amount of variable
rate debt financing (the Lehman Facility and the Seller Note) in connection with
the Acquisition. Increases and decreases in prevailing interest rates will
translate into increases and decreases in the future interest expense associated
with this indebtedness although the carrying value of such liabilities will not
be affected. At December 31, 2001, White Mountains also had $5.1 million in
fixed rate indebtedness outstanding which was prepaid in connection with the
Acquisition by the Debt Escrow transaction, therefore, its fair value is not
subject to future changes in prevailing interest rates.

During 2001 White Mountains entered into a ten-year, $200.0 million
notional interest rate swap and three separate three-year interest rate swaps at
an aggregate $500.0 million notional with two large financial institutions. The
interest rate swaps were undertaken to achieve a fixed interest rate on a
portion of the Lehman Facility. Pursuant to SFAS No. 133, these contracts are
carried at fair value on the balance sheet (which constituted an obligation by
White Mountains of $4.9 million at December 31, 2001) with changes in their fair
value reported directly through the income statement as they do not qualify for
hedge accounting since their duration is dissimilar to that of the Lehman
Facility.

The table below summarizes the estimated effects of hypothetical increases
and decreases in market interest rates on White Mountains' fixed maturity
portfolio and the interest rate swaps.

(1) The relevant interest rate for the assumed change in White Mountains' fixed
income portfolio and interest rate swaps is predicated upon assumed changes in
the three-year or the ten-year U. S. Treasury yield, depending on the duration
of the contract.

41

EQUITY PRICE RISK

The carrying values of White Mountains' common equity securities and its
other investments are based on quoted market prices or management's estimates of
fair value (which is based, in part, on quoted market prices) as of the balance
sheet date. Market prices of common equity securities, in general, are subject
to fluctuations which could cause the amount to be realized upon sale or
exercise of the instruments to differ significantly from the current reported
value. The fluctuations may result from perceived changes in the underlying
economic characteristics of the investee, the relative price of alternative
investments, general market conditions and supply and demand imbalances for a
particular security.

FOREIGN CURRENCY EXCHANGE RATES

A small portion of White Mountains' assets and liabilities are denominated
in foreign currencies. Net unrealized foreign currency translation gains and
losses are reported, after tax, as a net amount in a separate component of
common shareholders' equity. Changes in the values of these assets and
liabilities due to currency fluctuations, after tax, are reported on the income
statement as a component of other comprehensive income. White Mountains' assets
and liabilities denominated in foreign currency are not material.

FORWARD-LOOKING STATEMENTS

White Mountains relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that White Mountains specify important factors that could cause
actual results to differ materially from those contained in forward-looking
statements made by or on behalf of White Mountains. Accordingly, forward-looking
statements by the Company and its affiliates are qualified by reference to the
following cautionary statements.

In its filings with the SEC, reports to shareholders, press releases and
other written and oral communications, White Mountains from time to time
makes forward-looking statements. All statements regarding its expected
financial position and operating results, its business strategy and its
financial plans are forward-looking statements. Such forward-looking
statements include, but are not limited to, (i) projections of revenues,
income (or loss), earnings (or loss) per share, dividends, market share or
other financial forecasts, (ii) statements of plans, objectives or goals of
White Mountains or its management, including those related to growth in book
value and deferred credit per share or return on equity and (iii) expected
losses on, and adequacy of loss reserves for, insurance in force. Words such
as "believes", "anticipates", "expects", "intends", "may", "will" and "plans"
and similar expressions are intended to identify forward-looking statements
but are not the exclusive means of identifying such statements.

White Mountains cautions that a number of important factors could cause
actual results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in forward-looking statements made by White
Mountains. These factors include, but are not limited to: (i) competitive
forces, including the conduct of other property and casualty insurers and
reinsurers, (ii) changes in domestic or foreign laws or regulations applicable
to White Mountains, its competitors or its clients, (iii) an economic downturn
or other economic conditions (such as rising interest rate environment)
adversely affecting White Mountains' financial position, (iv) loss reserves and
other balance sheet items established by White Mountains subsequently proving to
have been inadequate, (v) the failure of pending transactions to be consummated
under expected terms or at all and (vi) the amount of time and extent of
business interruptions and other losses resulting from the Attacks. White
Mountains cautions that the foregoing list of important factors is not
exhaustive. In any event, such forward-looking statements made by White
Mountains speak only as of the date on which they are made, and White Mountains
does not undertake any obligation to update or revise such statements as a
result of new information, future events or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Market Risk Disclosures" contained in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data have been filed as a part
of this Annual Report on Form 10-K as indicated in the Index to Financial
Statements and Financial Statement Schedules appearing on page 49 of this
report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

a. DIRECTORS (AS OF MARCH 22, 2002)
Reported under the caption "Election of the Company's Directors" on pages 3
through 6 of the Company's 2002 Proxy Statement, herein incorporated by
reference.

b. EXECUTIVE OFFICERS (AS OF MARCH 22, 2002)

(a) All executive officers of the Company and its subsidiaries, are elected by
the Board for a term of one-year or until their successors have been elected and
have duly qualified.

MR. BARRETTE has served as Managing Director and Chief Executive Officer of
OneBeacon since June 2001, serving as Chairman of its Board of Managers since
December 2001, and has been a director of the Company since 2000. Mr. Barrette
formerly served as President of the Company from 2000 to June 2001 and served as
Executive Vice President and Chief Financial Officer of the Company from 1997 to
2000. He was formerly a consultant with Tillinghast-Towers Perrin from 1994 to
1996 and was with Fireman's Fund Insurance Company from 1973 to 1993. Mr.
Barrette is Chairman of Folksamerica and a director of Montpelier.

MR. BEAULIEU has served as Secretary and Treasurer of the Company since
June 1, 2001. Mr. Beaulieu previously served as Vice President and Secretary of
the Company from January 1995 to May 2001. He also served as secretary for a
number of the Company's subsidiary companies from January 1995 to May 2001 and
as Chief Financial Officer of White Mountains Insurance Company from March 1995
to June 1999. Prior to joining White Mountains, Mr. Beaulieu was Chief Financial
Officer of New Dartmouth Bank from October 1991 to June 1994.

MR. BYRNE was appointed CEO of the Company in February 2002 and has served
as Chairman of the Company since 1985. Mr. Byrne formerly served as Chairman of
OneBeacon from June 2001 to December 2001, as CEO of the Company from January
2000 to June 2001, as President and CEO of the Company from 1990 to 1997 and as
CEO from 1985 to 1990. Mr. Byrne is a member of OneBeacon and also serves as a
director of Folksamerica, Overstock.com and as Chairman of Montpelier.

MR. CAVOORES was appointed Managing Director, President and Chief Operating
Officer of OneBeacon in December 2001 and formerly served as a Managing Director
of Fund American from 2000 to June 2001 and as a Managing Director of OneBeacon
from June 2001 to December 2001. Prior to joining White Mountains in 2001, Mr.
Cavoores served as Chief Underwriting Officer of worldwide specialty business at
Chubb Corporation. Mr. Cavoores was with Chubb since 1981. Mr. Cavoores is a
member of OneBeacon.

43

MR. KEMP has served as President of the Company since June 2001 and has
been a director since 1994. Mr. Kemp previously served as Deputy Chairman from
January 2000 to June 2001 and as the Company's President and CEO from 1997 to
2000 and served as Executive Vice President from 1993 to 1997 and its Vice
President, Treasurer and Secretary from 1991 to 1993. Mr. Kemp is also a
director of Fund American Re, Folksamerica, MSA and Amlin plc.

MR. GILLESPIE has served as Managing Director of OneBeacon since June 2001
and has been a director of the Company since 1999. He is also the founder and
Managing Partner of his own investment firm, Prospector Partners, LLC
("Prospector"), in Hartford, Connecticut. Prior to forming Prospector, Mr.
Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age
Media Fund, Inc. Mr. Gillespie is a member of OneBeacon and serves as a director
of Folksamerica and Montpelier.

MR. PALMER has served as Chief Accounting Officer since June 2001 and
previously served as Controller of a subsidiary of White Mountains from 1999 to
2001. Prior to joining White Mountains in 1999, Mr. Palmer was with
PricewaterhouseCoopers LLP.

MR. RITCHIE was appointed Chief Financial Officer of Fund American
Companies, Inc. in March 2001 and was named a Managing Director and Chief
Financial Officer of OneBeacon in June 2001. Prior to joining White Mountains
in 2001, Mr. Ritchie served as Senior Vice President and Chief Financial
Officer of CIGNA Corporation's International Division. Mr. Ritchie was with
CIGNA since 1986. Mr. Ritchie is a member of OneBeacon and serves as a
director of Folksamerica.

ITEM 11. EXECUTIVE COMPENSATION

Reported under the captions "Compensation of Executive Officers" on pages
10 through 13, "Reports of the Compensation Committees on Executive
Compensation" on pages 13 though 15, "Member Return Graph" on page 17, and
"Compensation Plans" on page 12 of the Company's 2002 Proxy Statement, herein
incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reported under the caption "Voting Securities and Principal Holders
Thereof" on pages 7 through 9 of the Company's 2002 Proxy Statement, herein
incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reported under the captions "Other Compensation Arrangements" on page 12,
"Certain Relationships and Related Transactions" on page 13 and "Compensation
Committee Interlocks and Insider Participation in Compensation Decisions" on
page 18 of the Company's 2002 Proxy Statement, herein incorporated by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a. DOCUMENTS FILED AS PART OF THE REPORT

The financial statements and financial statement schedules and reports of
independent auditors have been filed as part of this Annual Report on Form 10-K
as indicated in the Index to Financial Statements and Financial Statement
Schedules appearing on page 49 of this report. A listing of exhibits filed as
part of the report appear on pages 46 through 47 of this report.

44

b. REPORTS ON FORM 8-K

On October 31, 2001, the Company filed a Form 8-K (Item 5) which announced
that it had executed a definitive agreement with Liberty Mutual to assume new
and renewal commercial and personal lines business produced by OneBeacon agents
in 42 states and the District of Columbia.

On November 1, 2001, the Company filed a Form 8-K (Item 9) which served to
furnish a letter issued by the Registrant's Chairman, dated October 31, 2001, to
shareholders concerning OneBeacon and Folksamerica.

On November 2, 2001, the Company filed a Form 8-K (Item 9) which served to
furnish information regarding White Mountains' involvement as a founding
shareholder in Montpelier.

On November 5, 2001, the Company filed a Form 8-K (Item 2) which provided
the definitive Liberty Mutual documents including the Renewal Rights Agreement.

On November 7, 2001, the Company filed a Form 8-K (Item 5) containing
Management's Discussion and Analysis to the audited consolidated financial
statements of CGU Corporation for the years ended December 31, 2000, 1999 and
1998 and the unaudited six month periods ended June 30, 2001 and 2000. This
information was filed as a supplement to the financial statement information
previously filed as Exhibit 99(w) to the Company's Form 8-K dated June 25, 2001.

On December 18, 2001, the Company filed a Form 8-K (Item 9) which served to
furnish information regarding the formation of Montpelier.

45

c. EXHIBITS

- --------------------------------------------------------------------------------

EXHIBIT NUMBER NAME
- --------------------------------------------------------------------------------

2 Plan of Reorganization (incorporated by reference herein to the
Company's Registration Statement on S-4 (No. 333-87649) dated
September 23, 1999)
3 (a) Memorandum of Continuance of the Company (incorporated by
reference herein to the Company's Registration Statement on S-4
(No. 333-87649) dated September 23, 1999)
3 (b) Bye-Laws of the Company (incorporated by reference herein to
the Company's Registration Statement on S-4 (No. 333-87649) dated
September 23, 1999)
4 Indenture dated January 1, 1993, with The First National Bank of
Chicago, as trustee, pursuant to the Company's offering of $150
million of medium-term notes (incorporated by reference herein to
the Company's Registration Statement on S-3 (No. 33-54006) dated
October 30, 1992)
10 (a) Stock Purchase Agreement among CGU International Holdings
Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company, Fund
American Enterprises Holdings, Inc. and Fund American Companies,
Inc. dated as of September 24, 2000 (incorporated by reference
herein to Exhibit 99(a) of the Company's Report on Form 8-K dated
September 24, 2000)
10 (b) Amendment No. 1 dated October 15, 2000 to the Stock Purchase
Agreement among CGU International Holdings Luxembourg S.A., CGU
Holdings LLC, CGNU PLC, the Company, Fund American Enterprises
Holdings, Inc. and Fund American Companies, Inc. dated as of
September 24, 2000 (incorporated by reference herein to Exhibit
99(c) of the Company's Report on Form 8-K dated October 19, 2000)
10 (c) Amendment No. 2 dated February 20, 2001 to the Stock Purchase
Agreement among CGU International Holdings Luxembourg S.A., CGU
Holdings LLC, CGNU PLC, the Company, Fund American Enterprises
Holdings, Inc. and Fund American Companies, Inc. dated as of
September 24, 2000 (incorporated by reference herein to Exhibit
99(i) of the Company's Report on Form 8-K dated February 20,
2001)
10 (d) Convertible Preferred Stock Term Sheet relating to the
Company's acquisition of OneBeacon (incorporated by reference
herein to Exhibit 99(e) of the Company's Report on Form 8-K dated
October 19, 2000)
10 (e) Berkshire Preferred Stock and Warrants Term Sheet relating to the
Company's acquisition of OneBeacon (incorporated by reference
herein to Exhibit 99(f) of the Company's Report on Form 8-K dated
October 19, 2000)
10 (f) $875 million Credit Agreement among Fund American Enterprises
Holdings, Inc., Fund American Companies, Inc. and the Company (as
borrowers), Lehman Brothers, Inc. (as arranger) and the several
lenders as parties thereto relating to the Company's acquisition
of OneBeacon dated March 16, 2001 (incorporated by reference
herein to Exhibit 10(f) of the Company's Report on Form 10-K
dated March 26, 2001)
10 (g) Adverse Development Agreement of Reinsurance No. 8888 between
Potomac Insurance Company and GRC dated April 13, 2001
(incorporated by reference herein to Exhibit 99(m) of the
Company's Report on Form 8-K dated June 1, 2001)
10 (h) Adverse Development Agreement of Reinsurance between NICO
(and certain of its affiliates) and Potomac Insurance Company
dated April 13, 2001 and related documents (incorporated by
reference herein to Exhibits 99(n), 99(o), 99(p) and 99(q) of the
Company's Report on Form 8-K dated June 1, 2001)
10 (i) Warrant Agreement among the Registrant and Berkshire dated May
30, 2001 (incorporated by reference herein to Exhibits 99(s) of
the Company's Report on Form 8-K dated June 1, 2001)
10 (j) Subscription Agreement among Berkshire, Fund American Companies,
Inc. and the Registrant dated May 30, 2001 (incorporated by
reference herein to Exhibits 99(t) of the Company's Report on
Form 8-K dated June 1, 2001)
10 (k) Form of Subordinated Note Due 2002 issued to CGU
International Holdings Luxembourg S.A. and CGU Holdings LLC dated
June 1, 2001 (incorporated by reference herein to Exhibits 99(u)
of the Company's Report on Form 8-K dated June 1, 2001)
10 (l) Note Purchase Option Agreement among CGU International
Holdings Luxembourg S.A. and CGU Holdings LLC and the Registrant
dated June 1, 2001 (incorporated by reference herein to Exhibits
99(v) of the Company's Report on Form 8-K dated June 1, 2001)

46

- --------------------------------------------------------------------------------

EXHIBIT NUMBER NAME
- --------------------------------------------------------------------------------

10 (m) Master Agreement by and among the Company, OneBeacon and
Liberty Mutual including the Renewal Rights Agreement and related
documents (incorporated by reference herein to Exhibits 99(d),
99(e), 99(f), 99(g) and 99(h) of the Company's Report on Form 8-K
dated November 1, 2001)
10 (n) Asset Purchase Agreement dated as of December 4, 2001 between
Folksam International Insurance Company, Ltd., Folksam Mutual
General Insurance Company and Fund American Reinsurance Company,
Ltd. And related documents (incorporated by reference herein to
Exhibits 99(a), 99(b), 99(c) and 99(d) of the Company's Report on
Form 8-K dated January 3, 2002)
10 (o) Stock Purchase and Indemnity Agreement by and among the
Company and Dexia S.A. for all of the outstanding capital stock
of White Mountains Holdings, Inc. and indirectly for certain of
the outstanding capital stock of FSA (incorporated by reference
herein to Exhibit 99.1 of the Company's Report on Form 8-K dated
March 10, 2000)
10 (p) Asset Purchase Agreement, as of January 10, 2000, by and
between Risk Capital Holdings, Inc., Risk Capital Reinsurance
Company, Folksamerica Holding Company, Inc. and Folksamerica
Reinsurance Company (incorporated by reference herein to Exhibit
10(a) of the Company's Report on Form 8-K dated January 10, 2000)
10 (q) Stock Purchase Agreement as of December 30, 1999, by and
among Humana Inc., Physician Corporation of America and
Folksamerica Holding Company, Inc. (incorporated by reference
herein to Exhibit 10(a) of the Company's Report on Form 8-K dated
December 30, 1999)
10 (r) Amended and Restated Management Contract by and between PCA
and Humana Workers Compensation Services, Inc. (incorporated by
reference herein to Exhibit 10(a) of the Company's Report on Form
8-K dated December 30, 1999)
10 (s) VGI Stock Acquisition Agreement dated February 10, 1999
between Unitrin, Inc. and the Company (incorporated by reference
herein to Exhibit 10(n) of the Company's 1998 Annual Report on
Form 10-K)
10 (t) Amendment No. 2 dated October 29, 1999 to the Credit
Agreement dated February 24, 1999 among Folksamerica Holding
Company, Inc., the Lenders (as named therein) and The First
National Bank of Chicago (incorporated by reference herein to
Exhibit 10(g) of the Company's 1999 Annual Report on Form 10-K)
10 (u) White Mountains Long-Term Incentive Plan, as amended,
(incorporated by reference to Appendix I of the Company's Notice
of 2001 Annual General Meeting of Shareholders and Proxy
Statement dated July 5, 2001) (**)
10 (v) White Mountains Insurance Group Discounted Option Plan
(*)(**)
10 (w) OneBeacon Insurance Discounted Option Plan (*)(**)
10 (x) OneBeacon Insurance Supplemental Plan (incorporated by
reference herein to Exhibit 4(c) of the Company's Report on Form
S-8 dated August 27, 2001) (**)
10 (y) Employment Agreement dated January 1, 2001 among John D.
Gillespie and Fund American Companies, Inc. (formerly TACK
Acquisition Corp.) (*)(**)
10 (z) Revenue Sharing Agreement among John D. Gillespie, Fund
American Companies, Inc. (formerly TACK Acquisition Corp.) and
Folksamerica Reinsurance Company (*)(**)
11 Statement Re Computation of Per Share Earnings (***)
21 Subsidiaries of the Registrant (*)
23 Consent of PricewaterhouseCoopers dated April 1, 2002 (*)
24 Powers of Attorney (*)

- --------------------------------------------------------------------------------

(*) Included herein.
(**) Management contracts or compensation plans/arrangements required to be
filed as an exhibit pursuant to Item 14(a)3 of Form 10-K.

(***) Not included herein as the information is contained elsewhere within
report. See Note 1 of the Notes to Consolidated Financial Statements.

d. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules and report of independent auditors have
been filed as part of this Annual Report on Form 10-K as indicated in the
Index to Financial Statements and Financial Statement Schedules appearing
on page 49 of this report.

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

WHITE MOUNTAINS INSURANCE GROUP, LTD.

Date: April 1, 2002 By: /s/ J. BRIAN PALMER
-------------------
Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

48

WHITE MOUNTAINS INSURANCE GROUP, LTD.
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

49

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements including Note 18 for Commitments
and Contingencies.

F-1

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

See Notes to Consolidated Financial Statements.

F-2

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY

See Notes to Consolidated Financial Statements.

F-3

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements.

F-4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries and have been prepared in accordance with GAAP
in the United States. Previously defined terms used within these financial
statements have the same meaning as they appear elsewhere within this report.
The Company is a Bermuda limited liability company with its headquarters located
at Crawford House, 23 Church Street, Hamilton, Bermuda HM 11. The Company's
principal executive office is located at 28 Gates Street, White River Junction,
Vermont, 05001- 7066 and its registered office is located at Clarendon House, 2
Church Street, Hamilton, Bermuda HM DX.

The Company's consolidated property and casualty insurance operations are
conducted primarily through OneBeacon, which was acquired by White Mountains
on June 1, 2001. Therefore, the Company's 2001 consolidated financial results
include OneBeacon's results only for the seven months ended December 31, 2001.
White Mountains' consolidated property and casualty reinsurance operations are
conducted through Folksamerica. Folksamerica, which is owned by OneBeacon, also
owns PIC, ACIC and BICC. All significant intercompany transactions have been
eliminated in consolidation. The financial statements include all adjustments
considered necessary by management to fairly present the financial position,
results of operations and cash flows of White Mountains.

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain amounts in the prior period
financial statements have been reclassified to conform with the current
presentation. White Mountains has completed numerous significant transactions
during the periods presented that have affected the comparability of the
financial statement information presented herein.

INVESTMENT SECURITIES

White Mountains' portfolio of fixed maturity investments, common equity
securities and other investments are classified as available for sale and are
reported at fair value as of the balance sheet date as determined by quoted
market values. Net unrealized investment gains and losses, after tax, associated
with such investments are reported as a net amount as a separate component of
shareholders' equity. Changes in net unrealized investment gains and losses,
after tax, are reported as a component of other comprehensive income. Investment
securities are regularly reviewed for impairment based on criteria that include
the extent to which cost exceeds market value, the duration of the market
decline, and the financial health of and specific prospects for the issuer.
Investment losses that are other than temporary are recognized in earnings.
Realized gains and losses resulting from sales of investment securities are
accounted for using the specific identification method.

Premiums and discounts on fixed maturity investments are accreted to income
over the anticipated life of the investment.

Other investments principally include investments in limited partnership
interests which are recorded using the equity method of accounting.

Short-term investments consist of money market funds, certificates of
deposit and other securities which mature or become available for use within one
year. Short-term investments are carried at amortized cost, which approximated
fair value as of December 31, 2001 and 2000.

CASH

Cash includes amounts on hand and demand deposits with banks and other
financial institutions. Amounts presented in the statement of cash flows are
shown net of balances acquired and sold in the purchase or sale of the Company's
consolidated subsidiaries.

F-5

INSURANCE AND REINSURANCE OPERATIONS

Premiums written are recognized as revenues and are earned ratably over the
terms of the related policies or reinsurance treaties. Unearned premiums
represent the portion of premiums written that are applicable to future
insurance or reinsurance coverage provided by policies or treaties in force.

Deferred acquisition costs represent commissions, premium taxes, brokerage
expenses and other costs which are directly attributable to and vary with the
production of new business. These costs are deferred and amortized over the
applicable premium recognition period as insurance and reinsurance acquisition
expenses. Deferred acquisition costs are limited to the amount expected to be
recovered from future earned premiums and anticipated investment income.

Losses and loss adjustment expenses are charged against income as incurred.
Unpaid insurance losses and loss adjustment expenses are based on estimates
(generally determined by claims adjusters, legal counsel and actuarial staff) of
the ultimate costs of settling claims, including the effects of inflation and
other societal and economic factors. Unpaid reinsurance losses and loss
adjustment expenses are based primarily on reports received from ceding
companies and actuarial projections. Unpaid loss and loss adjustment expense
reserves represent management's best estimate of ultimate losses and loss
adjustment expenses, net of estimated salvage and subrogation recoveries, if
applicable. Such estimates are regularly reviewed and updated and any
adjustments resulting therefrom are reflected in current operations. The process
of estimating loss and loss adjustment expenses involves a considerable degree
of judgement by management and the ultimate amount of expense to be incurred
could be considerably greater than or less than the amounts currently reflected
in the financial statements.

In connection with purchase accounting for the Acquisition, White Mountains
was required to adjust to fair value OneBeacon's loss and loss adjustment
expense reserves and the related reinsurance recoverables by $646.9 million and
$346.9 million, respectively, on OneBeacon's acquired balance sheet. This net
reduction to loss and loss adjustment expense reserves of $300.0 million will be
accreted through an income statement charge over the period that the claims are
expected to be settled. See Note 3.

White Mountains' insurance and reinsurance subsidiaries enter into
reinsurance contracts from time to time to protect their businesses from losses
due to concentration of risk, to manage their operating leverage ratios and to
limit losses arising from catastrophic events. The majority of such reinsurance
contracts are executed through excess of loss treaties and catastrophe contracts
under which the reinsurer indemnifies for a specified part or all of certain
types of losses over stipulated amounts arising from any one occurrence or
event. To a lesser extent, White Mountains has entered into quota share treaties
with reinsurers under which all risks meeting prescribed criteria are covered on
a pro- rata basis. The amount of each risk ceded by White Mountains is subject
to maximum limits which vary by line of business and type of coverage. Amounts
related to reinsurance contracts are recorded in accordance with SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" and EITF Topic D-54, as applicable.

Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policies. The
collectibility of reinsurance recoverables is subject to the solvency of the
reinsurers. White Mountains is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with a strong financial condition,
industry ratings and underwriting ability. Management monitors the financial
condition and ratings of its reinsurers on an ongoing basis.

Reinsurance premiums, commissions, expense reimbursements and reserves
related to reinsured business are accounted for on a basis consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded to other companies are reported as a
reduction of premiums written. Amounts applicable to reinsurance ceded for
unearned premium reserves (i.e., prepaid reinsurance premiums) have been
included as a component of other assets. Expense allowances received in
connection with reinsurance ceded have been accounted for as a reduction of the
related policy acquisition costs and are deferred and amortized accordingly.
Funds held under reinsurance treaties represent contractual payments due to the
reinsurer that White Mountains has retained to secure obligations of the
reinsurer. Such amounts are recorded as liabilities in the consolidated
financial statements.

F-6

FEDERAL AND FOREIGN INCOME AND WITHHOLDING TAXES

As a result of the Redomestication, income earned by the Bermuda and
Barbados Companies will generally be subject to an effective overall tax rate
lower than that imposed by the United States, however, no tax benefits will be
obtained in the event of net losses incurred by such companies. The U.S.
Companies are subject to United States income taxes. Prior to the
Redomestication, the Company filed a consolidated United States Federal income
tax return with its subsidiaries. The U.S. Companies continue to file United
States tax returns but may no longer do so on a group-wide consolidated basis.
As a result, the aggregate United States income tax liability of the U.S.
Companies may be higher than it otherwise would have been if part of a
consolidated tax return.

The Company is no longer subject to United States income taxes on its
direct earnings. The Company's Barbados subsidiaries are generally subject to a
5% United States withholding tax on dividends received from its subsidiaries as
well as a 1% Barbados income tax on taxable earnings (which include dividends
received from its subsidiaries). These taxes are recorded in addition to United
States income taxes accrued by its U.S. Companies.

Deferred tax assets and liabilities are recorded when a difference between
an asset or liability's financial statement value and its tax reporting value
exists, and for other temporary differences as defined by SFAS No. 109,
"Accounting for Income Taxes". The deferred tax asset or liability is recorded
based on tax rates expected to be in effect when the difference reverses.

FOREIGN CURRENCY TRANSLATION

Net after tax unrealized losses from foreign currency fluctuations
associated with Fund American Re's operations, Folksamerica's Canadian
operations and certain of BICC's loss reserves totalled $2.7 million and
$.7 million at December 31, 2001 and December 31, 2000, respectively. These net
after tax losses are recorded in shareholders' equity as a component of
accumulated other comprehensive income and changes in these values are reported
on the income and comprehensive income statement as a component of other
comprehensive income.

ACCOUNTING STANDARDS RECENTLY ADOPTED AND ISSUED

During 2001, White Mountains adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires companies to
record all derivatives on the balance sheet as either assets or liabilities
and measure those instruments at fair value. The manner in which companies
are to record gains and losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. Upon its adoption on January 1, 2001, SFAS No. 133 had no
impact on White Mountains' financial condition. During 2001, White Mountains
entered into various interest rate swap agreements which were undertaken to
achieve a fixed interest rate on the Lehman Facility. Pursuant to SFAS No.
133, these contracts are carried at fair value on the balance sheet which
constituted an obligation by White Mountains of $4.9 million at December 31,
2001. Changes in the fair value of these financial instruments are reported
directly through the income statement as they do not qualify for hedge
accounting since their duration is dissimilar to that of the Lehman Facility.
White Mountains is not currently invested in any other traditional or
embedded derivative financial instruments for hedging or for any other
purpose.

In June 2001 the FASB issued SFAS No. 141 entitled "Business
Combinations". SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. With
respect to deferred credits (i.e., negative goodwill), SFAS No. 141 calls for
the recognition of all existing deferred credits arising from business
combinations prior to July 1, 2001 through the income statement as a change
in accounting principle on the first day of the fiscal year beginning after
December 15, 2001, and requires deferred credits arising from business
combinations for which the acquisition date was after June 30, 2001 to be
immediately recognized through the income statement as an extraordinary gain.
As of December 31, 2001 and December 31, 2000, White Mountains had deferred
credits of $682.5 million and $92.2 million, respectively. In accordance with
SFAS No. 141, White Mountains recognized extraordinary gains of $16.6 million
during 2001 in connection with business combinations that it initiated after
July 1, 2001 and it will recognize its entire December 31, 2001 unamortized
deferred credit balance on January 1, 2002 as the effect of a change in
accounting principle. For the years ended December 31, 2001, 2000 and 1999,
White Mountains recognized revenue of $91.6 million, $34.6 million and $11.8
million, respectively from the amortization of its deferred credits.

F-7

In June 2001 the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets". SFAS No. 142 sets forth new standards concerning accounting
for deferred credits, goodwill and other intangible assets arising from business
combinations. With respect to goodwill, SFAS No. 142 calls for the amortization
of existing and prospective goodwill only when the asset acquired is deemed to
have been impaired rather than systematically over a perceived period of
benefit. SFAS No. 142 is effective for interim and annual periods beginning
after December 15, 2001. As of December 31, 2001 and December 31, 2000,
unamortized goodwill amounted to $22.3 million and $25.4 million, respectively.
For the years ended December 31, 2001, 2000 and 1999, White Mountains recognized
goodwill amortization of $3.1 million, $3.5 million and $1.3 million,
respectively. Pursuant to the requirements of SFAS No. 142, upon implementation
on January 1, 2002, White Mountains will cease amortization of the unamortized
goodwill balance. The Company is currently evaluating the effect of the
impairment testing requirements of SFAS No. 142, however, the impact is not
anticipated to be material to its results of operations or financial position.

In August 2001 the FASB issued SFAS No. 144 entitled "Accounting for the
Impairment or Disposal of Long- Lived Assets". This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
This statement requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to
include more disposal transactions. The provisions of this statement are
effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years, with early adoption permitted. The Company
is currently evaluating the effect of SFAS No. 144.

Effective January 1, 2001, insurance companies domiciled in the United
States were required to adopt new regulations implementing a codification of
statutory accounting principles for insurers ("Codification"). The purpose of
Codification was to enhance the consistency of the accounting treatment of
assets, liabilities, reserves, income and expenses of insurers, by setting forth
the accounting practices and procedures to be followed in completing annual and
quarterly financial statements required by state law. Codification served to
reduce Folksamerica's statutory surplus by $.5 million at January 1, 2001.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share amounts are based on the weighted
average number of Common Shares outstanding. Diluted earnings per share
amounts are based on the weighted average number of Common Shares and the net
effect of potentially dilutive Common Shares outstanding. In 1999 net income
is reduced by an amount deemed to be reflective of the dilution to FSA's
reported net income caused by its investment in FSA Preferred Stock. The
following table outlines the Company's computation of earnings (loss) per
share for the years ended December 31, 2001, 2000 and 1999:

F-8

(a) See Note 9 for detailed information concerning outstanding dilutive options
and warrants to acquire Common Shares
(b) During the 2001 period, options and warrants to acquire Common Shares are
not included in the dilutive share calculation as the impact of their inclusion
would serve to be antidilutive to the calculation of net loss per share.

F-9

NOTE 2. SIGNIFICANT TRANSACTIONS

ONEBEACON

On June 1, 2001, White Mountains acquired OneBeacon from CGNU for $2,114.3
million, of which $260.0 million consisted of the Seller Note with the balance
paid in cash. White Mountains and OneBeacon undertook a series of related
pre-closing transactions prior to the Acquisition as follows:

WHITE MOUNTAINS PRE-CLOSING TRANSACTIONS

DEBT TENDER AND DEBT ESCROW TRANSACTIONS. Prior to the Acquisition, the
Company completed the Debt Tender and repurchased and retired $90.9 million of
Notes and subsequently prepaid, through the Debt Escrow, the balance of the
Notes. The Company recorded a $4.8 million extraordinary loss on extinguishment
of debt in connection with the Debt Tender and the Debt Escrow during 2001.

EQUITY FINANCING. On June 1, 2001, a small group of private investors
purchased 2,184,583 Convertible Preference Shares, a newly-issued class of
non-voting convertible preference shares of the Company that contained a
mandatory redemption feature. Upon approval by shareholders at the 2001
Annual Meeting, the Convertible Preference Shares were converted into
2,184,583 Common Shares pursuant to the terms of the Convertible Preference
Share agreement. Had shareholder approval not been obtained by March 31,
2003, the holders of Convertible Preference Shares would not have been
entitled to conversion, but would have had the right to require the Company
to redeem for cash the Convertible Preference Shares on an "as converted"
basis with the redemption price equal to the then-current price of a Common
Share. This conversion right caused the Convertible Preference Shares to have
a redemption value in excess of cash received upon issuance, which resulted
in a net charge to retained earnings of $305.1 million for the brief period
from issuance until conversion, with an offsetting increase to paid-in
surplus. While outstanding, the Company declared and paid dividends on
Convertible Preference Shares of $.3 million.

On June 1, 2001, Berkshire purchased the Warrants from the Company for
$75.0 million in cash. The Warrants entitle Berkshire to acquire 1,714,285
Common Shares at an exercise price of $175.00 per Common Share. Of the total
Warrants purchased by Berkshire, Series A Warrants to purchase 1,170,000
Common Shares were immediately exercisable and Series B Warrants to purchase
544,285 Common Shares became exercisable upon approval by shareholders at the
2001 Annual Meeting. From the period June 1, 2001 through the date of the
2001 Annual Meeting, the Series B Warrants constituted a contingent put
liability (similar in nature to a stock appreciation right) which was carried
at fair value through a periodic charge or credit to the income statement.
The income statement charge recorded by the Company during 2001 associated
with Series B Warrants totalled $58.8 million. Upon shareholder approval, the
Series B Warrants were converted to common shareholders' equity. The Warrants
have a term of seven years from the date of issuance although the Company has
the right to call the Warrants for $60.0 million in cash commencing on the
fourth anniversary of their issuance.

On June 1, 2001, Berkshire purchased the Berkshire Preferred Stock for
$225.0 million. The Berkshire Preferred Stock was issued by a subsidiary of the
Company and is a cumulative non-voting instrument with a face value of $300.0
million. The Berkshire Preferred Stock is entitled to a dividend of no less than
2.35% per quarter and is mandatorily redeemable after seven years.

As previously mentioned, White Mountains received a total of $300.0 million
in cash from Berkshire in full payment for the Warrants and the Berkshire
Preferred Stock. The proceeds received were allocated to each instrument based
on their relative estimated fair values on June 1, 2001. As a result, $154.8
million of such proceeds were allocated to the Warrants (and therefore recorded
to shareholders' equity) and $145.2 million of such proceeds were allocated to
the Berkshire Preferred Stock. White Mountains is accreting the Berkshire
Preferred Stock's recorded value to its face value of $300.0 million using the
interest method of amortization over the instrument's seven-year term through
an income statement charge. During 2001, White Mountains recorded $5.1 million
of accretion charges on the Berkshire Preferred Stock.

F-10

On June 1, 2001, Zenith purchased the Zenith Preferred Stock for $20.0
million. The Zenith Preferred Stock was issued by a subsidiary of the Company
and is a cumulative non-voting instrument with a face value of $20.0 million.
The Zenith Preferred Stock is entitled to a dividend of no less than 2.5% per
quarter through June 30, 2007 and a dividend of no less than 3.5% per quarter
thereafter and is mandatorily redeemable after ten years.

BANK FINANCING. On June 1, 2001, a subsidiary of the Company borrowed
$825.0 million under the Lehman Facility consisting of $700.0 million in term
loans and $125.0 million in revolving loans (of a $175.0 million revolving loan
facility). The term loans are repayable in quarterly installments with a final
maturity on March 31, 2007. The revolving loan facility is available from the
closing date until the fifth anniversary of the closing. The loans are variable
rate instruments which are currently tied to a rate based on short-term
eurodollar rates. White Mountains subsequently entered into various interest
rate swap agreements which were undertaken to achieve a fixed interest rate on
the term loans. See Note 6.

SELLER NOTE. On June 1, 2001, White Mountains issued the Seller Note of
$260.0 million to CGNU. The Seller Note has an eighteen-month term and bears
interest at a rate equal to 50 basis points over the rate on White Mountains'
revolving loan facility described above. The Seller Note may be settled in
cash, or at White Mountains' option, with Common Shares valued at $245.00 per
Share. White Mountains has classified this obligation as debt since
management believes it has the ability to settle this obligation in a form
other than pursuant to the Note Purchase Option Agreement that governs the
Seller Note.

ONEBEACON PRE-CLOSING TRANSACTIONS

NICO COVER. Immediately prior to the Acquisition, CGNU caused OneBeacon to
purchase a reinsurance contract for a premium of $1,322.3 million under which
OneBeacon is entitled to recover up to $2.5 billion in ultimate losses and
loss adjustment expenses incurred related to asbestos claims arising from
business written by OneBeacon prior to 1992, environmental claims arising
from business written by OneBeacon prior to 1987 and certain other exposures.

Under the terms of the NICO Cover, in addition to the reinsurance premium,
NICO received the benefit of reinsurance recoverables from certain of
OneBeacon's third party reinsurers in existence at the time the NICO Cover was
executed. Third party reinsurance collected on the claims covered by this
agreement serve to protect the $2.5 billion limit of NICO coverage for the
benefit of OneBeacon.

GRC COVER. Immediately prior to the Acquisition, CGNU caused OneBeacon to obtain
$570.0 million of reinsurance protection through the GRC Cover consisting of
$400.0 million of adverse development coverage on losses related to its years
2000 and prior, in addition to $170.0 million of loss reserves ceded to GRC.

The NICO Cover and the GRC Cover, which were contingent on, and occurred
contemporaneously with the Acquisition, qualify for prospective reinsurance
accounting treatment under EITF Topic D-54 which characterizes the protections
as an indemnification by the seller for increases in the liabilities for losses
and loss adjustment expenses that existed at the acquisition date. See Notes 3
and 4.

PURCHASE ACCOUNTING ASSOCIATED WITH THE ACQUISITION

The Acquisition was accounted for by the purchase method of accounting in
accordance with the treatment of a purchase business combination under the APB
No. 16, "Business Combinations" and, therefore, the assets and liabilities of
OneBeacon were recorded by White Mountains at their fair values on June 1, 2001.
The process of determining the fair value of such assets and liabilities
acquired, as required under purchase accounting, was undertaken as follows:
(i) the purchase price of OneBeacon was preliminarily allocated to the acquired
assets and liabilities, based on their respective estimated fair values at June
1, 2001; (ii) the excess of the fair value of acquired net assets over the
purchase price was used to reduce the estimated fair values of all non-current,
non-financial assets acquired to zero; and (iii) the remaining $682.0 million
excess of the estimated fair value of net assets over the purchase price was
recorded as a deferred credit.

F-11

In accordance with the purchase method of accounting, on June 1, 2001,
White Mountains decreased the net assets of OneBeacon by $26.9 million ($17.4
million after taxes) representing adjustments to reflect the estimated fair
value of OneBeacon's assets and liabilities assumed. This decrease was
primarily comprised of pretax adjustments of (i) $185.3 million to record the
fair value of certain liabilities at the time of the Acquisition, mostly
assigned risk exposures in New York, (ii) $42.0 million in allowance for
doubtful accounts on insurance balances receivable and (iii) $85.9 million to
recognize the fair value of employee benefit obligations, offset by (iv) a
net asset increase of $300.0 million resulting from fair value adjustments
made to OneBeacon's loss and loss adjustment expense reserves and related
reinsurance recoverables. White Mountains also decreased the net assets of
OneBeacon by an additional $246.5 million ($175.9 million after tax)
representing an allocation of the excess of acquired net assets over the
purchase price to OneBeacon's non-current, non-financial assets existing at
the time of the Acquisition, primarily its property, plant and equipment.

The fair value of assets and liabilities acquired on June 1, 2001 were as
follows ($ in millions):

Fair value of assets acquired $ 11,895.1
Fair value of liabilities acquired 9,098.8
------------
Fair value of net assets acquired 2,796.3

Total purchase price, including expenses (2,114.3)
------------

Resulting deferred credit $ 682.0
============

Significant assets and liabilities acquired through OneBeacon included
$34.0 million of cash, $7,408.6 million of investments, $2,448.9 million of
reinsurance recoverable on paid and unpaid losses, $1,267.3 million of
insurance balances receivable, $7,011.1 million of loss and loss adjustment
expense reserves and $1,897.7 million of unearned insurance premiums.

In conjunction with its adoption of SFAS No. 141, White Mountains will
recognize its entire unamortized deferred credit balance on January 1, 2002,
including its unamortized deferred credit balance relating to OneBeacon of
$625.1 million at December 31, 2001, as a change in accounting principle. Had
the Acquisition occurred on or after July 1, 2001, White Mountains would have
immediately recognized this deferred credit on its income statement as an
extraordinary gain as was the case with its acquisitions of C-F and the
Folksam net assets.

POST-ACQUISITION TRANSACTION - RENEWAL RIGHTS AGREEMENT

On November 1, 2001, OneBeacon transferred its regional agency business,
agents and operations in 42 states and the District of Columbia to Liberty
Mutual. Service agreements have been put in place to ensure a smooth transition.
The underwriting results and cash flows of the renewed policies will be shared
between OneBeacon and Liberty Mutual over a two year period though a reinsurance
agreement whereby OneBeacon will assume two-thirds and one-third of the business
renewed in the first and second years, respectively. OneBeacon retained
substantially all of the existing assets and liabilities related to the
transferred business including all loss and loss adjustment expenses and
unearned premium reserves.

UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ACQUISITION AND THE RENEWAL
RIGHTS AGREEMENT - YEARS ENDED DECEMBER 31, 2001 AND 2000

Supplemental unaudited pro forma condensed combined income statement
information for the years ended December 31, 2001 and 2000, which assumes that
the Acquisition and the Renewal Rights Agreement had occurred as of
January 1, 2001 and 2000, respectively, follows:

F-12

The unaudited pro forma information presented above for the years ended
December 31, 2001 and 2000 has been supplied for comparative purposes only and
does not purport to reflect the actual results that would have been reported had
the Acquisition and the Renewal Rights Agreement been consummated at
January 1, 2001 and 2000, respectively. Additionally, such pro forma financial
information is not expected to be reflective of results that may occur in the
future, particularly in light of significant non-recurring transactions such as
the NICO Cover and the GRC Cover which are included therein. These transactions
served to reduce revenues during the 2001 and 2000 pro forma periods presented
by approximately $1.6 billion and $1.7 billion, respectively, and served to
reduce net loss by approximately $345.2 million and $296.6 million,
respectively.

OTHER ACQUISITIONS AND DISPOSITIONS

In December 2001 Fund American Re acquired substantially all of the
international reinsurance operations of Folksam. The $64.0 million purchase
price was paid in a combination of cash, a note and Common Shares. At
December 31, 2001, Fund American Re had $126.3 million of total assets and
$63.9 million of shareholder's equity. In accordance with SFAS No. 141, White
Mountains recognized a $3.0 million extraordinary gain during 2001
representing the excess of the fair value of Folksam's net assets over its
cost.

In September 2001 Folksamerica acquired C-F for total consideration of
$49.2 million plus related expenses. The purchase consideration included the
issuance of a $25.0 million, five-year note by Folksamerica which may be
reduced by adverse loss development experienced by C-F post-acquisition. In
accordance with SFAS No. 141, White Mountains recognized a $13.6 million
extraordinary gain during 2001 representing the excess of the fair value of
C-F's net assets over its cost.

In January 2001 the Company sold Waterford to a third party for
consideration of $23.6 million in cash, net of transaction related expenses.
White Mountains recognized a $12.4 million pretax gain on the sale of Waterford
in 2001.

In October 2000, Folksamerica purchased an 80% majority interest in
Esurance for $9.0 million. During the fourth quarter of 2001, Folksamerica
purchased the remaining 20% minority interest in Esurance for $1.5 million,
thereby making Esurance a wholly owned subsidiary as of December 31, 2001. At
and for the year ended December 31, 2001, Esurance had total assets of $9.6
million, total revenues of $3.2 million and an accumulated shareholder's
deficit of $16.1 million.

In October 2000 the Company was informed that the Internal Revenue
Service agreed with its position taken in its 1991 tax return concerning the
sale of Fireman's Fund and, accordingly, released a $95.0 million reserve
during 2000 to income which is presented as a gain from discontinued
operations.

In July 2000 White Mountains sold its indirect, wholly-owned subsidiary,
White Mountains Holdings, Inc. (which controlled a substantial amount of its
holdings of FSA) and all its other holdings of FSA Common Stock to Dexia for
proceeds of $620.4 million. White Mountains recognized a $391.2 million gain on
the Dexia Sale in 2000.

F-13

In May 2000 Folksamerica completed its acquisition of the Risk Capital
Operations for $20.3 million in cash plus related expenses. Because the cost
of the Risk Capital Operations was more than the fair value of its net
identifiable assets at that date, White Mountains recorded $24.9 million in
goodwill at acquisition ($22.3 million and $23.3 million at December 31, 2001
and 2000, respectively) which was being amortized to income over the
estimated period of benefit of ten years.

In March 2000 Folksamerica acquired PCA for $122.3 million in cash.
Because the cost of PCA was less than the fair value of its net identifiable
assets acquired at that date, White Mountains recorded a $37.9 million
deferred credit at acquisition ($26.8 million and $33.0 million at December
31, 2001 and 2000, respectively) which was being amortized to income over the
estimated period of benefit of six years.

In October 1999 the Company acquired IAG (which consisted primarily of
PIC, ACIC and BICC) for $86.7 million in cash. Because the cost of acquiring
PIC, ACIC and BICC was less than the value of their net identifiable assets, the
Company recorded a $62.0 million deferred credit at acquisition ($16.3 million
and $37.0 million at December 31, 2001 and 2000, respectively) which was being
amortized to income over the estimated period of benefit of three years.

In June 1999 Folksamerica acquired USF Re. The purchase consideration
included the issuance of a $20.8 million, five-year note (which was reduced
to zero by post-acquisition adverse loss development at USF Re of $6.8
million and $14.0 million during 2000 and 1999, respectively).

In June 1999 White Mountains sold VGI and received net proceeds of
$139.0 million in cash after receiving a special dividend prior to the closing
of $76.6 million (net of related tax liabilities) consisting of cash, investment
securities and the common stock of Waterford. White Mountains recorded a pretax
gain of $88.1 million in 1999 on the transaction. As part of the VGI Sale, White
Mountains has provided Unitrin, Inc. with certain adverse loss development
protections that will be settled as of December 31, 2002. During 2001 and 2000
White Mountains provided $5.9 million and $5.4 million, respectively, in
reserves for such adverse loss development protections.

In May 1999 White Mountains concluded the Mortgage Banking Sale and
received net proceeds totalling $180.6 million. White Mountains recorded a
$19.4 million pretax ($12.6 million after tax) net income on the sale of its
mortgage banking net assets which is presented as net income from discontinued
operations.

In August 1998 White Mountains acquired all the outstanding common stock of
Folksamerica thereby causing Folksamerica to become a consolidated subsidiary as
of that date. Because the cost of White Mountains' investment in Folksamerica
was less than the value of Folksamerica's net identifiable assets at that date,
White Mountains recorded a $39.8 million deferred credit ($14.3 million and
$22.2 million at December 31, 2001 and 2000, respectively) which was being
amortized to income ratably over the estimated period of benefit of five years.

F-14

NOTE 3. RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

ONEBEACON The following table summarizes the loss and loss adjustment
expense reserve activities of OneBeacon for the seven months ended December 31,
2001:

(1) Reinsurance recoverable on unpaid losses acquired in the Acquisition were
$1,969.8 million.

In connection with purchase accounting for the Acquisition, White
Mountains was required to adjust to fair value OneBeacon's loss and loss
adjustment expense reserves and the related reinsurance recoverables by
$646.9 million and $346.9 million, respectively, on OneBeacon's acquired
balance sheet. This reduction to net loss and loss adjustment expense
reserves of $300.0 million is being accreted through an income statement
charge over the period that the claims are expected to be settled. As such,
White Mountains recognized $56.0 million of loss and loss adjustment expenses
for the seven months ended December 31, 2001. The fair values of OneBeacon's
loss and loss adjustment expense reserves and related reinsurance
recoverables acquired on June 1, 2001 were based on the present value of
their expected cash flows with consideration for the uncertainty inherent in
both the timing of, and the ultimate amount of, future payments for losses
and receipts of amounts recoverable from reinsurers. In estimating fair
value, management adjusted OneBeacon's nominal loss reserves (net of the
effects of reinsurance obtained from the NICO Cover and the GRC Cover) and
discounted them to their present value using an applicable risk-free discount
rate. The series of future cash flows related to such loss payments and
reinsurance recoveries were developed using OneBeacon's historical loss data.
The result was subsequently reduced by the "price" for bearing the
uncertainty inherent in OneBeacon's net loss reserves. This was assumed to be
approximately 11% of the present value of the expected underlying cash flows
of the loss reserves and reinsurance recoverables, which is believed to be
reflective of the cost OneBeacon would incur if it had attempted to reinsure
the full amount of its net loss and loss adjustment expense reserves with a
third party reinsurer.

F-15

During the fourth quarter of 2001, OneBeacon increased its estimate of
losses and loss adjustment expense reserves for years 1999 and prior in the
workers compensation, general liability, commercial multiple peril and
commercial automobile lines of business. These actions exhausted the remaining
protection under the GRC Cover and resulted in a $50.0 million charge in the
2001 fourth quarter to loss and loss adjustment expense. Additionally, during
2001 OneBeacon recognized approximately $14.6 million in losses and loss
adjustment expenses related to certain unallocated loss adjustment expenses and
pools and associations which were not covered by the NICO Cover or the GRC
Cover.

OneBeacon discounts certain loss and loss adjustment expenses relating to
long-term workers compensation reserves. These liabilities on an undiscounted
net of reinsurance basis were $662.9 million at December 31, 2001. Discounting
these reserves served to reduce net loss and loss adjustment expense liabilities
by $278.1 million at December 31, 2001.

REINSURANCE AND OTHER INSURANCE OPERATIONS

The following table summarizes loss and loss adjustment expense reserve
activity relating to White Mountains' reinsurance and other insurance operations
for the years ended December 31, 2001, 2000 and 1999:

(1) Reinsurance recoverables on unpaid losses acquired in the Fund American Re,
Risk Capital Operations, PCA and USF Re acquisitions were $21.0 million,
$59.1 million, $153.3 million and $21.8 million, respectively.
(2) Represents $22.2 million and $270.6 million of loss reserves ceded to
Imagine Re during 2001 and 2000, respectively. See Note 4.

Prior accident year losses of $38.7 million incurred in 2001 consisted
primarily of $22.2 million in reserve strengthening on business ceded under a
retroactive reinsurance agreement entered into during the 2000 fourth quarter -
See Note 4 for details of this agreement. Because the reinsurance cover was
retroactive, the offsetting benefit (reinsurance recoverable) of $22.2 million
has been deferred and is being recognized into underwriting income over the
expected settlement period of the underlying claims. The remaining $16.5 million
in prior accident year losses incurred in 2001 were primarily due to higher than
expected reported losses in Folksamerica's property excess line.

F-16

Incurred losses for the years ended December 31, 2000 and 1999 related to
prior accident years of $23.6 million and $31.9 million, respectively, were
principally from the portfolios acquired with USF Re and the Risk Capital
Operations. In connection with the USF Re acquisition, Folksamerica issued the
USF Re Seller Note for $20.8 million under which Folksamerica was not required
to repay the loan should loss and loss adjustment expenses acquired in the
acquisition develop adversely. In response to adverse development experienced on
reserves acquired in the USF Re acquisition, the USF Re Seller Note was reduced
by $6.8 million and $14.0 million, which was recorded to "Amortization of
deferred credits and other benefits" in the Company's income statement during
the periods ended December 31, 2000 and 1999, respectively.

ASBESTOS AND ENVIRONMENTAL LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE ACTIVITY

White Mountains estimates its asbestos and environmental loss and loss
adjustment expense liabilities based upon several factors, including facts
surrounding reported cases and exposures to claims (such as policy limits and
deductibles), current law, past and projected claim activity and past settlement
values for similar claims.

During the fourth quarter of 2001, OneBeacon increased its reserves for
gross asbestos and environmental reserves so that its reserve levels are more
closely aligned with industry-wide survival ratios, substantially all of which
was covered under the NICO Cover. As a result, OneBeacon estimates that it has
exhausted approximately $1,771 million of the coverage provided by the NICO
Cover after estimating amounts that will be recovered by NICO from other third
party reinsurers at December 31, 2001. To the extent that OneBeacon's estimate
of ultimate asbestos and environmental losses and NICO's third-party
recoverables differs from actual experience, the amount of coverage remaining
under the NICO Cover could be higher or lower than $729 million. The following
table summarizes reported asbestos and environmental loss and loss adjustment
expense reserve activities (gross and net of reinsurance) for White Mountains'
consolidated insurance and reinsurance operations for the years ended December
31, 2001, 2000 and 1999, respectively.

F-17

White Mountains' insurance and reinsurance subsidiaries have estimated
environmental and asbestos loss and loss adjustment expense liabilities based
upon several factors including facts surrounding reported cases and exposures
(such as policy limits and deductibles), current law, past and projected
claim activity and past settlement values for similar claims. White
Mountains' reserves for environmental and asbestos losses at December 31,
2001 represent management's best estimate of the Company's ultimate liability
based on information currently available. However, as case law expands, White
Mountains may be subject to environmental and asbestos loss and loss
adjustment expense liabilities beyond that intended by policy coverage.
Furthermore, in the event that current case law is expanded to include claims
not contemplated in the establishment of White Mountains' recorded
environmental and asbestos loss and loss adjustment expense reserves, White
Mountains believes that it is unlikely that these claims will have a material
adverse effect on its financial condition or liquidity. Nonetheless, due to
the expansion of coverage and liability allowed under case law in the past
and the possibilities of similar interpretations in the future, additional
increases in environmental and asbestos loss reserves may emerge which would
adversely affect the Company's financial position and cash flows. Loss
reserve additions arising from such future unfavorable case law
interpretations cannot be reasonably estimated at the present time.

NOTE 4. THIRD PARTY REINSURANCE

In the normal course of business, White Mountains' insurance and
reinsurance subsidiaries seek to limit losses that may arise from catastrophes
or other events by reinsuring with third party reinsurers. White Mountains
remains liable for risks reinsured even if the reinsurer is unable to honor its
obligations under reinsurance contracts. The effects of reinsurance on White
Mountains' insurance and reinsurance subsidiaries' written and earned premiums
and on loss and loss adjustment expenses were as follows:

F-18

ONEBEACON

In the ordinary course of its business, OneBeacon cedes various risks to
high quality, highly rated, third party reinsurers in order to provide greater
diversification of risk and minimize its net loss arising from large risks or
catastrophic events.

Catastrophe losses are unpredictable and the level of catastrophic losses
experienced in any year could potentially be material to OneBeacon's results of
operations and financial position. Examples of catastrophes include losses
caused by earthquakes, wildfires, hurricanes and other types of storms,
tornadoes and terrorist acts. The extent of losses caused by catastrophes is
both a function of the total amount of insured exposure in an area affected by
the event and the severity of the event.

F-19

OneBeacon continually assesses and implements programs to manage its
exposure to catastrophe losses through individual risk selection, by limiting
its concentration of insurance written in catastrophe-prone areas (such as
coastal regions) and through the purchase of catastrophe reinsurance. OneBeacon
has entered into a property catastrophe reinsurance program for the 2002
calendar year whereby the first $125.0 million of losses resulting from any
single catastrophe are retained by OneBeacon. Property catastrophe losses from a
single event in excess of $125.0 million, up to $200.0 million, are reinsured
with a syndicate of reinsurers for 75% of the loss. Property catastrophe losses
from a single event in excess of $200.0 million, up to $750.0 million, are
reinsured with a group of reinsurers for 95% of the loss. OneBeacon's 2002
property catastrophe reinsurance program does not cover personal or commercial
property losses resulting from nuclear, biological or chemical terrorist attacks
and its property catastrophe program only covers 30% of commercial property
losses resulting from other types of terrorist attacks from $125.0 million to
$650.0 million and 95% of such losses from $650 million to $750 million. In the
event of a 2002 catastrophe, OneBeacon can reinstate property catastrophe
coverage for the remainder of 2002 by paying a reinstatement premium which is
based on the product of the percentage of coverage reinstated and its original
property catastrophe coverage premium of $34.7 million. OneBeacon also purchases
reinsurance coverage for certain specific risks below $125.0 million where
appropriate.

Reinsurance contracts do not relieve OneBeacon of its primary obligation
to its policyholders. Therefore, the financial position and solvency of
OneBeacon's reinsurers is critical to the collectibility of its reinsurance
coverages. OneBeacon is selective with regard to its reinsurers, placing
reinsurance with only those reinsurers with strong financial strength
ratings. Reinsurance recoverables from Berkshire (NICO and GRC's ultimate
parent) under the NICO Cover and the GRC Cover represented 62.0% of White
Mountains' total reinsurance recoverables at December 31, 2001. Both NICO and
GRC have A++ (Superior) ratings from A.M. Best. The remaining reinsurers
generally are rated A (Excellent) or better by A.M. Best. OneBeacon monitors
the financial strength of its reinsurers on an ongoing basis. As a result,
uncollectible amounts have not historically been significant.

In connection with the Acquisition, OneBeacon obtained the GRC Cover which
provided $570.0 million of reinsurance protection, consisting of $400.0 million
of adverse development coverage on losses occurring in years 2000 and prior, in
addition to $170.0 million of reserves ceded as of the date of the Acquisition.
During the fourth quarter of 2001, OneBeacon increased its estimate of gross
prior year loss reserves which exhausted the total coverage available under the
GRC Cover. The GRC Cover contains a feature whereby OneBeacon may not be
entitled to recover losses to the full contract limit should such losses be paid
out more quickly than expected. OneBeacon has estimated that approximately
$38.3 million of the total $570.0 million of available coverage is subject to
such limitation at December 31, 2001. Accordingly, OneBeacon has recorded
$531.7 million in recoverables due from GRC at December 31, 2001.

FOLKSAMERICA

Folksamerica has exposure to losses assumed from primary insurers including
losses caused by hurricanes, earthquakes, winter storms, windstorms and other
catastrophic events. In the normal course of business, Folksamerica seeks to
reduce the risk of loss that may arise from catastrophes or other events that
cause unfavorable underwriting results by closely monitoring aggregate exposures
and related probable maximum losses (PMLs), and by reinsuring excess risks with
other reinsurers. Folksamerica's catastrophe management strategy is to limit its
net loss to less than 10% of surplus for a 1 in 250 year event. Folksamerica's
current catastrophe protection program includes 85% of $35 million of protection
in excess of a $25 million retention for the first loss and additional coverage
for a second loss. The contract is 100% placed with a top quality reinsurer, and
has reinstatement provision whereby, in the event of one loss, the coverage is
reinstated for additional premium.

F-20

In the fourth quarter of 2000 Folksamerica purchased reinsurance coverage
(the "Imagine Cover") from Imagine Insurance Company, Ltd. of Barbados
("Imagine") which was designed to reduce its statutory operating leverage and to
provide adverse development protection of up to $115.0 million on (i) loss and
loss adjustment expense reserves remaining from the Risk Capital Operations;
(ii) loss and loss adjustment expense reserves remaining from the USF Re
acquisition; (iii) adverse development protection on Folksamerica's remaining
environmental and asbestos exposures and (iv) prospective reinsurance coverage
for losses in excess of premiums earned on policies which Folksamerica was
contractually bound to write as a result of the Risk Capital Operations. In
connection with the Imagine Cover, Folksamerica transferred loss and loss
adjustment expense reserves of $250.0 million and unearned premium reserves of
$65.0 million to Imagine for consideration of $315.0 million. $212.3 million of
the consideration due under the Imagine Cover is included as a liability
entitled "Funds held under reinsurance treaties" on White Mountains' December
31, 2001 balance sheet. Folksamerica holds a letter of credit and funds held as
collateral for amounts due from Imagine.

In accordance with SFAS No. 113, amounts related to reserves transferred to
Imagine for liabilities incurred as a result of past insurable events have been
accounted for as retroactive reinsurance. At December 31, 2001 and 2000,
Folksamerica's reinsurance recoverables include $442.3 million and $321.7
million, respectively, recorded under the Imagine Cover. At December 31, 2001
and December 31, 2000, Folksamerica has also recorded $40.0 million and $20.6
million in deferred gains, respectively, related to adverse development on loss
reserves transferred to Imagine at the inception of the Imagine Cover.
Folksamerica is recognizing these deferred gains into income over the expected
settlement period of the underlying claims, and accordingly recognized $2.8
million of such deferred gains during the year ended December 31, 2001.

At December 31, 2001 and 2000, Folksamerica had reinsurance recoverables
with a carrying value of $141.7 million and $116.7 million, respectively,
associated with London Life and Casualty Reinsurance Corporation. Folksamerica
holds a letter of credit and funds held as collateral for amounts due from
London Life and Casualty.

During the years ended December 31, 2001 and 2000, Folksamerica received
approximately 54.4% and 56.4%, respectively, of its gross reinsurance premiums
written from three major reinsurance brokers as follows: (1) AON Re, Inc. -
21.3% and 17.2%, respectively; (2) Benfield Blanch - 17.2% and 21.6%,
respectively; and (3) Guy Carpenter - 15.9% and 17.6%, respectively.

NOTE 5. INVESTMENT SECURITIES

White Mountains' net investment income is comprised primarily of interest
income associated with the fixed maturity investments of its consolidated
insurance and reinsurance operations, dividend income from its equity
investments and interest income from its short-term investments. Net investment
income for 2001, 2000 and 1999 consisted of the following:

F-21

The composition of realized investment gains (losses) for investments sold
consisted of the following:

White Mountains recognized gross realized investment gains of $290.8
million, $22.3 million and $90.4 million and gross realized investment losses of
$117.7 million, $31.1 million and $20.8 million on sales of investment
securities during 2001, 2000 and 1999, respectively. The components of White
Mountains' change in unrealized investment gains, after tax, as recorded on the
statements of income and comprehensive income were as follows:

The components of White Mountains' ending net unrealized investment gains
and losses on its investment portfolio and its investments in unconsolidated
insurance affiliates were as follows:

F-22

The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' fixed maturity investments as of
December 31, 2001 and 2000, were as follows:

The cost or amortized cost and carrying value of White Mountains' fixed
maturity investments at December 31, 2001 is presented below by contractual
maturity. Actual maturities could differ from contractual maturities because
borrowers may have the right to call or prepay certain obligations with or
without call or prepayment penalties.

F-23

The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of White Mountains' common equity securities and other
investments as of December 31, 2001 and 2000, were as follows:

White Mountains' consolidated insurance and reinsurance operations are
required to maintain deposits with certain insurance regulatory agencies in
order to maintain their insurance licenses. The fair value of such deposits
totalled $510.1 million and $69.1 million as of December 31, 2001 and 2000,
respectively.

Sales and maturities of investments, excluding short-term investments,
totalled $8,971.6 million, $582.1 million and $530.1 million for the years ended
December 31, 2001, 2000 and 1999, respectively. There were no non-cash exchanges
or involuntary sales of investment securities during 2001, 2000 or 1999.

OneBeacon participates in a securities lending program whereby it loans
investment securities to other institutions for short periods of time. OneBeacon
receives a fee from the borrower in return for the use of its assets.
OneBeacon's policy is to require collateral equal to approximately 102% of the
fair value of the loaned securities, which is held by a third party. All
securities loaned can be redeemed on short notice. The total market value of
OneBeacon's securities on loan at December 31, 2001 was $1,766.9 million with
corresponding collateral of $1,800.1 million.

NOTE 6. DEBT

SHORT-TERM DEBT

At December 31, 2001 the Company had $358.4 million of short-term debt
outstanding, consisting of the $260.0 million Seller Note, which bears interest
at a rate equal to 50 basis points over the rate on the Lehman Facility, $91.4
million representing the current portion of term loans under the Lehman Facility
and $7.0 million in other short-term borrowings. At December 31, 2000 the
Company had no short-term debt outstanding.

F-24

LONG-TERM DEBT
Long-term debt outstanding as of December 31, 2001 and 2000 consisted of
the following:

A schedule of contractual repayments of White Mountains' debt as of
December 31, 2001 follows:

LEHMAN FACILITY

GENERAL

In connection with the Acquisition, the Lehman Facility was provided to
Fund American Companies, Inc. ("Fund American"), a wholly-owned subsidiary of
the Company, as the borrower. The Lehman Facility is comprised of two term loan
facilities and a revolving credit facility. The term loan facilities are
comprised of a $300.0 million Tranche A Loan with a five-year maturity and a
$400.0 million Tranche B Loan with a six-year maturity. The revolving credit
facility provides for revolving credit loans of up to $175.0 million, including
up to $25.0 million available for the issuance of letters of credit. The
revolving credit facility expires on June 1, 2006.

INTEREST RATE, FEES

All borrowings under the Lehman Facility bear interest, at Fund American's
election, at a rate per annum equal to either: (a) the base rate (generally, the
higher of (x) the prime lending rate of the British Banking Association and (y)
the Federal funds rate as established by the Federal Reserve Bank of New York
plus 0.50%) plus (i) 0.50% to 1.75%, in the case of the revolving credit
facility and the Tranche A Loan, and (ii) 1.50% to 2.50%, in the case of the
Tranche B Loan, or (b) the eurodollar rate (the rate based on a formula relating
to the rate for dollar deposits in the interbank eurodollar market for a given
interest period) plus (i) 1.50% to 2.75%, in the case of the revolving credit
facility and the Tranche A Loan, and (ii) 2.50% to 3.50%, in the case of the
Tranche B Loan.

A commitment fee calculated at a rate of between 0.25% and 0.375% per annum
is payable on the average daily unused portion of the revolving credit facility.

F-25

INTEREST RATE SWAPS

Since June 2001, Fund American has entered into a series of interest rate
swaps with large financial institutions that were undertaken to achieve a fixed
interest rate on the term loans under the Lehman Facility. The interest rate
swaps consist of a $200.0 million notional contract that was executed in June
2001, which is indexed to a 6.050% ten- year rate, a $200.0 million notional
contract that was executed in September 2001, which is indexed to a 3.955%
three- year rate, and $100.0 million and $200.0 million notional contracts that
were executed in October 2001, which are indexed to a 3.825% three-year rate.

Pursuant to SFAS No. 133, the interest rate swaps are carried at fair value
on White Mountains' balance sheet with changes in their fair value reported
directly through the income statement as the swap investments do not match the
duration of the Lehman Facility. As a result, the swaps do not satisfy the
criteria for hedge accounting under SFAS No. 133. As of December 31, 2001, the
aggregate market value of the interest rate swaps was a net liability of $4.9
million.

As of December 31, 2001, the weighted average interest rate for the $700.0
million outstanding under the term portion of the Lehman Facility, after giving
effect to the interest rate swaps, was fixed at approximately 7.05%. As of
December 31, 2001, the interest rate on the $125.0 million outstanding under the
revolving portion of the Lehman Facility was based on the eurodollar rate in
effect at that time plus 2.13%, or 4.13%.

REPAYMENTS AND PREPAYMENTS

The Tranche A Loan and the Tranche B Loan are repaid quarterly in amounts
equal to a specified percentage rate multiplied by the principal amount
borrowed.

The term loans may be prepaid at any time without premium or penalty with
the exception that any payments on the Tranche B Loan on or prior to December 1,
2002, shall include a prepayment premium ranging from 0.5% to 1.5%.

The credit facilities are subject to mandatory prepayments with (i) 50% of
the net proceeds in excess of $5.0 million from certain equity issuances and
(ii) 100% of the net proceeds in excess of $10.0 million from certain asset
sales.

GUARANTEES

The obligations of Fund American with respect to the Lehman Facility are
unconditionally guaranteed by OneBeacon, each of its subsidiaries (other than
insurance company subsidiaries, certain foreign subsidiaries, and A.W.G. Dewar)
and Fund American Enterprises Holdings, Inc., a wholly owned subsidiary of White
Mountains.
The obligations of Fund American and each guarantor with respect to the
Lehman Facility are secured by a perfected first priority security interest in
all their assets including the capital stock of their non-insurance company
subsidiaries (other than A.W.G. Dewar) and each of their first-tier insurance
company subsidiaries.

CERTAIN COVENANTS

The Lehman Facility contains affirmative covenants which include:

- reporting requirements;
- conduct of business and compliance with laws;
- requirements to maintain properties and insurance; and
- requirements to maintain interest rate protection.
The Lehman Facility also contains negative covenants that restrict the
ability to:
- incur indebtedness and issue preferred stock;
- incur liens;
- engage in certain mergers, acquisitions, consolidations and
asset sales;
- declare dividends or redeem or repurchase capital stock;
- make certain investments;
- make payments in respect of, or modify the terms of,
subordinated indebtedness and other debt instruments;
- transact with affiliates; and
- enter into sale and leaseback transactions.

F-26

In addition, the Lehman Facility requires compliance with various financial
covenants, including minimum interest and fixed charge coverage, maximum
financial leverage, minimum net worth and statutory surplus and minimum
risk-based capital ratios. At December 31, 2001, White Mountains was in
compliance with all of the covenants under the Lehman Facility.

EVENTS OF DEFAULT

The Lehman Facility contains customary events of default including payment
defaults, breaches of representations and warranties, covenant defaults,
cross-default to certain other indebtedness, bankruptcy and insolvency events,
ERISA violations, material judgements, invalidity of any guarantee or security
document and a change of control.

OTHER DEBT

At December 31, 2000 the Company had $96.0 million in medium-term notes
outstanding. Pursuant to the Debt Tender, the Company repurchased and retired
$90.9 million of Notes and subsequently prepaid the $5.1 million balance of the
Notes through the Debt Escrow. The Company recorded a $4.8 million extraordinary
loss on extinguishment of debt in connection with the Debt Tender and the Debt
Escrow during 2001.

In September 2001 Folksamerica acquired C-F, an inactive insurance
company in run-off, for total consideration of $49.2 million plus related
expenses. The purchase consideration included the issuance of a $25.0 million,
five-year note by Folksamerica which may be reduced by adverse loss
development experienced by C-F post-acquisition.

Fund American Re acquired substantially all of the international
reinsurance operations of Folksam. The $64.0 million purchase price was paid in
a combination of cash, Common Shares and a $3.0 million note
(denominated in Swedish Kronor) due in 2006.

Total interest expense incurred by White Mountains for its indebtedness was
$45.7 million, $16.1 million and $14.7 million in 2001, 2000 and 1999,
respectively. Total interest paid by White Mountains for its indebtedness was
$35.0 million, $16.1 million and $15.6 million in 2001, 2000 and 1999,
respectively.

NOTE 7. INCOME TAXES

In connection with the Redomestication, the Company and certain of its
subsidiaries changed their domicile to either Bermuda or Barbados while certain
other subsidiaries remained domiciled in the United States. As a result, income
earned by the U.S. Companies will generally be subject to an effective
overall tax rate lower than that imposed by the United States, however, no tax
benefits will be attained in the event of net losses incurred by such companies.
These factors may serve to increase or decrease White Mountains' effective tax
rate for 1999 and beyond, depending on the events and circumstances occurring
during such periods.

In connection with the Redomestication, the Company was treated as if it
sold all of its directly owned assets in a fully taxable transaction in which
gains, but not losses, were recognized. The Company incurred a tax liability
upon the Redomestication of approximately $13.5 million.

The total income tax provision (benefit) consisted of the following:

F-27

The components of the income tax provision (benefit) on pretax earnings
follow:

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts received for tax purposes. Deferred income tax assets
and liabilities are shown net in circumstances where a consolidated income tax
return is filed. An outline of the significant components of White Mountains'
deferred tax assets and liabilities follows:

The Company believes that it is more likely than not that results of future
operations will generate sufficient taxable income to realize the deferred tax
asset balances carried as of December 31, 2001 and 2000. The valuation allowance
at December 31, 2001 reflects management's assessment that it is more likely
than not that the benefit related to certain foreign tax credit carryforwards
may not be realized before expiration of the carryforward period.

F-28

A reconciliation of taxes calculated using the 35% United States statutory
rate (the tax rate at which the majority of the Company's worldwide operations
are taxed) to the income tax provision on pretax earnings follows:

The non-United States component of pretax earnings (loss) was $(5.1)
million, $395.9 million and $9.0 million for the years ended December 31, 2001,
2000 and 1999, respectively.

During 2000, the Company released a $95.0 million tax reserve relating to
its 1991 sale of Fireman's Fund.

At December 31, 2001, there are net operating loss carryforwards of
approximately $800.0 million available, the majority of which will expire in
2020. Certain of these tax losses are subject to an annual limitation on
utilization under Internal Revenue Code Section 382.

At December 31, 2001, there are foreign tax credit carryforwards and
alternative tax credit carryforwards available of approximately $55.0 million
and $27.0 million, respectively. The foreign tax credits begin to expire in
2002. The alternative minimum tax credits do not expire.

The United States federal income tax returns of the U.S. Companies are
routinely audited by taxing authorities. In management's opinion, adequate
tax liabilities have been established for all open tax years.

On March 9, 2002, President Bush signed into law the Job Creation and
Worker Assistance Act of 2002. Pursuant to the Act, subsidiaries of White
Mountains will be allowed to carryback losses from 2001 and 2002 an additional 3
years. Federal taxes incurred and available for recoupment in the extended
carryback period total approximately $250.0 million. White Mountains is in the
process of calculating the potential refund it will receive under this new
provision.

NOTE 8. RETIREMENT AND POSTRETIREMENT PLANS

Certain of the Company's subsidiaries offer various retirement and
postretirement benefits to its employees. Under the terms of these plans, White
Mountains reserves the right to change, modify or discontinue the plans. Prior
to the purchase of OneBeacon, the cost associated with the retirement and
postretirement benefits was not material to White Mountains' financial
statements.

Certain of the Company's subsidiaries sponsor qualified and non-qualified,
non-contributory, defined benefit plans covering substantially all employees.
The benefits for the plans are based primarily on years of service and
employees' pay near retirement. Participants generally vest after five years of
continuous service. White Mountains' funding policy is consistent with the
funding requirements of federal laws and regulations.

In addition to the defined benefit plans, certain of the Company's
subsidiaries have multiple contributory postretirement benefit plans which
provide medical and life insurance benefits to pensioners and survivors.
White Mountains' funding policy is to make contributions to the Plan that are
necessary to cover its current obligations.

F-29

The following table sets forth (i) the change in the benefit obligation,
(ii) the change in the fair value of plan assets, (iii) the resulting funded
status reconciled with amounts reported in White Mountains' consolidated
financial statements, and (iv) the weighted average assumptions associated with
the various pension plan and postretirement benefits as of December 31, 2001:

The components of net pension costs were as follows:

For measurement purposes, a 10.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was assumed
to decrease gradually to 5% over a six year period and remain constant
thereafter.

F-30

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percent change in assumed
health care cost trend rates would have the following effects:

Certain of the Company's subsidiaries sponsor various employee savings
plans (defined contribution plans) covering the majority of employees. The
plans provide for salary reduction contributions by qualifying employees and
matching contributions of up to six percent of qualifying employees' salary.
Total expense for the plans was $9.6 million and $1.5 million in 2001 and
2000, respectively.

OneBeacon has a post-employment benefit liability of $16.6 million
related to its long-term disability plan at December 31, 2001.

NOTE 9. EMPLOYEE SHARE-BASED COMPENSATION PLANS

WHITE MOUNTAINS' INCENTIVE PLAN

The White Mountains Incentive Plan (the "Incentive Plan") provides for
granting to certain officers of the Company (and certain of its subsidiaries)
various types of share-based incentive awards including performance shares,
Restricted Shares and Options. On August 23, 2001, the Company's shareholders
approved an amendment to the Incentive Plan which provided a fresh inventory of
300,000 Common Shares available for grant thereunder over a ten year period. As
a result, 300,000 Common Shares were available for grant under the Incentive
Plan at December 31, 2001.

Performance shares are conditional grants of a specified maximum number of
Common Shares or an equivalent amount of cash. Grants are generally earned,
subject to the attainment of pre-specified performance goals, at the end of a
three-year period or as otherwise determined by the Compensation Committee of
the Board. The performance goal for full payment of performance shares issued
during 1999 and 2000 is the achievement of a 13% annual after tax return on
equity (as specifically defined by the Company's Compensation Committee) as
measured over the applicable performance periods. These performance shares can
double if after-tax returns on equity significantly exceed 13% over the
performance periods. The performance goal for full payment of performance shares
issued during 2001 is, in whole or in part, based on the achievement of a 12.1%
annual after tax return on equity. The Company's return on equity used to
determine awards includes the cost of all projected compensation awards. For
certain officers, the performance goal for full payment of performance shares
issued during 2001 is, in part, based on the achievement of a 105% core
insurance operations trade ratio for the period July 1, 2001 to December 31,
2003 (as specifically defined by the Company's Compensation Committee). These
performance shares can double if the trade ratio is 101% or less.

For the three-year performance periods beginning 2001, 2000 and 1999, White
Mountains granted a total of 84,600, 34,000 and 31,300 performance shares,
respectively, under the Incentive Plan. No performance share awards were paid
during 2001 or 2000. During 1999 White Mountains paid a total of 141,650
performance shares to its participants in Common Shares and cash. Performance
shares paid during 1999 included 58,100 performance shares relating to the
period from 1996 to 1998, 40,300 performance shares paid early relating to the
period from 1997 to 1999 and 43,250 performance shares paid early relating to
the period from 1998 to 2000.

For 2001 the Compensation Committee made a one time award of Restricted
Shares to key officers of the Company. Pursuant to the Incentive Plan, White
Mountains issued 94,500 Restricted Shares, of which 21,000 vest in December 2002
and 73,500 vest in June 2003. Vesting of Restricted Share awards is dependent on
continuous service by the employee throughout the award period. There are no
other restrictions on the Restricted Shares once they have become fully vested.

At December 31, 2001, the Company had outstanding 80,665 Options (15,865 of
which were exercisable) issued to certain key employees which vest incrementally
over a ten year period. The Options had a weighted average exercise price of
$118.22 per Common Share at December 31, 2001. During 2001, 335 Options were
exercised at an exercise price of $118.15 per Common Share.

F-31

ONEBEACON PERFORMANCE PLAN

OneBeacon's Performance Plan (the "Performance Plan") provides for granting
of performance shares to certain key employees of OneBeacon. The performance
goals for full payment of performance shares issued under the Performance Plan
are similar to those of the Incentive Plan.

For the thirty-month performance period from July 1, 2001 to December 31,
2003, OneBeacon granted a total of 148,100 performance shares to its key
employees. No performance shares were paid during 2001 under the Performance
Plan.

OTHER SHARE-BASED COMPENSATION

The defined contribution plans of OneBeacon and Folksamerica (the "401(k)
Plans") offer its participants the ability to invest their balances in several
different investment options, including the Company's Common Shares. As of
December 31, 2001 and 2000, the 401(k) Plans owned less than 1% of the total
Common Shares outstanding. In connection with the Acquisition, eligible
OneBeacon employees received a one-time contribution of two Common Shares which
resulted in the issuance of 11,980 Common Shares.

The Company's Chairman formerly held warrants to acquire Common Shares
entitling him to buy 1,000,000 Common Shares for $21.66 per Common Share. During
1999 the Chairman exercised the warrants early in exchange for a one-time
payment of $6.0 million. This one-time payment compensated the Chairman for the
estimated interest cost of borrowing the strike price and the amounts required
to prematurely pay his income taxes. The 1999 exercise of warrants provided the
Company with increased tax deductible expenses.

SHARE-BASED COMPENSATION EXPENSE

White Mountains expenses its performance shares awarded under the Incentive
Plan and the Performance Plan over the relevant performance period assuming full
vesting at the current market value of Common Shares. During 2001, 2000 and
1999, White Mountains recorded compensation charges of $31.6 million, $25.8
million, and $6.1 million, respectively, for outstanding performance shares.
White Mountains' performance share expense in 2001 was higher than 2000 as a
result of performance shares issued to OneBeacon employees post-acquisition.
White Mountains' performance share expense in 2000 was higher than that of 1999
due to a significant increase in the value of Common Shares during that year and
the recording of additional performance share expense in expectation of the 1999
and 2000 performance share awards vesting at an amount greater than 100% in
light of above target results for those award periods.

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its Options and
Restricted Shares. During 2001 the Company recognized a $9.5 million
compensation charge for its outstanding Options and recognized a $10.4 million
compensation charge for its outstanding Restricted Shares.

White Mountains has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock Based Compensation" with respect to its outstanding
Options and Restricted Shares. Had share-based compensation expense been
determined based on the fair value at the grant dates for these awards using a
Black-Scholes option valuation model, consistent with the provisions of SFAS No.
123, the compensation charge for the Options and Restricted Shares would have
been less than the amount actually recognized by the Company under APB No. 25
for the year ended December 31, 2001. This would have had an anti-dilutive
effect on the pro forma results of operations for the year ended December 31,
2001. The pro forma effect of recognizing compensation charge for its vested
Options under SFAS No. 123 for the year ended December 31, 2000 would have been
$.3 million, or $.06 per diluted Common Share. There were no Restricted Shares
outstanding during 2000 and there were no Restricted Shares or Options
outstanding during 1999.

F-32

NOTE 10. MINORITY INTEREST - MANDATORILY REDEEMABLE PREFERRED STOCK OF
SUBSIDIARIES AND CONVERTIBLE PREFERENCE SHARES

BERKSHIRE PREFERRED STOCK

On June 1, 2001, Berkshire purchased for $225.0 million, $300.0 million in
face value of cumulative non-voting preferred stock of a subsidiary of the
Company. The Berkshire Preferred Stock is entitled to a dividend of no less than
2.35% per quarter and is mandatorily redeemable after seven years. During 2001,
White Mountains declared and paid dividends of $16.4 million on the Berkshire
Preferred Stock and recorded $5.1 million of related accretion charges (See
Note 2).

ZENITH PREFERRED STOCK

On June 1, 2001, Zenith purchased $20.0 million in cumulative non-voting
preferred stock of a subsidiary of the Company. The Zenith Preferred Stock is
entitled to a dividend of no less than a 2.5% per quarter through June 30, 2007
and a dividend of no less than 3.5% per quarter thereafter and is mandatorily
redeemable after ten years. During 2001, White Mountains declared and paid
dividends of $1.7 million on the Zenith Preferred Stock.

CONVERTIBLE PREFERENCE SHARES

On June 1, 2001, a small group of private investors purchased 2,184,583
Convertible Preference Shares. Upon approval by shareholders at the 2001
Annual Meeting, the Convertible Preference Shares were repurchased and
cancelled in consideration of 2,184,583 Common Shares. This required the
Convertible Preference Shares to be marked-to-market, (i.e., redemption
value) until the date the Convertible Preference Shares were converted to
shareholders' equity, which occurred on August 23, 2001. This resulted in a
$305.1 million charge to retained earnings, with an offsetting increase to
paid-in surplus. During 2001, White Mountains declared and paid dividends of
$.3 million on the Convertible Preference Shares.

NOTE 11. COMMON SHAREHOLDERS' EQUITY

COMMON SHARES REPURCHASED AND RETIRED

During 2001, 2000 and 1999 the Company repurchased 6,000 Common Shares for
$1.9 million, 65,838 Common Shares for $8.3 million and 1,020,150 Common Shares
for $139.5 million, respectively. In conformance with Bermuda law, the Company
retires all Common Shares it repurchases.

COMMON SHARES ISSUED

During 2001 the Company issued a total of 2,390,566 Common Shares which
consisted of 2,184,583 Common Shares issued in connection with the conversion of
the Convertible Preference Shares, 86,385 Common Shares issued in connection the
purchase of the Folksam net assets, 94,500 Restricted Shares issued to key
employees and 25,098 Common Shares issued to employees in connection with
various White Mountains share-based compensation plans. No Common Shares were
issued during 2000. During 1999 the Company issued a total of 1,137,495 Common
Shares to its employees and Directors in satisfaction of the Chairman's warrant
exercise and various employee benefit plan obligations.

DIVIDENDS ON COMMON SHARES

During 2001, 2000 and 1999 the Company declared and paid cash dividends
totalling $5.9 million (or $1.00 per Common Share), $7.1 million (or $1.20 per
Common Share) and $8.8 million (or $1.60 per Common Share), respectively.

F-33

WARRANTS TO ACQUIRE COMMON SHARES

On June 1, 2001, Berkshire purchased the Warrants from the Company, for
$75.0 million in cash, entitling it to acquire 1,714,285 Common Shares at an
exercise price of $175.00 per Common Share. The Warrants have a term of seven
years from the date of issuance although the Company has the right to call the
Warrants for $60.0 million in cash commencing on the fourth anniversary of their
issuance. See Note 2.

NOTE 12. STATUTORY CAPITAL AND SURPLUS

White Mountains' insurance and reinsurance operations are subject to
regulation and supervision in each of the jurisdictions where they are
domiciled and licensed to conduct business. Generally, regulatory authorities
have broad supervisory and administrative powers over such matters as
licenses, standards of solvency, premium rates, policy forms, investments,
security deposits, methods of accounting, form and content of financial
statements, reserves for unpaid loss and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations and annual and other
report filings. In general, such regulation is for the protection of
policyholders rather than shareholders. Over the last several years most
states have implemented laws that establish standards for current, as well as
continued, state accreditation. In addition, the NAIC uses RBC standards for
property and casualty companies as a means of monitoring certain aspects
affecting the overall financial condition of insurance companies. At December
31, 2001, White Mountains' active insurance and reinsurance subsidiaries met
their respective RBC requirements.

OneBeacon's consolidated combined policyholders' surplus, as reported to
various regulatory authorities as of December 31, 2001, was $2,406.5 million.
OneBeacon's consolidated combined statutory net loss for the year ended December
31, 2001 was $408.4 million. The principal differences between OneBeacon's
combined statutory amounts and the amounts reported in accordance with GAAP
include deferred acquisition costs, gains recognized under retroactive
reinsurance contracts and market value adjustments for debt securities.
OneBeacon's insurance subsidiaries' statutory policyholders' surplus at December
31, 2001 was in excess of the minimum requirements of relevant state insurance
regulations.

Under the insurance laws of the states under which OneBeacon's insurance
subsidiaries are domiciled, OneBeacon's insurance subsidiaries may pay dividends
only from earned surplus as determined on a statutory basis. Generally, the
maximum amount of cash dividends that OneBeacon's insurance subsidiaries may pay
out of their statutory earned surplus without prior regulatory approval in any
twelve month period is the greater of the company's prior year statutory net
income or 10% of prior year end statutory surplus. Accordingly, there is no
assurance that dividends may be paid by OneBeacon's insurance subsidiaries in
the future. At December 31, 2001, OneBeacon's insurance subsidiaries have the
ability to pay dividends to its shareholder of $235.6 million in 2002 without
prior approval of regulatory authorities.

Folksamerica's policyholders' surplus, as reported to various regulatory
authorities as of December 31, 2001, and 2000, was $804.8 million and $443.9
million, respectively. The large increase in surplus from 2000 to 2001 resulted
principally from a $400.0 million capital contribution it received from it's
parent, OneBeacon, in the form of cash to permit Folksamerica to further
capitalize on improved pricing trends emerging after the Attacks. Folksamerica's
statutory net income (loss) for the years ended December 31, 2001, 2000 and 1999
was $(35.3) million, $(20.0) million and $48.6 million, respectively. The
principal differences between Folksamerica's statutory amounts and the amounts
reported in accordance with GAAP include deferred taxes, deferred acquisition
costs, gains recognized under retroactive reinsurance contracts and market value
adjustments for debt securities. Folksamerica's statutory policyholders' surplus
at December 31, 2001 was in excess of the minimum requirements of relevant state
insurance regulations.

F-34

Under the insurance laws of the state of New York, Folksamerica may pay
dividends only from earned surplus as determined on a statutory basis.
Generally, the maximum amount of cash dividends that a New York-domiciled
company may pay out of its statutory earned surplus without prior regulatory
approval in any twelve month period is the lesser of the company's statutory net
investment income or 10% of statutory surplus. Accordingly, there is no
assurance that dividends may be paid by Folksamerica in the future. At December
31, 2001, Folksamerica has the ability to pay a dividend to its shareholder of
approximately $30 million in 2002 without prior approval of regulatory
authorities.

The aggregate policyholders' surplus of PIC and ACIC at December 31, 2001
and 2000, as reported to regulatory authorities, was $54.0 million and $60.5
million, respectively. Statutory net loss for the years ended December 31, 2001
and 2000 and the period from October 16, 1999 to December 31, 1999 for PIC and
ACIC totalled $6.2 million, $1.7 million and $3.9 million, respectively. The
principal differences between PIC and ACIC's statutory amounts and the amounts
reported in accordance with GAAP include deferred taxes, deferred acquisition
costs and market value adjustments for debt securities. PIC and ACIC's statutory
policyholders' surplus at December 31, 2001 was in excess of the minimum
requirements of relevant state insurance regulations.

Under the insurance laws of the states under which PIC and ACIC are
domiciled, PIC and ACIC may pay dividends only from earned surplus as determined
on a statutory basis. Generally, the maximum amount of cash dividends that PIC
and ACIC may pay out of their statutory earned surplus without prior regulatory
approval in any twelve month period is the greater of the company's statutory
net income or 10% of statutory surplus. Accordingly, there is no assurance that
dividends may be paid by PIC and ACIC in the future. At December 31, 2001, $1.9
million of PIC's total statutory surplus was available for the payment of
dividends in 2002 to its shareholder without prior approval of regulatory
authorities. At December 31, 2001, no dividends could be paid from ACIC to its
shareholder without prior approval of regulatory authorities.

NOTE 13. SEGMENT INFORMATION

White Mountains has determined that its reportable segments include
OneBeacon, Folksamerica and Other Insurance Operations and Holding Company
(consisting of ACIC, BICC, PIC, Fund American Re, Esurance and the operations
of the Company and certain of its intermediate subsidiary holding companies).
OneBeacon's operations further include four distinct underwriting
sub-segments consisting of Personal, Commercial, Specialty and Non-core
insurance products. The Personal and Commercial sub-segments consist of
agency-produced business in New England, New York and New Jersey. Personal
products include auto, homeowners and Custom-Pac products (combination
policies offering home and auto coverage with optional umbrella, ocean marine
and inland marine coverages). Commercial products include package
(combination policies offering property and liability coverage), commercial
auto and workers' compensation. Specialty products principally include
non-crop farm and ranch business, ocean marine and tuition reimbursement.
Non-core products include business assumed from Liberty Mutual in connection
with the Renewal Rights Agreement, business in territories subject to the
Renewal Rights Agreement written prior to November 1, 2001, premiums
generated from NFU and national programs and national accounts and certain
other insurance products in run-off.

White Mountains has made its segment determination based on consideration
of the following criteria: (i) the nature of the business activities of each of
the Company's subsidiaries and affiliates; (ii) the manner in which the
Company's subsidiaries and affiliates are organized; (iii) the existence of
primary managers responsible for specific subsidiaries and affiliates; and (iv)
the organization of information provided to the Board. There are no significant
intercompany transactions among White Mountains' segments other than occasional
intercompany sales and transfers of investment securities (gains and losses
resulting from such transfers have been eliminated herein).

F-35

Certain amounts in the prior periods have been reclassified to conform with
the current presentation. Selected financial information for White Mountains'
segments follows:

F-36

The following table provides further information on OneBeacon's four
distinct underwriting sub-segments consisting of its Personal, Commercial,
Specialty and Non-core insurance products:

(1) Loss and loss adjustment expenses include losses, net of reinsurance,
associated with the Attacks of $2.8 million, $98.1 million and $4.1 million in
the Personal, Commercial and Non-core lines, respectively.

NOTE 14. INVESTMENTS IN UNCONSOLIDATED INSURANCE AFFILIATES

White Mountains' investments in unconsolidated insurance affiliates
represent operating investments in other insurers in which White Mountains has a
significant voting and economic interest but does not own more than 50.0% of the
entity. White Mountains' voting percentages and directorships in its
unconsolidated affiliates do not provide White Mountains the ability to exercise
significant influence over the operating and financial policies of its
investees.

INVESTMENT IN MONTPELIER

In December 2001 White Mountains, the Benfield Group plc and several other
private investors established Montpelier and Montpelier Re. OneBeacon invested
$180.0 million in Montpelier consisting of 1,800,000 common shares of Montpelier
valued at $100 per share and the Company received warrants to acquire an
additional 797,088 common shares at $100 per share over the next ten years. At
December 31, 2001, OneBeacon owned 20.6% of the outstanding common shares of
Montpelier and accounts for this investment using the equity method. At December
31, 2001, White Mountains carried its investment in Montpelier common shares at
$177.4 million. Amounts recorded by White Mountains during 2001 relating to its
investment in Montpelier consisted of a $3.0 million equity in loss from
Montpelier's operations and a $.4 million equity in net unrealized gains from
Montpelier's investment portfolio. The fair value of the warrants to acquire
Montpelier common stock was immaterial at December 31, 2001, as the book value
of Montpelier at that time was less than the Company's exercise price. No
dividends were declared or paid by Montpelier during 2001.

INVESTMENT IN MSA

At December 31, 2001, 2000 and 1999, White Mountains owned 222,093 shares
of the common stock of MSA. This represented 50.0% of the total shares of MSA
common stock outstanding at those times. White Mountains' investment in MSA is
accounted for using the equity method. The following table provides summary
financial amounts recorded by White Mountains relating to its investment in MSA
common stock:

(a) Includes related goodwill of $2.5 million, $3.7 million and $2.6 million
at December 31, 2001, 2000 and 1999, respectively.
(b) Recorded net of related amortization of goodwill.
(c) Recorded directly to shareholders' equity (after tax) as a component of
other comprehensive income.

F-37

At December 31, 2001 and 2000, White Mountains' consolidated retained
earnings included $28.9 million and $26.7 million, respectively, of accumulated
undistributed earnings of MSA (net of related amortization of goodwill). No
dividends were declared or paid by MSA during 2001, 2000 and 1999.

INVESTMENT IN FSA

During 2000 White Mountains concluded the Dexia Sale, which included all
its holdings of FSA at that time, for proceeds of $620.4 million and recognized
a pretax gain of $391.2 million.

White Mountains owned 6,943,316 shares of FSA Common Stock at December 31,
1999. This represented approximately 21.2% of the total shares of FSA Common
Stock outstanding at that time. At December 31, 1999, White Mountains also owned
FSA Preferred Stock which provided White Mountains the right to acquire
2,000,000 additional shares of FSA Common Stock for net consideration of $59.3
million.

Prior to the Dexia Sale, White Mountains' accounted for its investment in
FSA Common Stock using the equity method. White Mountains' accounted for its
investment in FSA Preferred Stock and FSA Options under the provisions SFAS No.
115 whereby the investment was reported at fair value as of the balance sheet
date, with related unrealized investment gains and losses, after tax, reported
as a net amount in a separate component of shareholders' equity and reported on
the income statement as a component of other comprehensive income. The following
table provides summary financial amounts recorded by White Mountains during 2000
and 1999 relating to its investment in FSA:

(a) Recorded net of related amortization of goodwill.
(b) Recorded directly to shareholders' equity (after tax) as a component of
other comprehensive income.

At December 31, 1999, White Mountains' consolidated retained earnings
included $53.3 million of accumulated undistributed earnings of FSA (net of
related amortization of goodwill).

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS

White Mountains carries its financial instruments on its balance sheet at
fair value with the exception of its fixed- rate, long-term indebtedness. At
December 31, 2001, White Mountains had no significant fixed-rate, long-term
indebtedness as a result of the Debt Tender and the Debt Escrow which
extinguished or prepaid its outstanding Notes. At December 31, 2000, the market
value of the Notes was $97.2 million which compared to a carrying value of $96.0
million. The fair value of the Notes outstanding in 2000 was estimated by
discounting future cash flows using incremental borrowing rates for similar
types of borrowing arrangements or quoted market prices.

F-38

NOTE 16. RELATED PARTY TRANSACTIONS

NICO and GRC are wholly-owned subsidiaries of Berkshire. Through the
Warrants, Berkshire has the right to acquire 1,714,285 Common Shares at an
exercise price of $175.00 per Common Share which represented approximately 17.1%
of the total outstanding Common Shares at December 31, 2001 on a fully-converted
basis.

Mr. Howard Clark, a Director of the Company, is Vice Chairman of Lehman
Brothers Inc. ("Lehman"). Lehman has, from time to time, provided various
services to White Mountains including investment banking services, brokerage
services, underwriting of debt and equity securities and financial consulting
services. Lehman is the arranger, the administrative agent and a lender under
the $875.0 million Lehman Facility. See Note 6.

Mr. George Gillespie, a Director of the Company, is a Partner at Cravath,
Swaine & Moore which has been retained by White Mountains from time to time to
perform legal services.

Pursuant to an employment agreement with White Mountains, Mr. John
Gillespie, a Director of the Company and an Officer of OneBeacon, may continue
his active involvement with his investment management business, Prospector
Partners, LLC ("Prospector"), so long as Mr. Gillespie devotes the requisite
time required to discharge his responsibilities to OneBeacon. The agreement
specifies procedures pursuant to which Prospector's funds have the ability to
invest first in opportunities appropriate for both White Mountains and such
funds. Pursuant to revenue sharing agreements, Mr. Gillespie has agreed to pay
White Mountains a portion of the revenues and distributions allocable to him in
connection with Prospector, in return for White Mountains agreeing to pay the
operational expenses of his investment management companies. At December 31,
2001, White Mountains had $82 million invested in funds managed by Prospector.

At December 31, 2001, White Mountains had limited partnership investment
interests in High Rise Partners, L.P. White Mountains also owns investments that
are managed by High Rise Capital Management L.P., of which Mr. Zankel, a
director of the Company, is the senior Managing Member.

White Mountains formerly owned two short-range aircraft jointly with
Haverford Utah, LLC ("Haverford"). Messrs. Jack Byrne, Patrick Byrne and Thomas
Kemp (each Directors of the Company and, in the case of Messrs. Jack Byrne and
Kemp, each Officers of the Company) were principals of Haverford. Both aircraft
were acquired from unaffiliated third parties during 1996. In exchange for
Haverford's 20% ownership interest in the aircraft, Haverford contributed
capital equal to 20% of the total initial cost of the aircraft and paid its pro
rata share of all fixed costs plus the direct operating costs for its use
pursuant to a Joint Ownership Agreement. The aircraft were sold to a third party
during 2000 which resulted in Haverford receiving 20% of the cash proceeds.

White Mountains believes that the above transactions were on terms that
were reasonable and competitive and, in the case of Lehman, were obtained
through a competitive bid process. White Mountains believes that such
transactions did not serve to impair the independence of any of the parties
involved. Additional transactions of this nature may be expected to take place
in the ordinary course of business in the future.

NOTE 17. ESTIMATED CHARGES INCURRED IN CONNECTION WITH THE TRAGEDIES OF
SEPTEMBER 11, 2001

In connection with the Attacks White Mountains recorded approximately
$130.0 million of pretax charges during 2001. Gross and net of reinsurance
losses from the Attacks were approximately $248.0 million and $105.0 million,
respectively, at OneBeacon and $104.0 million and $25.0 million,
respectively, at Folksamerica. White Mountains has evaluated each of its
significant reinsurers and believes its provision for uncollectible
reinsurance, with respect to reinsurance relating to the Attacks and
otherwise, to be adequate.

NOTE 18. COMMITMENTS AND CONTINGENCIES

White Mountains leases certain office space under noncancellable operating
leases expiring at various dates through 2010. Rental expense for all of White
Mountains' locations was approximately $22.3 million, $2.1 million and $1.6
million for the years ended December 31, 2001, 2000 and 1999, respectively.
White Mountains also has various other lease obligations which are immaterial in
the aggregate.

F-39

White Mountains' future annual minimum rental payments required under
noncancellable leases for office space are $33.5 million, $28.7 million, $19.9
million, $16.8 million and $43.1 million for the 2002, 2003, 2004, 2005 and 2006
and thereafter, respectively.

Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. In accordance with SOP 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", White Mountains' insurance subsidiaries record guaranty fund
assessments when such assessments are billed by the respective guaranty funds.
In addition, each insurance subsidiary's policy is to accrue for any significant
insolvencies when the loss is probable and the assessment amount can be
reasonably estimated. The actual amount of such assessments will depend upon the
final outcome of rehabilitation proceedings and will be paid over several years.
At December 31, 2001, the reserve for such assessments at White Mountains'
insurance subsidiaries totalled $39.6 million, of which $26.3 million related to
the insolvency of Reliance insurance Company.

As a condition of its license to do business in certain states, White
Mountains' insurance operations are required to participate in mandatory shared
market mechanisms. Each state dictates the types of insurance and the level of
coverage that must be provided. The total amount of such business an insurer is
required to accept is based on its market share of voluntary business in the
state. In certain cases, White Mountains is obligated to write business from
mandatory shared market mechanisms at some time in the future based on the
market share of voluntary policies it is currently writing. Underwriting results
related to assigned risk plans are typically adverse and are not subject to the
predictability associated with White Mountains' voluntarily written business.

Several of OneBeacon's insurance subsidiaries write voluntary automobile
insurance in the state of New York. In doing so, they are obligated to accept
assignments from the NYAIP for their market share of voluntary premiums written
two years prior. In connection with the Acquisition, White Mountains estimated
the fair value of the liability associated with NYAIP assignments as a result of
voluntary business written by OneBeacon in periods prior to the Acquisition and
recorded a liability of $110.0 million as a part of purchase accounting in its
financial statements. This liability was increased to $131.1 million as of
December 31, 2001. Management will periodically review and adjust this liability
in accordance with generally accepted accounting principles as circumstances
change within the New York automobile insurance marketplace.

Various claims have been made against White Mountains in the normal course
of its business. Based on all information available at the date of this report,
management believes that the outcome of such claims will not, in the aggregate,
have a material effect on White Mountains' financial position or results of
operations.

NOTE 19. INTERIM PERIOD AND PRO FORMA RESTATEMENTS (UNAUDITED)

As further discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained within this Annual
Report on Form 10-K, during the second and third quarters of 2001 the
Company, in consultation with its independent accountants, marked its
Convertible Preference Shares to market (based on the market value of
underlying Common Shares) with the excess of market over the cash proceeds it
received being charged directly to retained earnings. In preparing this
Annual Report on Form 10-K, it was determined that this net charge should
also have been included in the Company's determination of earnings or loss
per share, and the related determination of net income or loss available to
common shareholders. As a result, the Company has restated all applicable
interim and pro forma earnings per share and related disclosures herein.

This revision did not affect the Company's historical balance sheets,
its related determinations of book value per share and fully converted book
value per share or its net income (or loss) or comprehensive net income (or
loss) during any period. Since the Convertible Preference Shares were
converted to Common Shares on August 23, 2001, the Company's results for the
three month period ended December 31, 2001 were not affected.

F-40

n/c - represents captions not contained within the referenced filings.
F-41

REPORT ON MANAGEMENT'S RESPONSIBILITIES

The financial information included in this report, including the audited
consolidated financial statements, has been prepared by the management of White
Mountains. The consolidated financial statements have been prepared in
accordance with GAAP and, where necessary, include amounts based on informed
estimates and judgements. In those instances where there is no single specified
accounting principle or standard, management makes a choice from reasonable,
accepted alternatives which are believed to be most appropriate under the
circumstances. Financial information presented elsewhere in this report is
consistent with that shown in the financial statements.

White Mountains maintains internal financial and accounting controls
designed to provide reasonable and cost effective assurance that assets are
safeguarded from loss or unauthorized use, that transactions are recorded in
accordance with management's policies and that financial records are reliable
for preparing financial statements. The internal controls structure is
documented by written policies and procedures which are communicated to all
appropriate personnel and is updated as necessary. White Mountains' business
ethics policies require adherence to ethical standards in the conduct of its
business. Compliance with these controls, policies and procedures is
continuously maintained and monitored by management.

PricewaterhouseCoopers has audited the consolidated financial statements of
White Mountains as of December 31, 2001 and 2000 and for each of the three years
in the period ended December 31, 2001. PricewaterhouseCoopers has issued their
unqualified report thereon, which appears on page F-43.

In connection with their financial statement audit, PricewaterhouseCoopers
considers the structure of internal controls to the extent considered necessary.
Management reviews all recommendations of PricewaterhouseCoopers concerning the
structure of internal controls and responds to such recommendations with
corrective actions, as appropriate.

The Audit Committee of the Board, which is comprised solely of independent,
qualified directors, has general responsibility for the oversight and
surveillance of the accounting, reporting and financial control practices of
White Mountains as well as establishing and maintaining the Company's Audit
Committee Charter. The Audit Committee, which reports to the full Board,
annually reviews the overall quality and effectiveness of the independent
auditors and management with respect to the financial reporting process and the
adequacy of internal controls. The independent auditors have free access to the
Audit Committee, without members of management present, to discuss the results
of their audits, the adequacy of internal controls and any other matter that
they believe should be brought to the attention of the Audit Committee. The
Report of the Audit Committee appears on page 16 of the Company's 2002 Proxy
Statement, herein incorporated by reference.

John J. Byrne Dennis P. Beaulieu J. Brian Palmer
Chairman, Chief Executive Officer Corporate Secretary and Treasurer Chief Accounting Officer
(Principal Executive Officer) (Principal Financial Officer) (Principal Accounting Officer)

F-42

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of White Mountains Insurance Group, Ltd.:

In our opinion, the consolidated financial statements listed in the index
referenced under Item 14(a) on page 44 present fairly, in all material respects,
the financial position of White Mountains Insurance Group, Ltd. and subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedules listed in the
index referenced under Item 14(a) on page 44 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for business combinations in 2001.

/s/ PricewaterhouseCoopers

Hamilton, Bermuda
April 1, 2002

F-43

SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)

Selected quarterly financial data for 2001 and 2000 is shown in the
following table. The quarterly financial data includes, in the opinion of
management, all recurring adjustments necessary for a fair presentation of the
results of operations for the interim periods.

(a) The quarterly amounts subsequent to March 31, 2001 reflect the acquisition
of OneBeacon on June 1, 2001.
(b) The quarterly amounts subsequent to March 31, 2000 reflect the acquisitions
of PCA and the Risk Capital Operations. The quarterly amounts for the three
month period ended September 30, 2000 reflect the Dexia Sale and a $95.0
million reserve release relating to Fireman's Fund.
(c) Net income (loss) per share amounts reported for the three months ended
June 30, 2001 and September 30, 2001 have been restated from the amounts
previously reported in their respective quarterly reports on Form 10-Q. See
Note 19.

F-44

SCHEDULE I

WHITE MOUNTAINS INSURANCE GROUP, LTD.

SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
AT DECEMBER 31, 2001

NOTE - fair value was equal to carrying value at December 31, 2001.

FS-1

SCHEDULE II

WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)

CONDENSED BALANCE SHEETS

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FS-2

SCHEDULE II
(CONTINUED)

WHITE MOUNTAINS INSURANCE GROUP, LTD.
(REGISTRANT ONLY)

CONDENSED STATEMENTS OF CASH FLOWS

FS-3

SCHEDULE III

WHITE MOUNTAINS INSURANCE GROUP, LTD.

SUPPLEMENTARY INSURANCE INFORMATION
(MILLIONS)

(a) The amounts shown exclude net investment income relating to
non-insurance operations of $4.4 million, $20.2 million and $7.9 million
for the twelve months ended December 31, 2001, 2000 and 1999,
respectively.

FS-4

SCHEDULE IV

WHITE MOUNTAINS INSURANCE GROUP, LTD.
REINSURANCE

(a) Amounts shown in columns B through F represent activity for OneBeacon from
June 1, 2001 through December 31, 2001.

FS-5

SCHEDULE V

WHITE MOUNTAINS INSURANCE GROUP, LTD.
VALUATION AND QUALIFYING ACCOUNTS

(a) Includes $21.9 million and $95.7 million of reinsurance recoverable and
property and casualty insurance allowances, respectively, acquired from
OneBeacon. Remaining amounts represent activity for OneBeacon from June 1,
2001 through December 31, 2001.
(b) Amounts shown represent charge-offs of overdue recoverables for OneBeacon
from June 1, 2001 through December 31, 2001.
(c) Represents charge-offs of balances receivable

FS-6

SCHEDULE VI

WHITE MOUNTAINS INSURANCE GROUP, LTD.
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(MILLIONS)

(a) The amounts shown in columns F through K represent activity for OneBeacon
from June 1, 2001 through December 31, 2001.

(b) The amounts shown represent White Mountains' share of its property and
casualty insurance and reinsurance affiliates, MSA and Montpelier. MSA was
50.0% owned during the three year period ended December 31, 2001 and
Montpelier was 20.6% owned during the year ended December 31, 2001.

(c) The amounts shown exclude unamortized fair value adjustments to reserves of
$56.0 million for unpaid claims and claims adjustment expenses made in
purchase accounting as a result of White Mountains' purchase of OneBeacon.

FS-7