FUND AMERICAN ENTERPRISES HOLDINGS INC, 10-K, 1998-03-30

FUND AMERICAN ENTERPRISES HOLDINGS INC
10-K, 1998-03-30
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE>
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, 1997
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

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)

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

80 South Main Street, Hanover, New Hampshire 03755-2053
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (603) 643-1567

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, 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. [ ]

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 20, 1998, was $799,580,145.

As of March 20, 1998, 5,857,730 shares of Common Stock, par value of $1.00
per share, were outstanding.
<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Notice of 1998 Annual Meeting of Shareholders and
Proxy Statement dated March 30, 1998 (Part III)
<PAGE>

Fund American

TABLE OF CONTENTS

PART I

ITEM 1. Business ......................................................... 1
a. General ....................................................... 1
b. Insurance Operations .......................................... 1
c. Mortgage Banking Operations ................................... 7
d. Investment Portfolio Management ............................... 13
e. Certain Business Conditions ................................... 13
f. Competition ................................................... 14
g. Regulation .................................................... 15
h. Employees ..................................................... 15
i. Forward-Looking Statements .................................... 16

ITEM 2. Properties ....................................................... 16

ITEM 3. Legal Proceedings ................................................ 16

ITEM 4. Submission of Matters to a Vote of Security Holders .............. 16

PART II

ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................ 16

ITEM 6. Selected Financial Data .......................................... 17

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 19

ITEM 8. Financial Statements and Supplementary Data ...................... 36

ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 36

PART III

ITEM 10. Directors and Executive Officers ................................. 36

ITEM 11. Executive Compensation ........................................... 40

ITEM 12. Security Ownership of Certain Beneficial Owners and Management ... 40

ITEM 13. Certain Relationships and Related Transactions ................... 40

PART IV

ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K .. 40
<PAGE>

PART I

Item 1. Business

GENERAL

Fund American Enterprises Holdings, Inc., (the "Company"), is a Delaware
corporation which was organized in 1980. Within this report, the consolidated
organization is referred to as "Fund American." Fund American's principal
businesses are conducted through White Mountains Holdings, Inc. and its
operating subsidiaries ("White Mountains"). White Mountains' consolidated and
unconsolidated insurance operations are conducted through its subsidiaries and
affiliates in the businesses of property and casualty insurance, reinsurance and
financial guaranty insurance. White Mountains' mortgage banking operations are
conducted through Source One Mortgage Services Corporation and its subsidiaries
("Source One"). Fund American also owns a passive investment portfolio
consisting primarily of common equity securities. The Company's principal office
is located at 80 South Main Street, Hanover, New Hampshire, 03755-2053, and its
telephone number is (603) 643-1567.

INSURANCE OPERATIONS

Consolidated Insurance Operations

Since 1995 White Mountains has been acquiring and developing various
insurance operating interests. In December 1995, White Mountains acquired Valley
Group, Inc. ("VGI") of Albany, Oregon and Charter Group, Inc. ("CGI") of
Richardson, Texas for $41.7 million in cash less $3.0 million of purchase price
adjustments. In September 1995, White Mountains formed White Mountains Insurance
Company ("WMIC") which is a New Hampshire-based mid-size commercial property and
casualty company. Since 1995 White Mountains has been active in developing,
capitalizing and reorganizing its insurance operations.

Valley. VGI, through its wholly-owned subsidiaries including Valley
Insurance Company ("VIC"), Valley Property & Casualty Insurance Company ("Valley
P&C"), Valley National Insurance Company ("Valley National") and certain related
non-insurance affiliates, collectively ("Valley"), write personal and commercial
lines as further described below:

VIC: A Northwest-based property and casualty company which writes personal
and commercial lines. In 1997 and 1996, VIC had $77.7 million and $75.1 million
of net written premiums, respectively, primarily in Oregon, California and
Washington. At December 31, 1997, VIC had $146.6 million of total admitted
assets and $61.2 million of policyholders' surplus. VIC was established in 1982
and began writing insurance policies in 1985. VIC is rated "A" or "excellent" by
A.M. Best.

Valley P&C: On December 5, 1996, Valley's parent company formed Valley P&C
to specifically write property and casualty insurance within Oregon. Valley P&C
wrote its first policies in February 1997 and had $5.2 million in net written
premiums during 1997. At December 31, 1997, Valley P&C had $7.7 million of total
admitted assets and $3.7 million of policyholders' surplus.

Valley National: On January 19, 1996, Valley purchased an inactive
insurance company for $13.2 million, net of cash balances acquired. The newly
acquired insurance company, which was renamed Valley National, is licensed to
write property and casualty insurance in 48 states. Assets acquired pursuant to
the purchase of Valley National included an investment portfolio, consisting
principally of fixed maturity investments, totalling $6.7 million. Valley
National wrote its first policies in December 1996 and had $2.7 million in gross
written premiums ($.3 million of net written premiums) during 1997. Valley
National is expected to further expand its operations

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to certain other states in which it is currently licensed. At December 31, 1997,
Valley National had $11.5 million of total admitted assets and $11.1 million of
policyholders' surplus. Valley National is a wholly-owned subsidiary of VIC and
shares its A.M. Best's "A" rating through a combination of a reinsurance
arrangement with VIC and its ownership structure.

Valley markets insurance products principally through independent agents.
Valley'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 family-owned businesses. This approach has resulted in
an established track record of growth:

In 1997 and 1996 Valley wrote $89.2 million and $81.9 million,
respectively, of gross premiums within the following states, through
approximately 285 independent agents:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31, 1997
---------------------------------------------------
Gross Written Policies
Dollars in millions Premiums In Force* Agents*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oregon $43.1 30,789 98
California 26.2 12,333 80
Washington 17.2 6,960 69
Arizona, Idaho, Utah and other 2.7 2,180 38
---------------------------------------------------
Totals $89.2 52,262 285
- -----------------------------------===================================================

<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31, 1996
---------------------------------------------------
Gross Written Policies
Dollars in millions Premiums In Force* Agents*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oregon $40.9 31,118 99
California 27.5 12,910 74
Washington 13.2 4,554 63
Arizona, Idaho, Utah and other .3 222 9
---------------------------------------------------
Totals $81.9 48,804 245
======================================================================================
* Determined at year end.
</TABLE>

Valley began to write business in the states of Arizona, Idaho and Utah
during the fourth quarter of 1996. Valley intends to increase its premium
writings in those states in the future.

2
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Valley's focus on delivering insurance products to families and
family-owned businesses has resulted in a book of business which is balanced
between personal lines and commercial lines. Gross written premiums for Valley's
primary lines of business are shown below:

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The long-term relationships cultivated by Valley with its agents and
insured customers, along with superior customer service and convenient premium
billing and payment systems, have produced a relatively high level of
persistency in Valley's "package" book of business. In 1997 and 1996, package
business represented approximately 79.1% and 80.0% of Valley's premium writings,
respectively, for both personal and commercial lines:

Renewal persistency can be a significant indicator of an insurance
company's long-term prospects for successful underwriting. An insurance company
typically incurs more marketing and underwriting costs to write new business
(e.g., policies written for new customers) than it does to write "seasoned"
business (e.g., policy renewals). Additionally, losses and loss adjustment
expenses are typically higher and less predictable for new business than for
seasoned business.

WMIC. WMIC is currently licensed to write insurance in Maine, New
Hampshire, Vermont, Massachusetts and New York and is expected to expand its
operations to other states as additional regulatory approvals are obtained. WMIC
markets its products principally through independent agents and had gross
written premiums during 1997 and 1996 of $5.2 million and $2.4 million ($4.7
million and $2.0 million of net written premiums), respectively. At December 31,
1997, WMIC had $31.4 million of total admitted assets and $29.1 million of
policyholders' surplus. WMIC is a wholly-owned subsidiary of VIC and shares its
A.M. Best's "A" rating through a combination of a reinsurance arrangement with
VIC and its ownership structure.

Charter. CGI, through its wholly-owned subsidiary Charter Indemnity
Company, its controlled affiliate Charter County Mutual Insurance Company and
certain related non-insurance subsidiaries (collectively "Charter"), markets and
underwrites nonstandard automobile insurance to individuals in the State of
Texas. For the years ended December 31, 1997 and 1996, Charter's net written
premiums totalled $62.9 million and $69.9 million, respectively and its

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earned premiums totalled $62.4 million and $37.7 million, respectively. Written
premiums (and related expenses and losses) for Charter's policies written prior
to January 1, 1996, were entirely ceded to Charter's former parent and are now
fully retained, therefore, Charter's 1997 and 1996 earned premiums are not
directly comparable.

Charter writes all its business through independent agents located in
Texas. At December 31, 1997, Charter had approximately 750 agents located
throughout the State. Charter expects to write policies in Oklahoma during 1998
and is expected to expand its operations to other states.

The nonstandard automobile insurance market consists of drivers who are
unable to obtain coverage from standard carriers due to their prior driving
records, other underwriting criteria or market conditions. Management believes
that opportunities in the nonstandard automobile insurance market in Texas are
influenced by many factors including the market conditions for standard
automobile insurance, the residual market plan of the State, and the extent to
which State motor vehicle laws are enforced. The nonstandard automobile
insurance market has grown in recent years as the result of tightening of
underwriting standards by underwriters of standard and preferred automobile
insurance, and increased enforcement of motor vehicle laws including driving
while intoxicated and uninsured motorist laws.

Charter offers both liability and physical damage coverage in the Texas
nonstandard automobile insurance market, generally with policies having terms of
6 months or 12 months. Most of Charter's policyholders choose basic limits of
liability coverage, which in Texas are $20,000 per person and $40,000 per
accident for bodily injury, and $15,000 for property damage. For the year ended
December 31, 1997, Charter's net written premiums totalled $43.0 million for
liability coverages and $19.9 million for property damage coverages.

Management pursues a strategy of establishing Charter as a low-cost
provider of nonstandard automobile insurance while maintaining a commitment to
provide "service beyond expectation" to both agents and the insured. Management
believes that Charter has become a low cost provider of nonstandard automobile
insurance. Increased automation of certain marketing, underwriting, claims and
administrative functions has provided Charter with the ability to process more
business without a corresponding increase in costs, while maintaining a high
level of service to its agents and insured customers.

Management believes that most classes of nonstandard automobile insurance
can be underwritten profitably if they are priced adequately. Charter seeks to
classify risks into narrowly defined segments through the utilization of
available underwriting criteria and internal performance statistical data.
Charter maintains a proprietary database which contains statistical records with
respect to its agents and the insured. Management believes this database
enhances Charter's ability to analyze loss experience, and to underwrite and
price its products based on a number of variables. Charter utilizes many factors
and analyses to determine its rates including: type, age and location of the
vehicle; number of vehicles per policyholder; number and type of traffic
violations or accidents; limits of liability; deductibles; and age, sex and
marital status of the insured. Charter's combined ratio for the years ended
December 31, 1997 and 1996 was 94.2% and 99.3%, respectively.

Investments in Unconsolidated Insurance Affiliates

White Mountains' investments in unconsolidated insurance affiliates
represent strategic operating investments in other insurers in which White
Mountains has a significant voting and economic interest but does not own
greater than 50.0% of the entity. Since 1994, Fund American has been active in
accumulating its investments in unconsolidated affiliates which are further
described below:

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Financial Security Assurance Holdings Ltd. ("FSA"). FSA conducts its
operations principally through Financial Security Assurance Inc., a wholly-owned
monoline financial guarantee insurance subsidiary with Triple-A claims-paying
ratings from Moody's, Standard & Poor's and Fitch. FSA is principally engaged in
guaranteeing municipal bonds as well as residential mortgage and other
asset-backed securities. For 1997, 1996 and 1995 the present value of FSA's
gross written premiums totalled $250.3 million, $226.3 million and $139.1
million, respectively, and its net income was $100.5 million, $80.8 million and
$55.0 million, respectively. As of December 31, 1997 and 1996, FSA's total
assets were $1.9 billion and $1.5 billion, respectively and its shareholders'
equity was $882.4 million and $801.3 million, respectively.

In May 1994 the Company purchased 2,000,000 shares of the common stock of
FSA ("FSA Common Stock") from U S WEST Capital Corp., a wholly-owned subsidiary
of U S WEST, Inc. The purchase was part of an initial public offering of
8,082,385 shares of FSA Common Stock at the initial offering price of $20.00 per
share.

In September 1994 the Company acquired various fixed price options and
shares of convertible preferred stock ("FSA Options and Preferred Stock") which,
in total, give Fund American the right to acquire up to 4,560,607 additional
shares of FSA Common Stock for aggregate consideration of $125.7 million.

In 1995 and 1996, respectively, the Company purchased an additional 460,200
shares of FSA Common Stock on the open market for $8.8 million and an additional
1,000,000 shares of FSA Common Stock in a private transaction for $26.5 million.

All shares of and rights to FSA Common Stock owned or acquired by the
Company as described above (other than those acquired on the open market) are
subject to certain restrictions on transfer, voting provisions and other
limitations and requirements set forth in a Shareholders' Agreement, a
Registration Rights Agreement and a Voting Trust Agreement. As of December 31,
1997, 1996 and 1995 Fund American's economic interest in FSA was approximately
26.2%, 25.1% and 21.0%, respectively, and Fund American's voting interest in FSA
was approximately 24.0%, 23.0% and 19.0%, respectively. During 1997 Fund
American transferred all of its interests in FSA to Source One.

Mr. John J. ("Jack") Byrne (Chairman of the Company) is Vice Chairman of
FSA and Mr. K. Thomas Kemp (President and CEO of the Company and Chairman and
CEO of White Mountains) and Mr. James H. Ozanne, (President of Fund American
Enterprises, Inc. ("FAE"), a wholly-owned subsidiary of the Company) are
directors of FSA. In addition to being FSA directors, Mr. Kemp is Chairman of
FSA's Human Resources Committee and Mr. Ozanne is Chairman of FSA's Underwriting
Committee.

Fund American's investment in FSA Common Stock is accounted for using the
equity method. FSA Common Stock is publicly traded on the New York Stock
Exchange ("NYSE"). The market value of the FSA Common Stock as of December 31,
1997 and 1996, as quoted on the NYSE, exceeded Fund American's carrying value of
the FSA Common Stock on the equity method. Fund American's investments in FSA
Options and Preferred Stock are accounted for under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115 whereby the investments are
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 comprehensive net income.

Main Street America Holdings, Inc. ("MSA"). MSA, a subsidiary of National
Grange Mutual Insurance Company of Keene, New Hampshire ("NGM"), participates in
40% of NGM's business through a reinsurance pooling agreement. NGM writes
personal and commercial property and casualty insurance in the Eastern United
States. MSA's net written premiums totalled $156.6 million, $147.2 million and
$130.9 million in 1997, 1996 and 1995, respectively, and its net income was
$11.9 million, $9.7 million and $12.4 million, respectively. MSA's year-

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end total assets as of December 31, 1997 and 1996 were $337.2 million and $316.2
million, respectively, and its shareholders' equity was $120.6 million and
$101.4 million, respectively.

In December 1994 the Company acquired 90,606 shares of the common stock of
MSA ("MSA Common Stock") for $25.0 million in cash. In 1995 the Company paid NGM
an additional $1.2 million in purchase price adjustments for the MSA Common
Stock. In December 1995 the Company transferred all of its interest in MSA to
White Mountains. White Mountains' investment in MSA at December 31, 1997, 1996
and 1995 represented approximately 33.1% of the outstanding common stock of MSA
at those times.

Fund American's investment in MSA Common Stock is accounted for using the
equity method. White Mountains' President, Mr. Terry L. Baxter, and Mr. Kemp are
directors of MSA.

Folksamerica Holding Company, Inc. ("Folksamerica"). Folksamerica owns a
multi-line broker-market reinsurance company which in 1997 and 1996 had net
written premiums of $232.4 million and $171.9 million, respectively. At December
31, 1997 and 1996, Folksamerica had total assets $1.2 billion and $1.0 billion,
respectively, and shareholders' equity of $255.0 million and $167.6 million,
respectively.

In June 1996 White Mountains purchased, for $79.9 million including related
expenses, a 50.0% economic interest in Folksamerica. On November 20, 1997, White
Mountains made an additional investment in Folksamerica of $20.8 million which
served to maintain it's 50.0% economic interest. White Mountains' investment in
Folksamerica includes (i) 6,920,000 shares of ten-year 6.5% voting preferred
stock having a liquidation preference of $79.4 million ("Folksamerica Preferred
Stock"), (ii) ten-year warrants ("Folksamerica Warrants") to purchase up to
6,920,000 shares of the common stock of Folksamerica ("Folksamerica Common
Stock") for $11.47 per share, subject to certain adjustments and (iii) 1,563,907
shares of Folksamerica Common Stock. Folksamerica reported a book value per
share at December 31, 1997 and 1996, of $15.03 and $12.11, respectively.

White Mountains' investment in Folksamerica Common Stock is accounted for
using the equity method. White Mountains' investment in Folksamerica Preferred
Stock and Folksamerica Warrants are accounted for under the provisions of SFAS
No. 115 whereby the investments are 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 comprehensive net income.
Dividends earned on the Folksamerica Preferred Stock are recorded as earnings
from unconsolidated insurance affiliates on the income statement. Messrs. Baxter
and Kemp are directors of Folksamerica.

ML (Bermuda) Limited ("Murray Lawrence"). Murray Lawrence is a
Bermuda-based managing agency group in the Lloyd's insurance market. On December
8, 1997 White Mountains purchased, for $23.6 million, approximately 15.8% of the
common stock of Murray Lawrence ("Murray Lawrence Common Stock"). Mr. Kemp is a
director of Murray Lawrence.

MORTGAGE BANKING OPERATIONS

General

Source One was incorporated in 1972 and is the successor to Citizens
Mortgage Corporation which was organized in 1946. Source One's principal office
is located in Farmington Hills, Michigan. Source One is a wholly-owned
subsidiary of Fund American whereby the Company currently owns 3% of the
outstanding common stock of Source One and White Mountains owns the remaining
97% of the outstanding common stock of Source One.

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As a mortgage banker, Source One engages primarily in the business of
producing and selling conforming and subprime residential mortgage loans and
servicing and subservicing residential mortgage loans for third parties. Its
sources of revenue are net mortgage servicing revenue, net interest revenue, net
gain on sales of mortgages, net gain on sales of servicing and other revenue.
Through subsidiaries, Source One also markets credit-related insurance products
(such as life, disability, health, accidental death and property and casualty
insurance).

As of December 31, 1997 and 1996, Source One owned a mortgage loan
servicing portfolio totalling $11.6 billion and $26.4 billion, respectively, and
subserviced a portfolio of mortgage loans for others totalling $14.9 billion and
$2.8 billion, respectively. Source One services and subservices mortgage loans
on behalf of numerous institutional investors and other security holders. During
1997 and 1996, Source One originated $4.4 billion and $3.8 billion in mortgage
loans, respectively.

Industry Overview

Mortgage banking is the business of serving as a financial intermediary in
the: (i) origination and purchase of mortgage loans; (ii) holding of such loans
while aggregating sufficient loans to form appropriate mortgage-backed security
pools; (iii) subsequent sale of such loans through pools or directly to
investors; and (iv) ongoing management or servicing of such loans during the
repayment period. Mortgage bankers generate revenue in each of the four stages
of the mortgage banking process.

The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, reviewing title and credit matters, and funding
loans at closing. Mortgage loans are often purchased from the originators
thereof, who may receive a premium for releasing the right to service such
purchased mortgage loans. The purchase price and any premium paid for servicing
rights are greatly influenced by existing market conditions.

When interest rates on long-term mortgage loans exceed average interest
rates incurred on total borrowings by Source One, as is generally the case, the
holding of mortgage loans generates net interest income. In periods when
borrowing rates exceed long-term mortgage lending rates, the holding of mortgage
loans can generate net interest expense.

Marketing or selling mortgage loans requires matching the needs of the
production market (consisting of homebuyers and homeowners seeking new
mortgages) with the needs of the secondary market for mortgage loans (consisting
of securities broker-dealers, depository institutions, insurance companies,
pension funds and other investors). Conventional mortgage loans (e.g., those not
guaranteed or insured by agencies of the Federal government) which are secured
by one- to four-family residential properties, and which comply with applicable
requirements, are packaged for direct sale or conversion to a mortgage-backed
security, generally in pools of $1.0 million or more. Such mortgage-backed
securities are guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). Mortgage-backed
securities are sold by mortgage banking companies primarily to securities
broker-dealers. Federal Housing Administration ("FHA") insured mortgage loans
and Veterans Administration ("VA") partially guaranteed mortgage loans are
packaged in the form of modified pass-through mortgage-backed securities
guaranteed by the Government National Mortgage Association ("GNMA") for sale
primarily to securities broker-dealers. In addition, private entities may pool
mortgage loans in the form of collateralized mortgage obligations or
pass-through certificates, which may or may not qualify as real estate mortgage
investment conduits ("REMICs") under the Internal Revenue Code of 1986, as
amended (the "IRC"), and offer the resulting mortgage-backed securities to the
public through

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securities broker-dealers. There is also a limited private market for mortgage
loans which have not been pooled or securitized.

Servicing involves: (i) collecting principal, interest and funds to be
escrowed for tax and insurance payments from mortgage loan borrowers; (ii)
remitting principal and interest to mortgage loan investors; (iii) paying
property taxes and insurance premiums on mortgaged property; (iv) in some cases,
advancing uncollected payments to mortgage loan investors; (v) administering
delinquent loans; (vi) supervising foreclosures in the event of unremedied
defaults; and (vii) performing all related accounting and reporting activities.
Servicing generates cash income in the form of fees, which represent a
percentage of the declining outstanding principal amount of the loans serviced
and are collected from each mortgage loan payment received plus any late
charges.

Mortgage Loan Production

Source One produces residential mortgage loans through a system of retail
branch offices, a specialized marketing program, mortgage brokers, and a
correspondent network of banks, thrift institutions and other mortgage lenders.
The existence of multiple mortgage production sources gives Source One the
flexibility to shift its production between those sources as market conditions
warrant and allows Source One to emphasize the production mode which is most
economically advantageous at the time.

Loans produced, whether through origination or purchase, include
conventional residential mortgage loans as well as mortgage loans which are
either insured by the FHA or partially guaranteed by the VA. In evaluating loans
purchased through its correspondent network and loans originated through its
broker network, Source One applies the same quality standards as those required
for loans originated by Source One itself. Source One's quality control
department reviews a random sample of the loans purchased to determine
compliance with Source One's standards.

Source One primarily produces fixed rate mortgage loans. Generally
speaking, fixed rate mortgages tend to capture a large share of origination
volumes in a declining interest rate environment. Additionally, fixed rate
mortgage loans are inherently less susceptible to prepayment risk than
adjustable rate mortgages. During periods of increasing interest rates, the
likely adverse effects of lower fixed rate mortgage loan originations are
mitigated by a reduction in the prepayment risk on the fixed rate mortgage loans
Source One services. During 1997 and 1996, fixed rate mortgage loan production
accounted for approximately 88% and 90%, respectively, of Source One's total
mortgage loan production.

The following table sets forth selected information regarding Source One's
mortgage loan production:

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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Millions 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan production by type of loan:
FHA insured and VA guaranteed $2,985 $2,035 $1,565 $2,065 $ 3,453
Conventional 1,418 1,796 1,287 2,521 7,999
-------------------------------------------------------
Total $4,403 $3,831 $2,852 $4,586 $11,452
- -----------------------------------------------------------=======================================================
Loan production by origination source:
Correspondent network acquisitions $2,552 $1,640 $1,157 $1,081 $ 2,643
Retail branch office originations 1,339 1,590 1,347 2,005 4,922
Mortgage broker originations 390 369 196 696 1,708
Specialized marketing program originations 122 232 152 804 2,179
-------------------------------------------------------
Total $4,403 $3,831 $2,852 $4,586 $11,452
==================================================================================================================
</TABLE>

During 1997 Source One broadened its product line by offering higher
profit margin products such as FHA home improvement ("203(k)") loans,
manufactured housing loans, subprime loans and 125% loan to value second
mortgage ("125% LTV") loans. The 203(k) loans and manufactured housing loans
produced by Source One are sold to third parties with servicing retained
whereby the subprime loans and 125% LTV loans produced by Source One are sold
to third parties on a servicing released basis. Source One is currently
planning to establish the capability to service and subservice subprime loans
and to subservice 125% LTV loans. These new products did not account for a
significant portion of Source One's total mortgage loan production during
1997 and are expected to account for less than 10% of Source One's 1998
mortgage loan production.

Correspondent Network. Source One conducts a program through which it
agrees to purchase mortgage loans from a network of banks, thrift institutions
and other mortgage lenders. The funding price for such loans is set by Source
One on a daily basis. In addition, Source One pays a premium for the release of
servicing rights which is negotiated on a case-by-case basis. As of December 31,
1997, there were approximately 236 participants in Source One's correspondent
network, with no single participant or group of affiliated participants
accounting for more than 12% of Source One's total mortgage loan originations.

Retail Branch Offices. As of December 31, 1997, Source One had 129 retail
branch offices in 26 states with its highest concentration of branch offices
located in California, Washington and New York. Each office has sales
representatives who originate mortgage loans through contacts with real estate
brokers, builders, developers and others, as well as through direct contact with
homebuyers.

Mortgage loans originated by Source One are subject to a defined
underwriting process in order to assess each prospective borrower's ability to
repay the loan requested and the adequacy of each property as collateral. In
addition, Source One is subject to the underwriting guidelines of FHA, VA, FHLMC
and FNMA, as well as specific contractual requirements of institutional
investors who have agreed to acquire mortgage loans originated by Source One.
Most branch office originations are referred to regional operating centers for
preparation of loan

10
<PAGE>

documentation, evaluation of compliance with Source One's underwriting
conditions and closing of the loans.

Mortgage Brokers. Source One conducts a program through which it closes
loans originated by a network of mortgage brokers. The funding price for such
loans is set by Source One on a daily basis. The originating mortgage broker
receives compensation equivalent to the difference between Source One's pricing
schedule and the closing price. As of December 31, 1997, there were
approximately 425 active participants in Source One's mortgage broker network,
with no single broker or group of affiliated brokers accounting for more than 1%
of Source One's total mortgage loan originations.

Specialized Marketing Program. Source One also generates mortgage loan
originations through affinity programs and by responding to refinancing requests
from the population of loans currently serviced by Source One.

Sales of Loans

Source One sells mortgage loans either through mortgage-backed securities
issued pursuant to programs of GNMA, FNMA and FHLMC, or to institutional
investors. Most mortgage loans are aggregated in pools of $1.0 million or more,
which are purchased by institutional investors after having been guaranteed by
GNMA, FNMA or FHLMC. During 1997 approximately 65.5%, 23.3% and 6.7% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. During 1996 approximately 42.8%, 35.3% and 11.6% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. During 1995 approximately 46.3%, 34.3% and 9.3% of the
principal amount of Source One's loans were sold in pools through GNMA, FNMA and
FHLMC, respectively. Substantially all GNMA securities are sold without recourse
to Source One for loss of principal in the event of a subsequent default by the
mortgage borrower due to the underlying FHA and VA insurance. Prior to December
1992, substantially all conventional securities were sold with recourse to
Source One, to the extent of insufficient proceeds from private mortgage
insurance, foreclosure and other recoveries. Since December 1992 all
conventional loans have been sold without recourse to Source One.

Servicing agreements relating to mortgage-backed securities issued pursuant
to the programs of GNMA, FNMA or FHLMC require Source One to advance funds to
make the required payments to investors in the event of a delinquency by the
borrower. Source One expects that it would recover most funds advanced upon cure
of default by the borrower or at foreclosure. However, in connection with VA
partially guaranteed loans and certain conventional loans (which may be
partially insured by private mortgage insurers), funds advanced may not cover
losses due to potential declines in collateral value. In addition, most of
Source One's servicing agreements for mortgage-backed securities typically
require the payment to investors of a full month's interest on each loan
although the loan may be paid off (by optional prepayment or foreclosure) other
than on a month-end basis. In this instance, Source One is obligated to pay the
investor interest at the pass-thru rate from the date of the loan payoff through
the end of that calendar month without reimbursement.

Historically, Source One's sales of loans have generated net gains.
However, if secondary market interest rates decline after Source One obtains a
mandatory forward commitment for a loan, the loan may not close and Source One
may incur a loss from the cost of covering its obligations under such
commitment. If secondary market interest rates increase after Source One commits
to an interest rate for a loan, and Source One has not obtained a forward
commitment, Source One may incur a loss when the loan is subsequently sold. To
minimize this risk, Source One obtains mandatory forward commitments of up to
120 days to sell

11
<PAGE>

mortgage-backed securities with respect to all loans which have been funded and
a substantial portion of loans in process (the "Pipeline") which it believes
will close.

Source One's risk management function closely monitors the Pipeline to
determine appropriate forward commitment coverage on a daily basis. In addition,
the risk management area seeks to reduce counterparty risk by committing to sell
mortgage loans only to approved dealers, with no dealer having in excess of 20%
of current commitments. Source One currently transacts business with 17 approved
dealers.

Loan Servicing

Source One generally retains the rights to service the mortgage loans it
produces with the exception of subprime and 125% LTV loans which are sold to
third parties on a servicing released basis. In addition, Source One may acquire
the rights to service or subservice a mortgage loan portfolio without
originating or acquiring the underlying mortgage loans. Source One customarily
purchases servicing rights from banks, thrift institutions and other mortgage
lenders. The fees paid to acquire such servicing rights are negotiated on a
case-by-case basis. During 1996, Source One purchased the rights to service $2.8
billion of mortgage loans from third parties. There were no significant
purchases of mortgage servicing rights by Source One during 1997.

Source One also sells servicing rights when management deems it
economically advantageous. During 1997 Source One sold the rights to service a
$17.0 billion portfolio of nonrecourse mortgage loans and continues to
subservice a portion of these loans pursuant to a subservicing agreement. During
1996 Source One sold the rights to service $3.3 billion of mortgage loans and
did not retain the right to subservice the loans.

The following table summarizes the changes in Source One's mortgage loan
servicing portfolio, excluding loans sold but not transferred:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Billions 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Servicing portfolio owned at beginning of year $ 26.4 $ 27.8 $ 35.3 $ 38.4 $ 37.3
-----------------------------------------------------
Mortgage loan production 4.4 3.8 2.9 4.6 11.4
Servicing acquisitions and other -- 2.8 4.7 3.7 6.4
-----------------------------------------------------
Total servicing in 4.4 6.6 7.6 8.3 17.8
-----------------------------------------------------
Regular payoffs 1.2 3.0 2.3 4.7 13.5
Sales of servicing 17.0 3.3 11.0 3.9 -
Principal amortization, foreclosures and other 1.0 1.7 1.8 2.8 3.2
-----------------------------------------------------
Total servicing out 19.2 8.0 15.1 11.4 16.7
-----------------------------------------------------
Servicing portfolio owned 11.6 26.4 27.8 35.3 38.4
Subservicing portfolio 14.9 2.8 4.0 4.3 -
-----------------------------------------------------
Balance at end of year $ 26.5 $ 29.2 $ 31.8 $ 39.6 $ 38.4
==================================================================================================================
</TABLE>

Related Activities

12
<PAGE>

In conjunction with its mortgage origination and servicing activities,
Source One markets certain credit-related insurance products (such as life,
disability, health, accidental death, and property and casualty insurance).
Source One acts as an agent and receives fees based on premium value but does
not assume any insurance risk. Total fees recognized under these programs for
1997 and 1996 were $4.2 and $4.6 million, respectively.

INVESTMENT PORTFOLIO MANAGEMENT

The passive investment portfolios of the Company and White Mountains are
primarily managed by a small group of employees located in Hanover, New
Hampshire. FAE's passive investment portfolio is primarily managed by a small
group of employees located in White River Junction, Vermont.

During 1997 and 1996, Fund American engaged First Manhattan Co. to provide
discretionary investment management services with respect to the disposition of
a portfolio of passive investment securities. The invested assets managed by
First Manhattan Co. included certain equity securities held by the Company, FAE,
White Mountains, Valley, Charter and WMIC. First Manhattan Co. is a registered
investment advisor.

During 1997 and 1996 Fund American also engaged affiliates of FSA and MSA
to provide discretionary investment management services with respect to the
fixed income investment portfolios of Valley, Charter and WMIC.

Fund American's philosophy is to invest all assets to maximize their after
tax total return over a three- to five-year time frame. Under this approach,
each dollar of after tax investment income, realized capital gains and
unrealized appreciation is valued equally. Management believes that it should
focus its equity investment efforts on a small number of quality companies
selling at reasonable prices in the marketplace. While such an approach results
in a highly concentrated portfolio, management believes it will provide superior
returns over a three- to five-year horizon. However, management does not believe
that owning a large portfolio of passive investment securities in a taxable
corporation format will maximize shareholder returns over the long-term.
Therefore, Fund American's long-term goal is to reinvest its passive investment
securities into operating businesses in which management has knowledge and
experience.

CERTAIN BUSINESS CONDITIONS

Inflation and changes in market interest rates can have significant effects
on White Mountains' insurance operations. Inflation increases the costs of
settling insurance claims over time. Increases in market interest rates, which
often occur during periods of high inflation, reduce the market value of the
insurance operations' fixed-income investments. Conversely, reductions in market
interest rates increase the market value of White Mountains' fixed-income
investments.

Changes in the economy or prevailing interest rates can also have
significant effects, including material adverse effects, on the mortgage banking
industry including Source One. Inflation and changes in interest rates can have
differing effects on various aspects of Source One's business, particularly with
respect to marketing gains and losses from the sale of mortgage loans, mortgage
loan production, the value of Source One's servicing portfolio and net

13
<PAGE>

interest revenue. Historically, Source One's loan originations and loan
production income have increased in response to falling interest rates and have
decreased during periods of rising interest rates. Periods of low inflation and
falling interest rates tend to reduce loan servicing income and the value of
Source One's mortgage loan servicing portfolio because prepayments of mortgages
increase and the average life of mortgage servicing rights is shortened.
Conversely, periods of increasing inflation and rising interest rates tend to
increase loan servicing income and the value of Source One's mortgage servicing
rights because prepayments of mortgages decline and the average life of loan
servicing rights is lengthened. In an attempt to mitigate Source One's exposure
to changes in market interest rates, Source One utilizes various derivative
financial instruments. See "Management's Discussion and Analysis".

COMPETITION

The principal competitive factors that affect White Mountains' insurance
subsidiaries are: (i) pricing; (ii) underwriting; (iii) quality of claims and
policyholder services; (iv) appointing and retaining high quality independent
agents; (v) operating efficiencies; and (vi) product differentiation and
availability. No single company or group of affiliated companies dominates the
insurance industry. The highly competitive environment in the property and
casualty insurance market during the past several years has intensified due to
increased capacity resulting from growing capital supporting the industry and
robust investment returns achieved in recent years. Each of White Mountains'
insurance operating affiliates strives to be a low cost operator within its
sector of the insurance industry while maintaining superior levels of customer
service. Each of White Mountains' insurance affiliates also maintains a
disciplined approach to pricing and underwriting of insurance risks. Application
of this disciplined approach in a highly competitive environment results in a
lower volume of insurance premiums than would result from a less disciplined
approach, but should produce better overall financial returns from the business
over long periods of time.

Perception of financial strength, as reflected in the ratings assigned to
an insurance company, especially by A.M. Best, is also a factor in White
Mountains' insurance subsidiaries' competitive position. Each of White
Mountains' insurance operating affiliates has consistently maintained adequate
capitalization and claims payment ratings to effectively conduct its business
and management believes that such strength will continue to be maintained in the
future.

In the United States, property and casualty insurance can be obtained
through national and regional companies that use an agency distribution system,
direct writers (who may have an employed agency force) or brokers, or through
self-insurance including the use by corporations of subsidiary captive insurers.
All of White Mountains' consolidated insurance companies market their products
principally through independent agents.

14
<PAGE>

Source One competes nationally and locally for loan production with other
mortgage banks, state and national banks, thrift institutions and insurance
companies. National banks and thrift institutions have substantially more
flexibility in their loan origination programs than Source One, which generally
originates loans meeting the standards of the secondary market. Mortgage lenders
compete primarily with respect to price and service. Competition may also occur
on mortgage terms and closing costs. Source One competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders and developers and members of its correspondent and broker
network. It is the opinion of the management of Source One that no single
mortgage lender dominates the industry.

REGULATION

Valley, Charter and WMIC are subject to regulation and supervision of their
operations in each of the jurisdictions where they conduct business. Regulations
vary between jurisdictions but, generally, they provide regulatory authorities
with broad supervisory, regulatory 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 losses and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations and annual and other report
filings. Over the last several years most states have, and continue to
implement, laws which 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. The RBC ratios for Valley, Charter and WMIC, as
of December 31, 1997, were above the levels which would require regulatory
action.

Source One is subject to the rules and regulations of, and examinations by,
investors and insurers including FNMA, FHLMC, GNMA, FHA and VA with respect to
the origination and selling and servicing of mortgage loans. Lenders are
required to submit audited financial statements annually and to maintain
specified net worth levels which vary depending on the amount of loans serviced
and annual production. Mortgage loan origination activities are also subject to
fair housing laws, the Equal Credit Opportunity Act, the Federal
Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit
Reporting Act, licensing laws, usury laws, the Home Mortgage Disclosure Act, and
regulations promulgated thereunder which, among other things, prohibit
discrimination in residential lending and require disclosure of certain
information to borrowers. There are various other state laws and regulations
affecting Source One's mortgage banking and insurance operations. Source One's
internal audit and quality control departments monitor compliance with all these
laws and regulations.

Fund American 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 or any other matters that would require disclosure
herein.

EMPLOYEES

As of December 31, 1997, the Company employed 11 persons and White
Mountains employed 2,038 persons (including 281 persons at Valley, 165 persons
at Charter, 1,572 persons at Source One and 3 persons at FAE). None of Fund
American's employees are covered by a collective bargaining agreement.
Management believes that Fund American's employee relations are good.

15
<PAGE>

FORWARD-LOOKING STATEMENTS

From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and similar matters. This information is often subject
to various risks and uncertainties. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that numerous
factors could cause actual results and experience to differ materially from
anticipated results or other expectations expressed in its forward-looking
statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Company's business include those
discussed elsewhere herein (such as competition and regulation).

Item 2. Properties

Fund American leases 8,600 square feet of space at 80 South Main Street,
Hanover, New Hampshire, under a lease expiring in 2006. This space is used as
the principal office for the Company, White Mountains and WMIC. Valley owns a
40,000 square foot office building in Albany, Oregon and leases 6,200 square
feet in Sacramento, California under a lease expiring in 1998. Charter leases
56,000 square feet of office space in Richardson, Texas under a lease expiring
in 2007. Source One owns its principal office in Farmington Hills, Michigan,
which houses the majority of its employees. Fund American leases several other
office facilities and operating equipment under cancelable and noncancelable
agreements. Most of such leases contain renewal clauses.

Item 3. Legal Proceedings

Various claims have been made against Fund American in the normal course of
its business. In management's opinion, the outcome of such claims will not, in
the aggregate, have a material effect on Fund American's financial position or
results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of Fund American's shareholders
during the fourth quarter of 1997.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

As of March 20, 1998, there were 506 registered holders of shares of the
Company's Common Stock, par value $1.00 per share ("Shares").

From 1992 to 1994 the Company did not pay regular cash dividends to holders
of Shares. In the fourth quarter of 1995 the Company's Board of Directors (the
"Board") reinstated and paid a $.20 regular quarterly dividend per Share. During
1997 and 1996, the Company declared and paid quarterly cash dividends of $.20
per Share and expects to pay regular quarterly cash dividends of $.40 per Share
during 1998. The Board currently intends to reconsider from time to time the
declaration of regular periodic dividends on Shares with due consideration given
to the financial characteristics of Fund American's remaining invested assets
and operations and the amount and regularity of its cash flows at the time. The
Company's Common Stock (symbol FFC) is listed on the NYSE. The quarterly trading
range for Shares during 1997 and 1996 is presented below:

- ------------------------------------------------------------------------------
1997 1996
------------------------ -----------------------
High Low High Low
- ------------------------------------------------------------------------------
Quarter ended:
December 31 $ 124 $ 105 1/4 $ 95 3/4 $ 86 3/4
September 30 108 99 1/2 93 1/2 80 1/4
June 30 110 1/2 98 82 1/4 76
March 31 109 3/4 94 79 7/8 72 1/8
==============================================================================

16
<PAGE>

Item 6. Selected Financial Data

Selected consolidated income statement data and ending balance sheet data
for each of the five years ended December 31, 1997, follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
Millions, except per share amounts 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $ 314 $ 332 $ 222 $ 229 $ 251
Expenses 336 347 226 226 234
------------------------------------------------------------------
Pretax operating earnings (loss) (22) (15) (4) 3 17
Net investment gains 97 39 39 39 124
------------------------------------------------------------------
Pretax earnings 75 24 35 42 141
Income tax provision 29 19 17 21 71
------------------------------------------------------------------
After tax earnings 46 5 18 21 70
Loss on early extinguishment of debt, after tax (6) -- -- -- --
Gain from sale of discontinued operations,
after tax -- -- 66(a) -- --
Cumulative effect of accounting change -
purchased mortgage servicing, after tax -- -- -- (44)(b) --
------------------------------------------------------------------
Net income (loss) 40 5 84 (23) 70
Change in net unrealized investment gains,
after tax 56 55 18 (55) 46
------------------------------------------------------------------
Comprehensive net income (loss) $ 96 $ 60 $ 102 $ (78) $ 116
- ----------------------------------------------------==================================================================
Basic earnings per share:
After tax earnings $ 6.89 $ .66 $ 1.88 $ 1.27 $ 6.07
Net income (loss) 5.98 .66 10.30 (3.72) 6.07
Comprehensive net income (loss) 14.55 8.01 12.64 (9.89) 10.84
Diluted earnings per share:
After tax earnings 6.22 .60 1.71 1.20 5.68
Net income (loss) 5.40 .60 9.36 (3.51) 5.68
Comprehensive net income (loss) 13.17 7.33 11.48 (9.34) 10.15
Cash dividends paid per share of common stock .80 .80 .20 -- --
- ----------------------------------------------------------------------------------------------------------------------
Ending Balance Sheet Data:
Total assets $ 2,033 $ 1,981 $ 1,872 $ 1,807 $ 3,305
Short-term debt 571 408 445 254 1,537
Long-term debt 304 424 407 547 601
Minority interest - preferred stock of subsidiary 44 44 44 100 --
Shareholders' equity 674(c) 687(c) 700(c) 661(c) 905(c)
Book value per common and equivalent share (d) 102.19 90.81 83.28 68.95 77.27
======================================================================================================================
</TABLE>

17
<PAGE>

(a) Reflects the settlement of certain tax liabilities relating to the sale of
Fireman's Fund Insurance Company ("Fireman's Fund") for less than the
previously accrued amount.
(b) Reflects the prior years' cumulative effect of a change in Source One's
methodology used to measure impairment of its purchased mortgage servicing
rights asset.
(c) Reflects redemptions of the Company's Voting Preferred Stock Series D, par
value $1.00 per share (the "Series D Preferred Stock") and/or repurchases
of Shares. See Note 13 of the Notes to Consolidated Financial Statements.
(d) Book value per common share as adjusted for the after tax dilutive effects
of outstanding options and warrants to acquire Shares.

18
<PAGE>

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

RESULTS OF OPERATIONS: Years Ended December 31, 1997, 1996 and 1995

Consolidated Results

Fund American reported comprehensive net income (which includes the net
change in after tax unrealized investment gains) of $95.6 million for the year
ended December 31, 1997, which compares to comprehensive net income of $59.5
million and $102.3 million for 1996 and 1995, respectively. Net income for 1997
was $39.3 million versus $4.9 million and $84.1 million for 1996 and 1995,
respectively. The 1997 income statement includes pretax net realized investment
gains of $96.7 million versus $38.5 million of pretax gains recorded in 1996 and
$38.8 million recorded in 1995. The 1996 income statement includes a $32.6
million pretax, $29.4 million after tax, write-off of all Source One's existing
goodwill and certain other intangible assets. The 1995 income statement includes
four non-recurring items: (i) the adoption of SFAS No. 122 as of January 1,
1995, by Source One; (ii) a $46.2 million pretax charge to compensation expense
related to outstanding employee stock warrants; (iii) a $66.0 million favorable
tax development relating to the sale of Fireman's Fund; and (iv) the receipt of
a $9.7 million pretax breakup fee, plus related expenses, from Home Holdings,
Inc. These four items served to increase 1995 net income by a total of $41.8
million.

After tax earnings for 1997 were $45.3 million versus $4.9 million and
$18.5 million for 1996 and 1995, respectively.

Book value per common and common equivalent share was $102.19 at December
31, 1997, which compares to $90.81 at December 31, 1996. Strong operating
results at White Mountains' growing consolidated and unconsolidated insurance
operations and favorable investment portfolio results produced most of the
increase in book value per share from 1996 to 1997.

Insurance Operations

White Mountains is acquiring and developing various insurance operating
interests. Fund American acquired its investment in MSA in 1994 and assigned the
investment to White Mountains in 1995, White Mountains acquired Valley and
Charter and created WMIC in 1995, White Mountains acquired its investments in
Folksamerica Preferred Stock and Folksamerica Common Stock in June 1996 and
November 1997, respectively, and White Mountains acquired its investment in
Murray Lawrence in December 1997. White Mountains also owns approximately 97% of
Source One which owns Fund American's investments in FSA which were acquired
during 1994, 1995 and 1996.

Valley, Charter and WMIC represent Fund American's consolidated insurance
subsidiaries. Valley, Charter and WMIC's results for the years ended December
31, 1997 and 1996, included $145.3 million and $109.7 million of property and
casualty insurance premiums earned, respectively, and $97.1 million and $85.9
million of losses and loss adjustment expenses, respectively. Valley, Charter
and WMIC's results for the one-month period ended December 31, 1995, included
$5.8 million of property and casualty insurance premiums earned and $8.2 million
of losses and loss adjustment expenses.

A summary of 1997 and 1996 underwriting results for Valley, Charter and
WMIC follows:

- --------------------------------------------------------------------------------
Year Ended December 31, 1997
Dollars in millions Valley Charter WMIC
- --------------------------------------------------------------------------------
Net written premiums $ 83.2 $ 62.9 $ 4.7
------------------------------------
Earned premiums 79.6 62.4 3.3
Losses and loss adjustment expenses 51.8 41.8 3.5
Underwriting expenses 28.3 17.1 2.0
------------------------------------

19
<PAGE>

Underwriting (loss) profit $ (.5) $ 3.5 $ (2.2)
====================================
Statutory ratios:
Loss and loss adjustment expense 65.0% 66.9% 107.8%
Underwriting expense 34.8 27.3 53.1
------------------------------------
Combined 99.8% 94.2% 160.9%
================================================================================

- --------------------------------------------------------------------------------
Year Ended December 31, 1996
Dollars in millions Valley Charter WMIC
- --------------------------------------------------------------------------------
Net written premiums $ 75.1 $ 69.9 $ 2.0
------------------------------------
Earned premiums 70.7 37.7 1.3
Losses and loss adjustment expenses 54.3 30.3 1.2
Underwriting expenses 24.9 8.0 .9
------------------------------------
Underwriting loss $ (8.5) $ (.6) $ (.8)
====================================
Statutory ratios:
Loss and loss adjustment expense 76.8% 80.4% 95.8%
Underwriting expense 34.9 18.9 50.4
------------------------------------
Combined 111.7% 99.3% 146.2%
================================================================================

Valley and Charter's 1997 underwriting results produced satisfactory
combined ratios and an overall underwriting profit. However, premium growth at
both Valley and Charter suffered during 1997 as a result of increased
competition in the marketplace which illustrates Fund American's underwriting
discipline in a highly competitive market. WMIC's 1997 results were adversely
impacted by several large workers' compensation claims although underwriting
results on this small and growing book of business are not yet considered to be
meaningful.

Valley's 1996 underwriting results were adversely impacted by severe fourth
quarter storm-related losses and by $3.5 million in reserve strengthening for
losses and loss adjustment expenses incurred in prior years. Charter's earned
premiums trailed net written premiums during 1996 because Charter began for the
first time in 1996 to retain virtually all its written premiums. Charter's
policies written prior to 1996 were fully ceded to a former affiliate of
Charter.

Losses and loss adjustment expenses are charged against income as incurred.
Unpaid losses and loss adjustment expenses are based on estimates 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 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. 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 the normal course of business, Valley, Charter and WMIC seek to limit
losses that may arise from catastrophes or other events that may cause
unfavorable underwriting results by reinsuring certain levels of risk in various
areas of exposure with other insurance enterprises or reinsurers. Valley,
Charter and WMIC remain contingently liable for risks reinsured with third
parties to the extent that the reinsurer is unable to honor its obligations
under reinsurance contracts at the time of loss.

While there may be greater individual risks of loss associated with
nonstandard automobile insurance than with standard automobile insurance (e.g.,
higher loss frequency), the insurance premiums charged in consideration of these
additional risk characteristics are generally higher

20
<PAGE>

than those of standard automobile coverage and in many cases, if the coverage is
properly underwritten, the risk to rate characteristics of writing nonstandard
automobile insurance are at least equal to or more favorable than that of
standard automobile coverage. Additionally, nonstandard automobile individual
liability limits are generally lower than those of standard automobile coverages
which results in the amount of individual losses being less volatile (e.g.,
lower loss severity). In general, loss costs for nonstandard automobile
insurance are, in fact, more predictable than those for several other lines of
property and casualty insurance (e.g., medical malpractice or umbrella liability
coverages).

FSA, MSA, Folksamerica and Murray Lawrence represent Fund American's
investments in unconsolidated insurance affiliates. Fund American's investment
in FSA increased $80.1 million during 1997 which consisted of $11.4 million of
pretax earnings from FSA Common Stock, $68.0 million of pretax unrealized
investment gains from FSA Options and Preferred Stock, $2.1 million of pretax
unrealized investment gains from FSA's investment portfolio, less $1.4 million
of dividends received from FSA Common Stock. Fund American's investment in FSA
increased $23.1 million during 1996 (excluding Fund American's purchase of
1,000,000 additional shares of FSA Common Stock for $26.5 million during 1996)
which consisted of $7.8 million of pretax earnings from FSA Common Stock, $17.3
million of pretax unrealized investment gains from FSA Options and Preferred
Stock, less $1.0 million of pretax unrealized investment losses from FSA's
investment portfolio, less $1.0 million of dividends received from FSA Common
Stock.

White Mountains' investment in MSA increased $6.2 million during 1997 which
consisted of $3.8 million of pretax earnings from MSA Common Stock and $2.4
million of pretax unrealized investment gains from MSA's investment portfolio.
White Mountains' investment in MSA increased $1.0 million during 1996 which
consisted of $1.5 million of pretax earnings from MSA Common Stock offset by $.5
million of pretax unrealized investment losses from MSA's investment portfolio.

White Mountains' investment in Folksamerica increased $25.1 million during
1997 (excluding White Mountains' purchase of Folksamerica Common Stock for $20.8
million during 1997) which consisted of $.9 million of pretax earnings from
Folksamerica Common Stock, $22.4 million of pretax unrealized investment gains
from Folksamerica Preferred Stock, $1.8 million of pretax unrealized investment
gains from Folksamerica's investment portfolio. White Mountains' investment in
Folksamerica increased $.2 million from June 1996 to December 31, 1996 as a
result of pretax unrealized investment gains from Folksamerica Warrants and
Folksamerica Preferred Stock.

White Mountains investment in Murray Lawrence, which was acquired on
December 8, 1997, remained at its cost of $23.6 million during 1997.

Management expects that White Mountains' consolidated and unconsolidated
insurance operations will have a significantly larger impact on Fund American's
reported financial results in future years. See "Liquidity and Capital
Resources."

Mortgage Origination and Servicing Operations

For the year ended December 31, 1997 Source One had a net loss applicable
to common stock of $17.2 million versus a loss of $8.0 million for 1996. Source
One's 1997 results include the following charges: (i) a $6.0 million after tax
extraordinary loss on early extinguishment of debt, (ii) restructuring and
compensation charges of $3.1 million pretax, $2.0 after tax, associated with
Source One's plan to reduce its operating costs and improve its financial
performance, (iii) an $8.0 million pretax, $5.2 million after tax, loss on sales
of mortgage

21
<PAGE>

servicing rights and assumption of subservicing and (iv) a $17.7 million pretax,
$11.5 million after tax, charge to Source One's valuation allowance for
impairment of their capitalized mortgage loan servicing portfolio. Source One's
1996 results include a $29.1 million pretax ($25.9 after tax) write-off of
goodwill and certain other intangible assets which was partially offset by a
$10.1 million pretax, $6.6 million after tax, gain on sales of mortgage
servicing rights. Source One had net income applicable to common shareholders of
$18.6 million for the year ended December 31, 1995 which includes a $40.0
million pretax, $26.0 million after tax, gain on mortgage servicing rights which
was partially offset by $28.0 million pretax, $18.2 million after tax, of
capitalized mortgage servicing portfolio impairment.

Gross mortgage servicing revenue was $95.0 million for the year ended
December 31, 1997 which compares to $139.6 million in 1996 and $141.9 million in
1995. The decrease in gross mortgage servicing revenue from 1995 to 1997 is
primarily the result of sales of servicing rights with respect to $17.0 billion
and $3.3 billion of mortgage loans during 1997 and 1996, respectively.

22
<PAGE>

Source One's net mortgage servicing revenue decreased to $42.1 million for
the year ended December 31, 1997, from $77.6 in 1996 and $61.3 million in 1995.
Net mortgage servicing revenue for 1997 has been reduced by $17.7 million of
pretax impairment resulting from decreases in market interest rates during the
year versus pretax impairment of $.9 million for 1996 and $28.0 million in 1995.
Net mortgage servicing revenue for the year ended December 31, 1997 was enhanced
by $11.3 million of pretax net gains on financial instruments versus gains of
$9.9 million for 1996 and $.8 million for 1995.

Source One utilizes derivative contracts, consisting of interest rate floor
contracts and principal-only swaps, in an attempt to offset the effect on
earnings of higher amortization and impairment of the capitalized servicing
asset caused by changes in market interest rates. These financial instruments
are carried at fair value on the balance sheet with unrealized and realized
gains reported as net gains on financial instruments on the income statement.
The interest rate contracts, which were first entered into during 1995, derive
their value from differences between the floor strike rate specified in the
contract and prevailing market interest rates and are not subject to total
losses in excess of their original cost. As of December 31, 1997, 1996 and 1995,
Source One's open interest rate contracts had a fair value of $8.2 million, $4.8
million and $3.5 million and had an applicable original cost of $4.7 million,
$5.4 million and $2.6 million, respectively. As of December 31, 1997, the open
interest rate contracts had a total notional principal amount of $.7 billion and
had remaining terms ranging from 3 to 5 years. The principal-only swap
transactions, which were first entered into during 1996, derive their value from
changes in the value of referenced principal-only securities. As of December 31,
1997 and 1996, Source One's principal-only swap transactions had a fair value of
$12.5 million and $3.2 million, respectively. Source One's exposure to losses on
the principal-only swap transactions is related to changes in the market value
of the underlying principal-only securities over the life of the contract. As of
December 31, 1997, the open principal-only swap transactions had an original
notional principal amount of $98.1 million and had remaining terms of 3 to 4
years.

Net gains on sales of mortgages were $21.5 million for the year ended
December 31, 1997, versus $38.3 million in 1996 and $24.0 million in 1995. The
1997 amount includes a $3.0 million pretax charge, recorded during 1997, related
to mortgage loans held for investment which have been identified for sale and
marked down from amortized cost to current market value. The balance of the 1997
decline is due primarily to a change in Source One's loan production mix which
included a proportionately higher volume of correspondent production which
generates lower originated mortgage servicing rights income, as compared to
1996. The increased gains from 1995 to 1996 reflect increased production and
related mortgage sales volumes during the period.

During 1997 Source One sold the rights to service $17.0 billion of
nonrecourse mortgage loans for adjusted proceeds of $266.9 million, resulting in
a pretax loss of $4.3 million. As part of the servicing sale, Source One
retained the right to subservice these loans until 1998. Source One recorded an
additional pretax loss of $3.7 million during 1997 in connection with the
extension of its subservicing responsibilities for these loans for one
additional year at less favorable terms than the original agreement provided.
During 1996 Source One sold the rights to service $3.3 billion of mortgage loans
for net proceeds of $55.9 million, resulting in a pretax gain of $10.1 million.
During 1995 Source One sold the rights to service $11.0 billion of mortgage
loans for net proceeds of $199.1 million, resulting in a pretax gain of $40.0
million.

Total mortgage loan production for the years ended December 31, 1997, 1996
and 1995, was $4.4 billion, $3.8 billion and $2.9 billion, respectively. The
increase in production from 1995 to 1997 is reflective of overall lower market
interest rates and a corresponding increase in refinancing activities during the
period. Production related to refinancing activities made up 40%, 33% and 23% of
total production during 1997, 1996 and 1995, respectively. Regular mortgage loan
payoffs due principally to refinancings on Source One's owned servicing
portfolio

23
<PAGE>

for the years ended December 31, 1997, 1996 and 1995, were $1.2 billion, $3.0
billion and $2.3 billion, respectively.

Source One's 1997 results include $9.5 million of pretax earnings
associated with Fund American's investment in FSA which was contributed to
Source One during 1997 to provide additional credit support to Source One's
mortgage banking operations.

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<PAGE>

Investment Operations

The total return from Fund American's investment activities is shown below:

(a) Excludes net unrealized investment gains and losses recorded from Fund
American's investments in unconsolidated insurance affiliates.

Fund American's net investment income is comprised primarily of interest
income earned on mortgage loans originated by Source One (gross of related
interest expense on short-term borrowings used to finance such loans), interest
income associated with the fixed maturity investments of its consolidated
insurance operations, dividend income from its equity investments and interest
income from short-term investments. The increase in net investment income from
mortgage banking operations from 1995 to 1997 is mainly attributable to
increased interest income from mortgage loans held for sale related to higher
mortgage loan production experienced during those periods. The increase in net
investment income from insurance and other operations during from 1996 to 1997
is a result of increases in investment income from White Mountains' growing
portfolio of fixed maturity investments. The decrease in net investment income
from insurance operations and the passive investment portfolio from 1995 to 1996
was primarily the result of lower dividend income due to net sales from Fund
American's passive investment portfolio during 1995 and 1996.

Net realized investment gains during 1997 included $37.2 million of pretax
gains from the sale of 1,980,982 shares of the common stock of Travelers
Property Casualty Corp. ("Travelers P&C") for net proceeds of $69.2 million,
$24.3 million of pretax gains from the sale of 5,000,000 units of beneficial
interest of San Juan Basin Royalty Trust ("San Juan") for net proceeds of $45.7
million, $10.3 million of pretax gains from the sale of 388,140 shares of the
common stock of Mid Ocean Limited ("Mid Ocean") for net proceeds of $22.6
million and $15.5 million of pretax gains from the sale of 834,895 shares of the
common stock of Veritas DGC Inc. for net proceeds of $20.9 million. Net realized
investment gains during 1996, before tax, included $27.2 million of pretax gains
from the sale of 2,928,100 shares of the common stock of The Louisiana Land &
Exploration Company common stock for net proceeds of $125.1 million, $1.4
million of pretax gains from the sale of 2,042,572 shares of the common stock of
Zurich Reinsurance Centre Holdings, Inc. ("ZRC") for net proceeds of $61.8
million and $9.3 million of pretax gains from the sale of 600,000 of the shares
of common stock of Mid Ocean for net proceeds of $28.2 million. Net realized
investment gains during 1995 included $23.9 million of pretax gains from the
sale of 2,401,000 shares of the common stock of American Express Company for net
proceeds of $76.7 million.

A review of certain significant holdings in Fund American's portfolio of
common equity securities and other investments at December 31, 1997 follows.
Share or unit and dollar amounts refer to the aggregate number of common shares
or units of beneficial interest owned

25
<PAGE>

and the aggregate fair value at December 31, 1997, of Fund American's holdings
of each security discussed.

26
<PAGE>

White River Corporation (718,818 shares; "White River Shares"; $57.1
million). White River Corporation ("White River") was formerly a wholly-owned
subsidiary of Fund American. On December 22, 1993, the Company distributed
approximately 74% of the outstanding White River Shares to its shareholders.
White River through its consolidated subsidiaries, provides automated vehicle
valuation and collision repair estimating services and software for use by the
insurance and automobile repair industries, and services which improve the
handling and settling of automobile damage claims. White River also owns a
passive investment portfolio. Fund American owns a total of 1,014,750 White
River Shares, including 295,932 White River Shares carried in other assets which
are being held for delivery upon the exercise of existing employee stock
options. As of December 31, 1997, Fund American's total ownership position
represented approximately 20.8% of the total White River Shares. Fund American
does not account for its investment in White River Shares on the equity method
as it does not currently possess the ability to exercise significant influence
over White River.

San Juan (5,994,876 units; $55.5 million). San Juan units receive a 75% net
overriding royalty interest from certain of Southland Royalty Company's
leasehold and royalty interests in the San Juan Basin of Northwestern New
Mexico. Fund American believes that changes in crude oil and natural gas prices
and in the level of development and production expenditures by the operator of
San Juan may affect the distributions to unitholders of San Juan and, therefore,
the market prices of the units of San Juan. In addition, Fund American believes
that the tax and accounting issues involved in owning units in San Juan may make
such units unappealing to many investors. Fund American's investment in San Juan
as of December 31, 1997, represented approximately 12.9% of the total San Juan
units outstanding. San Juan units are nonvoting. Fund American does not account
for it investment in San Juan units on the equity method as it does not posses
the ability to exercise significant influence over the Trustee of San Juan.

Travelers P&C (1,161,924 shares; $49.2 million). Travelers P&C is one of
the largest property and casualty insurers in the United States and is an
independent agency writer of personal and commercial lines. Fund American's
investment in Travelers P&C as of December 31, 1997, represented approximately
1.7% of the total shares publicly traded. Mr. Jack Byrne is a director of
Travelers P&C.

Expenses

Compensation expense as reported totalled $101.8 million, $91.3 million and
$111.6 million for each of the years ended December 31, 1997, 1996 and 1995,
respectively. Compensation expense for 1995 includes a $46.2 million pretax
charge related to an extension of the expiration date of outstanding employee
stock warrants. Additionally, Source One nets mortgage loan origination fees
(which can fluctuate significantly during periods of strong mortgage loan
production), less certain direct costs, against compensation and benefits
expense. Excluding the effects of the 1995 warrant extension and mortgage loan
origination fees, adjusted compensation and benefits expense was $121.4 million,
$111.1 million and $82.9 million for each of the years ended December 31, 1997,
1996 and 1995, respectively. The increase in adjusted compensation and benefits
expense from 1995 to 1996 is primarily the result of the inclusion of a full
year of Valley and Charter's personnel costs in the 1996 consolidated financial
statements. The increase in adjusted compensation and benefits expense from 1996
to 1997 is primarily the result of an increase in stock-based compensation
accruals associated with certain of the Company's long-term compensation plans
and its qualified and nonqualified retirement plans. During 1997 the market
value of the Company's common stock rose 26% from $95.75 to $121.00 per share.

General expenses of $87.6 million for 1997 compare to 1996 and 1995 amounts
of $87.4 million and $60.3 million, respectively. The increase in general
expenses from 1995 to 1996 is

27
<PAGE>

primarily the result of the inclusion of a full year of Valley and Charter's
operations in the 1996 consolidated financial statements. General expenses for
1997 include $3.1 million of pretax restructuring and compensation charges at
Source One.

Source One's provision for mortgage loan losses, included in general
expenses, was $8.6 million in 1997 which compares to $10.3 million for 1996 and
$7.0 million for 1995. The increase in the provision for loan losses from 1995
to 1996 is due primarily to (i) higher average loss volumes relating to certain
California residential mortgage loans, (ii) charge-offs relating to certain
commercial real estate owned properties and (iii) an increase in delinquencies
as the result of servicing portfolio acquisitions made by Source One during the
fourth quarters of 1996 and 1995. The delinquency rates of the these portfolios
(which were acquired on favorable terms considered to be reflective of the
higher delinquency rates inherent on the portfolios) were generally higher than
those of Source One's existing portfolio resulting in a higher provision for
loan losses; however, Source One's proactive management of such delinquencies is
expected to reduce future delinquency rates on the acquired portfolios to a
level more commensurate with the balance of Source One's servicing portfolio.
The decrease in provision for loan losses from 1996 to 1997 primarily reflects a
significant reduction in the size of Source One's owned mortgage servicing
portfolio during 1997.

Source One closely monitors the rate of delinquencies and foreclosures
incidental to its servicing portfolio. The following table summarizes
delinquency and foreclosure experience with respect to the residential mortgage
loans serviced and subserviced by Source One:

Source One has established an allowance for mortgage loan losses which
totalled $12.8 million and $15.4 million as of December 31, 1997 and 1996,
respectively. In addition, Source One has established an $8.2 million and $7.3
million pretax reserve for estimated losses on its principal recourse portfolio
as of December 31, 1997 and 1996, respectively. Source One believes that its
total allowances are adequate to provide for estimated uninsured losses on the
mortgage servicing portfolio.

Interest expense of $49.7 million in 1997 compares to $50.0 million for
1996 and $45.8 million for 1995. The fluctuations in interest expense primarily
reflect increases and decreases in average indebtedness outstanding during each
year at Source One which is mainly driven by mortgage loan production.

Insurance losses and loss adjustment expenses for the years ended 1997 and
1996 totalled $97.1 million and $85.9 million, respectively. Loss and loss
adjustment expenses of $8.2 million for 1995 reflect only one-month of activity
due to the timing of White Mountains' acquisition of Valley and Charter.
Insurance losses and loss adjustment expenses reported for the years ended
December 31, 1996 and 1995, included $3.5 million and $3.0 million of reserve
strengthening for losses and loss adjustment expenses incurred in prior periods,
respectively. During 1997, losses and loss adjustment expenses relating to prior
years developed favorably by $2.5 million.

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<PAGE>

During 1996 Fund American re-assessed the recoverability of goodwill and
certain other intangible assets related to Source One and determined that it
should write-off all such assets related to Source One. This resulted in a $32.6
million pretax write-off of goodwill and other intangible assets. Factors
considered in the determination to write-off all Source One's goodwill and other
assets were (i) increased competition and industry consolidation during 1996
which had adversely impacted the value of both the mortgage loan production and
servicing operations of Source One and (ii) the attainment of a definitive
agreement in the fourth quarter of 1996 to sell the majority of Source One's
mortgage servicing portfolio at essentially book value.

Fund American's consolidated affiliates are currently expected to be year
2000 compliant by the third quarter of 1998. Fund American has been identifying,
modifying and testing its internal systems and controls that will be impacted by
the year 2000 issue. Fund American estimates that its total pretax cost of
becoming internally year 2000 compliant, excluding its unconsolidated insurance
affiliates, is approximately $2.5 million of which approximately $1.3 million
has been expensed as of December 31, 1997. These figures do not include the cost
of normal software replacements and upgrades.

29
<PAGE>

Fund American has also been closely monitoring the year 2000 issues of its
third party constituents (e.g. customers, suppliers, reinsurers, creditors,
borrowers...) and of its unconsolidated insurance affiliates. Based on
preliminary determinations, it is not expected that Fund American will be
materially adversely affected by its third party constituents. This
determination has been made as a result of an extensive interview process which
requests that constituents demonstrate an ability to become year 2000 compliant
on a timely basis. For those constituents who are deemed to be unlikely to
remedy their own year 2000 issues in a timely manner, Fund American is in the
process of either replacing that constituent or establishing similar
relationships with new parties. All of Fund American's unconsolidated insurance
affiliates are expected to be internally year 2000 compliant by the fourth
quarter of 1998 and each affiliate is in the process of determining its third
party exposures in a similar manner to that of Fund American. The total cost of
the year 2000 issue for Fund American's unconsolidated insurance affiliates has
not yet been specifically determined, however, Fund American's portion of such
costs are not expected to be material.

Income Taxes

The income tax provision related to pretax earnings for 1997, 1996 and 1995
represents an effective tax rate of 39.4%, 79.3% and 47.3%, respectively. The
primary reason for the increase in Fund American's effective tax rate from 1995
to 1996 was the 1996 write-off of goodwill and certain other intangible assets
related to Source One. The total pretax write-off of these assets was $32.6
million and the related tax benefit was $3.2 million, as no deferred tax
liability was established related to Source One's goodwill. This had the effect
of increasing Fund American's 1996 effective income tax rate from 45.4% to
79.3%.

Fund American has recorded a net deferred Federal income tax liability of
$27.5 million as of December 31, 1997. The deferred tax liability includes a
$79.3 million liability related to net unrealized gains on investment securities
partially offset by $51.8 million in net assets related to various operating
items.

On January 2, 1991, the Company sold Fireman's Fund to Allianz of America,
Inc. The $1.3 billion gain from the sale as reported in 1991 included a $75.0
million tax benefit related to the Company's estimated tax loss from the sale.
Since 1991 the Company has carried an estimated reserve related to tax matters
affecting the amount of the deductible tax loss from the sale and other tax
matters. The conclusion in 1995 of Internal Revenue Service ("IRS") audits of
Fund American's Federal income tax returns for all years through December 31,
1985, resolved certain of the tax matters affecting the amount of the Company's
deductible tax loss from the sale of Fireman's Fund and the Company, therefore,
re-estimated its tax reserve. As a result of the reserve re-estimation, the
Company included in its 1995 income statement an additional $66.0 million income
tax benefit from the sale. The amount of tax benefit from the sale of Fireman's
Fund ultimately realized by the Company may be significantly more or less than
the Company's current estimate due to possible changes in or new interpretations
of tax rules, possible amendments to Fund American's 1991 or prior years'
Federal income tax returns, the results of further IRS audits and other matters
affecting the amount of the deductible tax loss from the sale.

LIQUIDITY AND CAPITAL RESOURCES

Since the sale of Fireman's Fund, Fund American has been gradually
liquidating its portfolio of passive investment securities. Management's primary
strategic goal is to either (i) reinvest Fund American's passive investments,
together with other resources available to Fund American, into operating
businesses in which management has knowledge and experience (if appropriate
opportunities can be found) or (ii) return excess capital to shareholders
through additional repurchases of Shares. Management believes that this strategy
will, over time, further

30
<PAGE>

enhance shareholder value. As is further described below, the formation,
capitalization and ongoing development of White Mountains embodies this
strategy.

31
<PAGE>

Parent Company

The primary sources of cash inflows for the Company are investment income,
sales of investment securities and dividends received from its operating
subsidiaries.

In November 1996 the Company entered into a $35.0 million revolving credit
agreement with a syndicate of banks which served to replace an expiring
arrangement in the amount of $75.0 million. Under the agreement, through
November 25, 1998, the Company and certain of its subsidiaries may borrow up to
$35.0 million at short-term market interest rates. The credit agreement contains
certain customary covenants including a minimum tangible net worth requirement,
a minimum financial asset coverage requirement and a maximum leverage ratio
requirement. At December 31, 1997 and 1996, the Company was in compliance with
all covenants under the facility and had no borrowings outstanding under the
agreement.

During 1993 the Company issued $150.0 million in principal amount of
medium-term notes for net cash proceeds of $148.0 million after related costs.
During 1995 and 1994 the Company repurchased $8.8 million and $24.9 million,
respectively, in principal amount of the notes due in February 2003. At December
31, 1997, the $116.3 million of remaining outstanding notes had an average
maturity of 5.4 years and a yield to maturity of 7.82%.

In July 1995 the Company redeemed the remaining 20,833 shares of the Series
D Preferred Stock outstanding for $75.0 million. The redemption price for the
shares of Series D Preferred Stock redeemed was equal to the stock's liquidation
preference. The annual dividend rate on the Series D Preferred Stock during 1995
was 8.75%.

During 1997, 1996 and 1995 the Company repurchased 924,739 Shares, 779,077
Shares and 877,868 Shares, respectively, for $103.5 million, $66.3 million and
$65.5 million, respectively. All Shares repurchased from 1995 to 1997 have been
retired. The repurchases of Shares represent a return of excess capital to the
Company's shareholders.

In the fourth quarter of 1995 the Board reinstated and paid a $.20 regular
quarterly dividend per Share. During 1997 and 1996 the Company declared and paid
quarterly cash dividends of $.20 per Share and expects to pay regular quarterly
cash dividends of $.40 per Share during 1998.

In connection with Source One's February 28, 1997 sale of approximately
$17.0 billion of mortgage servicing rights to a third party, the Company has
made certain collection, payment and performance guarantees to the buyer for a
period of no more than ten years. The aggregate amount of the Company's guaranty
is initially limited to $20.0 million and is expected to amortize down to $15.0
million.

As approved by shareholders at the 1995 Annual Meeting, the Company entered
into a five year employment contract (the "Agreement") with Mr. Jack Byrne. The
Agreement provided Mr. Byrne with the right to receive from the Company a
guarantee of a loan obtained from a third party, in an amount up to $15.0
million. In accordance with the Agreement, in October 1995 the Company
guaranteed a $15.0 million loan from a third party to Mr. Byrne. The new loan is
recourse to Mr. Byrne's net worth and has a term ending December 31, 1999, a
market interest rate and otherwise standard commercial terms. The Company was
not required to provide collateral protection for its guarantee of the loan and,
accordingly, the loan guarantee is not recorded on the balance sheet.

Pursuant to the terms of a 1993 credit agreement among the Company and
White River, the Company provided White River with a $50.0 million term note
(the "Term Note") and a $40.0 million revolving credit facility (the
"Revolver"). The credit agreement granted White River the right to use certain
of its investment securities to repay these borrowings.

On June 29, 1995, White River repaid $35.1 million in principal amount of
the Revolver with (i) 930,000 shares of the common stock of Mid Ocean and (ii)
options to acquire an additional 388,140 shares of the common stock of Mid Ocean
through November 2002. On July 3, 1995, White River repaid the remaining $4.9
million principal balance of the Revolver and $5.0 million in principal amount
of the Term Note in exchange for certain common equity securities. On

32
<PAGE>

August 31, 1995, White River repaid the remaining $45.0 million principal
balance of the Term Note with 1,525,424 shares of common stock of ZRC.

33
<PAGE>

White Mountains, Valley and Charter

In November 1996 White Mountains and Valley entered into a five year credit
facility under which they may borrow up to $50.0 million and $15.0 million,
respectively, at market interest rates. The $15.0 million of borrowings under
the facility available to Valley are guaranteed by White Mountains. The facility
contains certain customary covenants including a minimum tangible net worth
requirement, a minimum financial asset coverage requirement, a maximum leverage
ratio requirement, a minimum fixed charge coverage ratio requirement and a
minimum policyholders' surplus requirement. The facility also limits White
Mountains' ability to pay dividends to its shareholders. As of December 31, 1997
and 1996, White Mountains and Valley were in compliance with all covenants under
the facility. During 1997 and 1996 Valley had $15.0 million of borrowings
outstanding under the facility with a weighted average interest rate of 6.09%
and 5.83%, respectively. White Mountains had no borrowings outstanding at
December 31, 1997 and 1996 under the facility.

In November 1995 Charter issued two notes totalling $20.2 million. Certain
of the notes were due in 1996 and other notes could be extended to be payable in
three equal installments in 1997, 1998 and 1999. During 1996 Charter elected to
extend the maturity of $3.2 million of notes payable. The notes are
collateralized by certain assets of Charter.

During 1997 the Company reorganized its structure in order to strengthen
Source One and make it a part of Fund American's permanent operating group under
White Mountains. Pursuant to this reorganization plan, White Mountains was
merged into FAE and the combined entity was immediately renamed White Mountains.
In addition, Source One received $139 million of capital infusions, consisting
primarily of Fund American's investments in FSA, in order to improve Source
One's debt ratings and reduce its borrowing costs. As a result of the
reorganization plan, the Company currently owns 3% of the outstanding common
stock of Source One and White Mountains owns the remaining 97% of the
outstanding common stock of Source One.

On November 20, 1997, White Mountains purchased 1,563,907 shares of
Folksamerica Common Stock for $20.8 million and on December 8, 1997 White
Mountains purchased 38,651,270 shares of Murray Lawrence Common Stock for $23.6
million. The purchase prices paid for the Folksamerica Common Stock and the
Murray Lawrence Common Stock was paid with proceeds from sales of passive
investment securities.

On November 1, 1996, Fund American signed a definitive agreement (the "MSA
Agreement") to increase its ownership of MSA from 33% to 50%. MSA currently
shares in 40% of NGM's business through a quota share reinsurance agreement
which will be increased to 60% pursuant to the MSA Agreement. Also pursuant to
the MSA Agreement, NGM will contribute certain of its insurance, reinsurance and
financial services subsidiaries to MSA. The aggregate purchase price to be paid
by Fund American pursuant to the MSA Agreement is approximately $70.1 million,
subject to certain purchase price adjustments. Fund American expects to assign
the additional investment in MSA to White Mountains. White Mountains expects
that the purchase price for the additional MSA investment will be paid with
proceeds from borrowings under White Mountains' $50.0 million revolving credit
facility, and sales of passive investment securities. The closing is dependent
upon the receipt of state regulatory approvals and is expected to occur in the
first quarter of 1998.

Source One

On February 28, 1997, Source One sold the rights to service $17.0 billion
of nonrecourse mortgage loans to a third party for adjusted proceeds of $266.9
million. Source One will

34
<PAGE>

continue to service these loans pursuant to a subservicing agreement until 1999.
The proceeds were used by Source One to reduce and retire debt.

In 1996 Source One sold the rights to service $3.3 billion of mortgage
loans to third parties for net cash proceeds of $55.9 million. The proceeds were
used by Source One for general corporate purposes.

In 1995 Source One sold the rights to service $11.0 billion of mortgage
loans to third parties for net cash proceeds of $199.1 million. The proceeds
were used by Source One to retire debt and to repurchase shares of its common
stock.

In July 1997 Source One amended and restated its secured revolving credit
agreement to reflect a reduction in its borrowing requirements resulting from
the 1997 servicing sale. The provisions of the amended agreement decreased
Source One's revolving credit facility from $750.0 million to $600.0 million and
reduced Source One's borrowing costs by lowering the facility fee. At December
31, 1997, Source One was in compliance with all covenants under the facility. As
of December 31, 1997, Source One had $559.0 million of borrowing outstanding
under this facility. As of December 31, 1996, Source One had no outstanding
borrowings under the previous facility.

In May 1997 Source One entered into a new unsecured revolving credit
agreement under which it can borrow up to $15.0 million through June 1, 1998. As
of December 31, 1997, there was $10.5 million outstanding under the revolving
credit agreement. As of December 31, 1996, Source One had no outstanding
borrowings under a previous facility which allowed for borrowings of up to $10.0
million.

Source One has a $650.0 million domestic commercial paper program. During
1997 Source One's commercial paper rating was downgraded by Moody's to "Not
Prime" and by Standard & Poor's to "A-3". As a result of the 1997 ratings
downgrades, Source One has not issued fresh commercial paper and has supplanted
its commercial paper borrowings with its $600.0 million committed facility. As
of December 31, 1996, there was $347.2 million of commercial paper outstanding.
The weighted average number of days to maturity of commercial paper outstanding
at December 31, 1996 was 23 days.

In 1997 Source One amended a short-term borrowing agreement which it had
entered into in 1996. The amended agreement increased Source One's facility from
$25.0 million to $50.0 million As a result of the 1997 ratings downgrade, Source
One is not able to borrow under this agreement. As of December 31, 1996, there
was $15.0 million outstanding under the original agreement.

In August 1995 Source One entered into a $60.0 million unsecured revolving
credit facility which expired in July 1997. As of December 31, 1996 there was
$45.0 million outstanding under this arrangement.

In 1991 Source One issued $160.0 million of 8.875% medium-term notes due in
2001 of which $138.4 million remained outstanding at December 31, 1996. During
1997 Source One repurchased and retired in principal amount $119.7 million of
these notes leaving $18.7 million outstanding at December 31, 1997.

In 1992 Source One issued $100.0 million of 9% debentures due in 2012
pursuant to a $250.0 million shelf registration statement. The debentures may
not be redeemed by Source One prior to maturity. The proceeds from issuance were
used for general corporate purposes.

In December 1995, Source One exchanged and retired 2,239,061 shares of
preferred stock (the "Source One Preferred Stock") for $56.0 million in
principal amount of 9.375% subordinated debentures. The subordinated debentures
are due in 2025 but are redeemable at the option of Source One, in whole or
part, at any time on or after May 1, 1999. Source One pays quarterly cash
dividends on the Source One Preferred Stock at an annual rate of 8.42%.
Dividends on the Source One Preferred Stock totalled $3.7 million, $3.7 million
and $8.4 million during 1997, 1996 and 1995, respectively.

35
<PAGE>

In 1989 Source One issued $40.0 million of medium-term notes due in 1996
and having a total weighted average interest rate of 9.65%. During 1996 Source
One repurchased and retired the remaining $29.7 million in principal amount
outstanding of these notes.

In 1986 Source One issued $125.0 million of 8.25% debentures due November
1, 1996. During 1996 Source One repurchased and retired the remaining $74.6 in
principal amount outstanding of these debentures.

Source One is currently considering further steps to restructure its debt
including the issuance of approximately $50.0 million of additional medium-term
notes pursuant to an existing shelf registration and entering into interest rate
swaps which would enable Source One to achieve a floating rate of interest on
certain of its fixed interest obligations.

Source One must comply with certain financial covenants provided in its
secured and unsecured revolving credit facilities, including restrictions
relating to tangible net worth and leverage. In addition, the secured facility
contains certain covenants which limit Source One's ability to pay dividends or
make distributions of its capital in excess of preferred stock dividends and
subordinated debt interest requirements each year. Source One is currently in
compliance with all such covenants.

Source One's investments, mortgage loans held for sale and mortgage loan
servicing portfolio provide a liquidity reserve since these assets may be sold
to meet cash needs.

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 Schedule appearing on page 46 of this report.

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

On January 24, 1997, the Company's Board of Directors, upon recommendation
of the Audit Committee, appointed KPMG Peat Marwick LLP as its independent
auditors for the fiscal year ending December 31, 1997, to replace Ernst & Young
LLP ("Ernst & Young") as independent auditors for the Company and Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as independent auditors for Valley,
effective upon the date of their reports on such consolidated financial
statements for the year ended December 31, 1996, contained herein.

In connection with the audits of the two years ended December 31, 1996,
there were no disagreements with Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to their satisfaction, would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.

The Company acquired Valley on December 1, 1995. Coopers & Lybrand served
as the independent auditors of Valley through 1996. The report of Coopers &
Lybrand on the consolidated financial statements of Valley for the year ended
December 31, 1996, has been relied upon in the Ernst & Young report contained
herein. There have been no disagreements with Coopers & Lybrand on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures with respect to Valley.

The Company requested Ernst & Young and Coopers & Lybrand to furnish a
letter addressed to the Commission stating whether it agrees with the above
statements. Copies of those letters, dated March 27, 1997, are contained herein
as Exhibits 16(a) and 16(b).

PART III

Item 10. Directors and Executive Officers

36
<PAGE>

a. Directors (as of March 20, 1998)

Reported under the caption "Election of Directors" on pages 3 through 5 of
the Company's 1998 Proxy Statement, herein incorporated by reference.

37
<PAGE>

b. Executive Officers (as of March 20, 1998)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Executive
officer
Name Position Age since
- -------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Raymond Barrette Executive Vice President and Chief Financial Officer 47 1997
Terry L. Baxter President of White Mountains 52 1994
Reid T. Campbell Vice President and Director of Finance 30 1996
Morgan W. Davis Executive Vice President of White Mountains 47 1994
K. Thomas Kemp President and CEO 57 1991
Michael S. Paquette Senior Vice President and Controller 34 1993
David G. Staples Vice President and Director of Taxation 37 1997
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

All executive officers are elected by the Company's Board of Directors for
a term of one year or until their successors have been elected and have duly
qualified.

Mr. Barrette joined Fund American in November 1997 as the Company's
Executive Vice President and Chief Financial Officer. Mr. Barrette is also
Executive Vice President and Chief Financial Officer of White Mountains. He was
formerly a consultant with Tillinghast-Towers Perrin from 1994 to 1996 and was
President of the Personal Insurance Division of Fireman's Fund from 1991 to
1993. Mr. Barrette is a director of FAE, Source One, White Mountains, MSA and
WMIC.

Mr. Baxter was elected President of White Mountains in February 1997. Mr.
Baxter previously served as Chairman of Source One from May 1996 to February
1997 and as President and Secretary of FAE from 1994 to 1997. Prior to joining
Fund American in 1994, Mr. Baxter was Managing Director of the National
Transportation Safety Board from 1990. Prior to that, he was the Assistant
Director of OMB in the Reagan Administration. Mr. Baxter is a director of FAE,
MSA, Source One, Folksamerica, White Mountains, Valley, Charter, WMIC and
Sextant Underwriting Plc.

Mr. Campbell was elected Vice President and Director of Finance in February
1998 and previously served as Assistant Controller from 1996 to 1998 and
Director of Accounting from 1995 to 1996. Mr. Campbell has been with Fund
American since 1994. Mr. Campbell is also Vice President and Director of Finance
of White Mountains and is a director of WMIC and Merastar Insurance Company and
is an advisory director of Southern Heritage Insurance Company. Prior to joining
Fund American, Mr. Campbell was with KPMG Peat Marwick from 1990 to 1994.

Mr. Davis has served as White Mountains' Executive Vice President since
1997 and served as Senior Vice President since 1994. Mr. Davis is also President
and Chief Executive Officer of WMIC and Chairman and President of VGI. Prior to
joining Fund American in 1994, Mr. Davis was an independent consultant. Mr.
Davis is a director of White Mountains, WMIC, Valley, MSA, Charter and CCC
Information Services Group Inc. and is a trustee of Azusa Pacific University.

38
<PAGE>

Mr. Kemp was appointed President and Chief Executive Officer in October
1997. Mr. Kemp previously served as Executive Vice President since 1993 and as
Vice President, Treasurer and Secretary from 1991 to 1993. Mr. Kemp also serves
as a director of the Company, Chairman and Chief Executive Officer of White
Mountains and Chairman of WMIC. He is also a director of Folksamerica, FSA, FAE,
MSA and Murray Lawrence.

Mr. Paquette was elected Vice President and Chief Accounting Officer in
1993, was appointed Vice President and Controller in February 1995 and became a
Senior Vice President in November 1997. Mr. Paquette is also Senior Vice
President and Controller of White Mountains and WMIC. Mr. Paquette has been a
member of the Fund American organization since 1989. Mr. Paquette is a director
of White Mountains and WMIC.

Mr. Staples was elected Vice President and Director of Taxation in February
1997 and has been with Fund American since 1996. Prior to joining Fund American,
Mr. Staples served as Vice President and Director of Taxation for Crum & Forster
Holdings, Inc. from 1993 to 1996, and was with KPMG Peat Marwick from 1983 to
1993.

39
<PAGE>

Item 11. Executive Compensation

Reported under the captions "Compensation of Executive Officers" on
pages 10 through 14, "Reports of the Compensation Committees on Executive
Compensation" on pages 15 though 18, "Shareholder Return Graph" on page 19,
and "Compensation Plans" on page 20 of the Company's 1998 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 8 through 9 of the Company's 1998 Proxy Statement, herein
incorporated by reference.

Item 13. Certain Relationships and Related Transactions

Reported under the captions "Certain Relationships and Related
Transactions" on page 14 and "Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" on page 21 of the Company's 1998 Proxy
Statement, herein incorporated by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K

a. Documents Filed as Part of the Report

The financial statements and financial statement schedule 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 Schedule appearing on page 46 of this report. A listing of exhibits
filed as part of the report appear on pages 41 and 43 of this report.

b. Reports on Form 8-K

On October 15, 1997, the Company filed a Current Report on Form 8-K
announcing the resignation of its Senior Vice President and Chief Financial
Officer, Allan L. Waters, which was effective on October 8, 1997. Mr. Waters,
who held the position of Chief Financial Officer since 1993, left the Company
for personal reasons.

40
<PAGE>

c. Exhibits

- --------------------------------------------------------------------------------
Exhibit
number Name
- --------------------------------------------------------------------------------

3 (i) -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3(a) of the Company's
1993 Annual Report on Form 10-K)

(ii) -- Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3(b) of the Company's 1993 Annual Report on Form
10-K)

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 to Exhibit (4)
of the Company's Report on Form 8-K dated January 15, 1993)

9 -- Voting Trust Agreement dated September 2, 1994 between the Company,
U S WEST Capital Corporation and First Chicago Trust Company of New
York (filed pursuant to Exhibit 10(f) herein)

10(a) -- Credit Agreement dated November 26, 1996 among the Company, Fund
American Enterprises, Inc., the Lenders (as named therein) and The
First National Bank of Chicago (incorporated by reference to Exhibit
10(e) of the Company's 1996 Annual Report on Form 10-K)

(b) -- Credit Agreement dated November 26, 1996 among White Mountains
Holdings, Inc., the Lenders (as named therein) and The First National
Bank of Chicago (incorporated by reference to Exhibit 10(f) of the
Company's 1996 Annual Report on Form 10-K)

(c) -- Credit Agreement dated November 26, 1996 among VGI, the Lenders (as
named therein) and The First National Bank of Chicago (incorporated by
reference to Exhibit 10(g) of the Company's 1996 Annual Report on Form
10-K)

(d) -- Amended and Restated Credit Agreement dated July 31, 1997 among the
Company, Fund American Enterprises, Inc., the Lenders (as named
therein) and The First National Bank of Chicago (*)

(e) -- Amended and Restated Credit Agreement dated July 30, 1997 among
White Mountains Holdings, Inc., the Lenders (as named therein) and The
First National Bank of Chicago (*)

(f) -- Amended and Restated Credit Agreement dated July 30, 1997 among
VGI, the Lenders (as named therein) and The First National Bank of
Chicago (*)

(g) -- First Amendment dated November 20, 1997 to the Amended and Restated
Credit Agreement dated July 30, 1997 among White Mountains Holdings,
Inc., the Lenders (as named therein) and The First National Bank of
Chicago (*)

(h) -- First Amendment dated November 20, 1997 to the Amended and Restated
Credit Agreement dated July 30, 1997 among VGI, the Lenders (as named
therein) and The First National Bank of Chicago (*)

(i) -- Securities Purchase Agreement dated April 10, 1994 between the
Company, U S WEST, Inc., U S WEST Capital Corporation and Financial
Security Assurance Holdings Ltd. (incorporated by reference to Exhibit
10(a) of the Company's Report on Form 8-K dated April 10, 1994)

(j) -- Stock Purchase Agreement dated August 8, 1995 between the Company,
Skandia U.S. Holding Corporation, and Skandia America Corporation
(incorporated by reference to Exhibit 10(e) of the Company's 1995
Annual Report on Form 10-K)

(k) -- Securities Purchase Agreement dated March 6, 1996 between the
Company and Folksamerica Holding Company, Inc. (incorporated by
reference to Exhibit 10(a) of the Company's Report on Form 8-K dated
June 19, 1996)

41
<PAGE>

(l) -- Subscription Agreement dated November 6, 1997 between Folksamerica
Holding Company, Inc., the Company, White Mountains, Folksam Mutual
General Insurance Company, Folksam International Insurance Co. Ltd,
Weiner Staedtische Allgemeine Versicherung AG, P&V Assurances S.C. and
Samvirke Skadeforsikring AS (*)

(m) -- Guaranty, dated February 28, 1997, by the Company to and for the
benefit of Chemical Mortgage Company (incorporated by reference to
Exhibit 10(y) of the Company's 1996 Annual Report on Form 10-K)

(n) -- Employment Agreement dated February 15, 1995, between the Company
and John J. Byrne incorporated by reference to Appendix II of the
Company's Notice of 1995 Annual Meeting of Shareholders and Proxy
Statement) (**)

(o) -- Common Stock Warrant Agreement with respect to shares of the
Company's Common stock between the Company and John J. Byrne
(incorporated by reference to Exhibit 10(v) of the Company's
Registration Statement on Form S-1 (No. 33-0199)) (**)

(p) -- The Company's Retirement Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10(aa) of the Company's 1992
Annual Report on Form 10-K) (**)

(q) -- The Company's Voluntary Deferred Compensation Plan, as amended on
November 15, 1996 (incorporated by reference to Exhibit 10(o) of the
Company's 1996 Annual Report on Form 10-K) (**)

(r) -- The Company's Deferred Benefit Plan, as amended on November 15,
1996 (incorporated by reference to Exhibit 10(p) of the Company's 1996
Annual Report on Form 10-K) (**)

(s) -- The Company's Long-Term Incentive Plan, as amended February 15,
1995 (incorporated by reference to Appendix I of the Company's Notice
of 1995 Annual Meeting of Shareholders and Proxy Statement) (**)

(t) -- Valley Group Employees' 401(k) Savings Plan (incorporated by
reference to Exhibit 4(c) of the Company's Registration Statement on
Form S-8 (No. 333-30233) (**)

11 -- Statement Re Computation of Per Share Earnings (***)

16(a) -- Letter of Ernst & Young LLP dated March 27, 1997 (incorporated by
reference to Exhibit 16(a) of the Company's 1996 Annual Report on
Form 10-K)

(b) -- Letter of Coopers & Lybrand L.L.P. dated March 27, 1997
(incorporated by reference to Exhibit 16(b) of the Company's 1996
Annual Report on Form 10-K)

21 -- Subsidiaries of the Registrant (*)

23(a) -- Consent of KPMG Peat Marwick LLP dated March 27, 1998 (*)

(b) -- Consent of Ernst & Young LLP dated March 27, 1998 (*)

24 -- Powers of Attorney (*)

27.1 -- 1997 Financial Data Schedule (*)

27.2 -- 1995 and 1996 restated Financial Data Schedules (*)

99(a) -- Report of Coopers & Lybrand L.L.P. dated February 14, 1997
relating to VGI (incorporated by reference to Exhibit 99(a) of the
Company's 1996 Annual Report on Form 10-K)

(b) -- The Consolidated Financial Statements of FSA and the related Report
of Independent Accountants as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 (*)

42
<PAGE>

================================================================================
(*) 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 Schedule

The financial statement schedule 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 Schedule appearing
on page 46 of this report.

43
<PAGE>

SIGNATURES

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

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

Date: March 27, 1998 ----------------------------------------
By: /s/ MICHAEL S. PAQUETTE
Senior Vice President and Controller

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
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
RAYMOND BARRETTE* Executive Vice President and March 27, 1998
- ------------------------------------------------ Chief Financial Officer
Raymond Barrette

JOHN J. BYRNE* Chairman March 27, 1998
- ------------------------------------------------
John J. Byrne

PATRICK M. BYRNE* Director March 27, 1998
- ------------------------------------------------
Patrick M. Byrne

HOWARD L. CLARK* Director March 27, 1998
- ------------------------------------------------
Howard L. Clark

HOWARD L. CLARK, JR.* Director March 27, 1998
- ------------------------------------------------
Howard L. Clark, Jr.

ROBERT P. COCHRAN* Director March 27, 1998
- ------------------------------------------------
Robert P. Cochran

GEORGE J. GILLESPIE, III* Director March 27, 1998
- ------------------------------------------------
George J. Gillespie, III

/s/ K. THOMAS KEMP President, Chief Executive Officer and March 27, 1998
- ------------------------------------------------ Director
K. Thomas Kemp

GORDON S. MACKLIN* Director March 27, 1998
- ------------------------------------------------
Gordon S. Macklin
</TABLE>

44
<PAGE>

<TABLE>
<S> <C> <C>
FRANK A. OLSON* Director March 27, 1998
- ------------------------------------------------
Frank A. Olson

MICHAEL S. PAQUETTE* Senior Vice President and Controller March 27, 1998
- ------------------------------------------------
Michael S. Paquette

ARTHUR ZANKEL* Director March 27, 1998
- ------------------------------------------------
Arthur Zankel

*By: /s/ K. THOMAS KEMP
- -----------------------------------------------------
K. Thomas Kemp, Attorney-in-Fact
</TABLE>

45
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
Index to Financial Statements and Financial Statement Schedule

- --------------------------------------------------------------------------------
Form
10-K
page(s)
- --------------------------------------------------------------------------------

Financial statements:
Consolidated balance sheets as of December 31, 1997 and 1996.......... F-1
Consolidated income statements for each of the years ended
December 31, 1997, 1996 and 1995.................................. F-3
Consolidated statements of shareholders' equity for each of the
years ended December 31, 1997, 1996 and 1995...................... F-5
Consolidated statements of cash flows for each of the years ended
December 31, 1997, 1996 and 1995.................................. F-6
Notes to consolidated financial statements............................ F-7

Other financial information:
Report on management's responsibilities............................... F-42
Independent auditors' reports......................................... F-43
Selected quarterly financial data (unaudited)......................... F-47

Financial statement schedule:
I. Condensed financial information of the Registrant.......... FS-1

================================================================================

All other schedules are omitted as they are not applicable or the
information required is included in the financial statements or notes thereto.

46
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Common equity securities, at fair value (cost $64.7 and $101.1) $ 104.2 $ 160.8
Fixed maturity investments, at fair value (cost $165.4 and $154.5) 168.3 155.4
Other investments (cost $103.1 and $119.7) 167.9 176.5
Short-term investments, at amortized cost (which approximated fair value) 62.8 67.5
---------------------------
Total investments 503.2 560.2
Cash 7.0 4.8
Mortgage loans held for sale 519.3 314.9
Capitalized mortgage servicing, net of accumulated amortization 181.0 410.9
Pool loan purchases 149.8 131.5
Mortgage claims receivable and real estate acquired,
less allowance for mortgage loan losses of $12.8 and $15.4 41.2 57.1
Receivable from sale of mortgage servicing 27.3 --
Insurance premiums receivable 56.1 52.2
Reinsurance recoverable on paid and unpaid losses 9.6 40.0
Investments in unconsolidated insurance affiliates 382.7 226.9
Other assets 155.7 182.1
---------------------------
Total assets $ 2,032.9 $ 1,980.6
===================================================================================================================
Liabilities
Short-term debt $ 571.4 $ 407.9
Long-term debt 304.3 424.2
Unearned insurance premiums 78.0 72.6
Loss and loss adjustment expense reserves 71.9 65.4
Accounts payable and other liabilities 289.7 279.5
---------------------------
Total liabilities 1,315.3 1,249.6
- -------------------------------------------------------------------------------------------------------------------
Minority interest - preferred stock of subsidiary 44.0 44.0
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock - authorized 125,000,000 shares,
issued 31,015,463 and 31,940,202 shares 31.0 31.9
Paid-in surplus 355.9 366.5
Retained earnings 1,008.9 1,067.1
Common stock in treasury, at cost: 25,034,939 shares (871.0) (871.0)
Net unrealized investment gains, after tax 148.8 92.5
---------------------------
Total shareholders' equity 673.6 687.0
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and shareholders' equity $ 2,032.9 $ 1,980.6
===================================================================================================================
</TABLE>

F-1
<PAGE>

See Notes to Consolidated Financial Statements.

F-2
<PAGE>

CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
Millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Gross mortgage servicing revenue $ 95.0 $139.6 $ 141.9
Amortization and impairment of capitalized mortgage servicing (64.2) (71.9) (81.4)
Net gain on financial instruments 11.3 9.9 .8
---------------------------------------
Net mortgage servicing revenue 42.1 77.6 61.3
Net gain on sales of mortgages 21.5 38.3 24.0
Gain (loss) on sales of mortgage servicing rights and assumption
of subservicing (8.0) 10.1 40.0
Other mortgage operations revenue 19.1 18.1 15.6
Earned property and casualty insurance premiums 145.3 109.7 5.8
Earnings from unconsolidated insurance affiliates 21.3 12.0 9.4
Other insurance operations revenue 7.8 9.4 10.8
Net investment income 65.1 57.3 55.4
---------------------------------------
Total revenues 314.2 332.5 222.3
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 101.8 91.3 111.6
General expenses 87.6 87.4 60.3
Interest expense 49.7 50.0 45.8
Insurance losses and loss adjustment expenses 97.1 85.9 8.2
Write-off of goodwill and other intangible assets -- 32.6 --
---------------------------------------
Total expenses 336.2 347.2 225.9
- -------------------------------------------------------------------------------------------------------------------
Pretax operating loss (22.0) (14.7) (3.6)
Net realized investment gains 96.7 38.5 38.8
---------------------------------------
Pretax earnings 74.7 23.8 35.2
Income tax provision 29.4 18.9 16.7
---------------------------------------
After tax earnings 45.3 4.9 18.5
Tax benefit from sale of discontinued operations -- -- 66.0
Loss on early extinguishment of debt, after tax (6.0) -- (.4)
---------------------------------------
Net income 39.3 4.9 84.1
Change in net unrealized investment gains, after tax 56.3 54.6 18.2
---------------------------------------
Comprehensive net income 95.6 59.5 102.3
Dividends on preferred stock -- -- (3.8)
---------------------------------------
Comprehensive net income applicable to common stock $ 95.6 $ 59.5 $ 98.5
- ----------------------------------------------------------------------------=======================================
Basic earnings per share:
After tax earnings $ 6.89 $ .66 $ 1.88
Tax benefit from sale of discontinued operations -- -- 8.47
Loss on early extinguishment of debt, after tax (.91) -- (.05)
---------------------------------------
Net income $ 5.98 $ .66 $ 10.30
=======================================
Comprehensive net income $ 14.55 $ 8.01 $ 12.64
=======================================
</TABLE>

F-3
<PAGE>

<TABLE>
<S> <C> <C> <C>
Diluted earnings per share:
After tax earnings $ 6.22 $ .60 $ 1.71
Tax benefit from sale of discontinued operations -- -- 7.70
Loss on early extinguishment of debt, after tax (.82) -- (.05)
---------------------------------------
Net income $ 5.40 $ .60 $ 9.36
=======================================
Comprehensive net income $ 13.17 $ 7.33 $ 11.48
===================================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Common Net Loan for
stock and Common unrealized common
Preferred paid-in Retained stock in investment stock
Millions Total stock surplus earnings treasury gains issued
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $661.1 $75.0 $371.7 $1,098.2 $(878.5) $ 19.7 $(25.0)
- ---------------------------------------------------------------------------------------------------------------------

Net income 84.1 -- -- 84.1 -- -- --
Dividends to shareholders (4.8) -- -- (4.8) -- -- --
Redemption of preferred stock (75.0) (75.0) -- -- -- -- --
Purchases of common stock retired (65.4) -- (9.7) (55.7) -- -- --
Stock options and warrants exercised 10.3 -- -- 2.8 7.5 -- --
Extension of outstanding stock warrants 46.2 -- 46.2 -- -- -- --
Change in net unrealized investment
gains and losses, after tax 18.2 -- -- -- -- 18.2 --
Repayment of loan for common stock
issued 25.0 -- -- -- -- -- 25.0
- ---------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 699.7 -- 408.2 1,124.6 (871.0) 37.9 --
- ---------------------------------------------------------------------------------------------------------------------

Net income 4.9 -- -- 4.9 -- -- --
Dividends to shareholders (5.9) -- -- (5.9) -- -- --
Purchases of common stock retired (66.3) -- (9.8) (56.5) -- -- --
Change in net unrealized investment
gains and losses, after tax 54.6 -- -- -- -- 54.6 --
- ---------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 687.0 -- 398.4 1,067.1 (871.0) 92.5 --
- ---------------------------------------------------------------------------------------------------------------------

Net income 39.3 -- -- 39.3 -- -- --
Dividends to shareholders (5.3) -- -- (5.3) -- -- --
Purchases of common stock retired (103.7) -- (11.5) (92.2) -- -- --
Change in net unrealized investment
gains and losses, after tax 56.3 -- -- -- -- 56.3 --
- ---------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $673.6 $ -- $386.9 $1,008.9 $(871.0) $148.8 $ --
=====================================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------
Millions 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 39.3 $ 4.9 $ 84.1
Charges (credits) to reconcile net income (loss) to cash flows from
operations:
Undistributed earnings from unconsolidated insurance affiliates (14.7) (8.2) (8.6)
Net realized investment gains (96.7) (38.5) (38.8)
Net unrealized gain on financial instruments (13.3) (1.8) (.8)
Mortgage loan production (4,403.3) (3,831.6) (2,852.0)
Mortgage loan sales and amortization 4,198.9 3,897.7 2,681.5
Loss (gain) on sales of mortgage servicing rights 8.0 (10.1) (40.0)
Increase in unearned insurance premiums 5.4 37.6 2.7
Increase in insurance premiums receivable (3.9) (6.9) (1.3)
(Decrease) increase in deferred insurance policy acquisition costs (1.1) (6.5) .2
Net increase in insurance loss reserves 6.5 21.2 12.3
Depreciation and amortization of servicing assets, goodwill and other 67.1 85.4 86.4
Net change in current and deferred income taxes receivable and payable 4.5 11.8 14.9
Change in other assets 55.9 (29.3) (4.9)
Change in accounts payable and other liabilities 11.1 33.7 35.9
Tax benefit from sale of discontinued operations -- -- (66.0)
Compensation expense resulting from warrant extension -- -- 46.2
Write-off of goodwill and other intangible assets -- 32.6 --
Other, net 23.5 6.1 (5.8)
---------------------------------------
Net cash (used for) provided from operating activities (112.8) 198.1 (54.0)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in short-term investments 4.7 36.1 15.6
Sales of common stocks and other investments 207.9 231.6 208.3
Sales of fixed maturity investments 92.5 131.7 62.1
Purchases of common stocks and other investments (54.8) (85.0) (63.7)
Purchases of fixed maturity investments (102.6) (180.8) (48.8)
Acquisitions of consolidated insurance affiliates -- (13.2) (42.2)
Investments in unconsolidated insurance affiliates (44.4) (107.6) (33.0)
Collections on other mortgage origination and servicing assets 274.2 175.3 210.9
Additions to capitalized mortgage servicing rights (139.5) (88.6) (120.8)
Proceeds from sales of mortgage servicing rights 242.6 11.7 181.1
Additions to other mortgage origination and servicing assets (285.1) (205.7) (172.7)
Net (purchases) sales of fixed assets (2.9) (7.3) .4
---------------------------------------
Net cash provided from (used for) investing activities 192.6 (101.8) 197.2
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net issuances (repayments) of short-term debt 162.4 (36.2) 96.5
Issuances of long-term debt -- 15.0 --
Repayments of long-term debt (131.0) -- (93.7)
Purchases of common stock retired (103.7) (66.3) (65.5)
Cash dividends paid to shareholders (5.3) (5.9) (6.4)
Redemptions of preferred stock -- -- (75.0)
Other -- (.8) 2.1
---------------------------------------
Net cash used for financing activities (77.6) (94.2) (142.0)
- --------------------------------------------------------------------------------------------------------------
Net increase in cash during year 2.2 2.1 1.2
Cash balance at beginning of year 4.8 2.7 1.5
---------------------------------------
Cash balance at end of year $ 7.0 $ 4.8 $ 2.7
==============================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements

F-6
<PAGE>

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
Generally Accepted Accounting Principles ("GAAP"). 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 Fund American. 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 year financial
statements have been restated to conform with the current year presentation.

The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" as of December 31, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components (such as changes in net unrealized investment gains and losses) in a
financial statement that is displayed with the same prominence as other
financial statements. In accordance with the adoption of SFAS No. 130, the
Company now reports comprehensive net income on its income statement. All prior
period income statements have been restated to reflect application of this
statement. Additionally, the Company has provided supplemental comprehensive
earnings per share computations.

Investment securities

Fund American's portfolio of common equity securities, fixed maturity
investments and other investments are mainly classified as available for sale
and are reported at fair value as of the balance sheet date. Net unrealized
investment gains and losses, after tax, associated with such investments are
reported as a net amount in a separate component of shareholders' equity.
Changes in net unrealized investment gains and losses, after tax, are reported
on the income statement as a component of comprehensive net income.

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

Other investments include: non-redeemable preferred and common equity
securities having no established public market value and carried at internally
appraised fair value; securities which, due to restrictions regarding resale,
are carried at a discount to the quoted market value for similar unrestricted
securities; investment partnership interests accounted for using the equity
method or otherwise; mortgage loans held for investment; REMICs; interest rate
floor contracts; and principal-only swap agreements. Mortgage loans held for
investment are stated at the lower of cost or fair value, determined on an
individual loan basis. REMICs are classified as held to maturity and are carried
at amortized cost using a method which approximates the effective yield method
of amortization. Interest rate floor contracts and principal-only swap
agreements are classified as trading securities and are carried at fair value
with realized and unrealized gains and losses reported in net gain on financial
instruments.

Realized gains and losses resulting from sales of investment securities or
from other than temporary impairments of value are accounted for using the
specific identification method.

Short-term investments consist primarily of money market instruments and
mortgage-backed securities with remaining maturities of up to one year. Money
market instruments are carried at amortized cost which approximated fair
value as of December 31, 1997 and 1996. Short-term mortgage-

F-7
<PAGE>

backed securities are classified as trading securities and are stated at fair
value with unrealized gains and losses, if any, reported in income.

Fund American's consolidated insurance operations are required to maintain
deposits with insurance regulators of certain states in order to maintain their
insurance licenses. The total fair value of such deposits totalled $11.3 million
and $10.7 million as of December 31, 1997 and 1996, respectively.

Insurance operations

Premiums are taken into income as earned on a daily pro rata basis over the
terms of the policies. Unearned premiums represent the portion of premiums
applicable to future insurance coverage provided by policies in force. As of
December 31, 1997, White Mountains' insurance subsidiaries insured commercial
and personal property and casualty risks in Arizona, California, Idaho, New
Hampshire, Massachusetts, Oregon, Texas, Utah, Vermont and Washington.

Policy acquisition costs include commissions, premium taxes and other costs
that vary with and are primarily related to the acquisition of new and renewal
insurance policies. Policy acquisition costs are deferred and amortized over the
terms of the applicable policies. Deferred acquisition costs are reviewed to
determine if they are recoverable from future income, and if not, are charged to
expense.

In the normal course of business, White Mountains' insurance subsidiaries
seek to limit losses that may arise from catastrophes or other events that may
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers. White
Mountains' insurance subsidiaries remain contingently liable for risks reinsured
with third parties to the extent that the reinsurer is unable to honor its
obligations under reinsurance contracts at the time of loss.

Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. 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 have been reported as a reduction of premiums
written. Amounts applicable to reinsurance ceded for unearned premium reserves,
and loss and loss adjustment expense reserves, (e.g., prepaid reinsurance
premiums and reinsurance recoverable on unpaid losses, respectively) are not
material and 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.

Mortgage origination and servicing

Fund American acquired Source One in 1986. The purchase price paid for
Source One in 1986 was in excess of the estimated fair value of the net assets
acquired on that date and was

F-8
<PAGE>

allocated to goodwill. Prior to December 1996 Source One's goodwill was being
amortized over 20 years. During 1996 Fund American re-assessed the
recoverability of goodwill and certain other intangible assets related to Source
One and determined that it should write-off all such assets related to Source
One. This resulted in a $32.6 million pretax write-off of goodwill and other
intangible assets. Factors considered in the determination to write-off all
Source One's goodwill and other assets were (i) increased competition and
industry consolidation during 1996 which had adversely impacted the value of
both the mortgage loan production and servicing operations of Source One and
(ii) the attainment of a definitive agreement in the fourth quarter of 1996 to
sell the majority of Source One's mortgage servicing portfolio at essentially
book value.

Mortgage loans held for sale are stated at the lower of aggregate cost or
fair value, including the fair value of commitments to originate and sell
mortgage loans. Conventional mortgage loans are placed on a non-accrual basis
when delinquent 90 days or more as to interest or principal. Interest on
delinquent FHA insured loans is accrued at the insured rate beginning on the
sixty-first day of delinquency. Interest on delinquent VA guaranteed loans is
accrued at the loan rate during the period of delinquency.

Gains and losses from sales of mortgage loans are recognized when the
proceeds are received. Loan origination fees, net of certain direct costs, are
deferred and recognized as income when the related mortgage loans are sold.
Discounts from the origination of mortgage loans held for sale are deferred and
recognized as adjustments to gains or losses on sales.

Capitalized mortgage servicing includes certain costs incurred in the
origination and acquisition of mortgage servicing rights which are deferred and
amortized over the expected life of the loan. The total cost of acquiring
mortgage loans, either through origination activities or purchase transactions,
is allocated between the mortgage servicing rights and the loans based on their
relative fair values. The fair values of mortgage servicing rights are estimated
by calculating the present value of the expected future net cash flows
associated with such rights, incorporating assumptions that market participants
would use in their estimates of future servicing income and expense. A current
market rate is used to discount estimated future cash flows. Impairment of
capitalized mortgage servicing rights is measured on a disaggregated basis by
stratifying the mortgage servicing rights based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each individual stratum. The valuation allowance for
Source One's principal recourse portfolio includes a reserve for estimated
losses on the corresponding loans.

Pool loan purchases, which are carried at cost, represent FHA insured,
VA guaranteed and conventional loans which were either delinquent or in the
process of foreclosure at the time they were purchased from GNMA, FNMA or
FHLMC mortgage-backed security pools which Source One services. Interest is
accrued on these purchased loans at a rate based on expected recoveries.

Mortgage claims receivable represent claims filed primarily with FHA and
VA. These receivables are carried at cost less an estimated allowance for
amounts that are not fully recoverable from the claims filed with the underlying
mortgage insuring agencies.

Real estate acquired is stated at the lower of fair value less estimated
selling costs or the recorded balance satisfied at the date of acquisition, as
determined on an individual property basis. Costs related to maintaining the
properties are charged to expense as incurred.

Mortgage servicing revenue represents fees earned for servicing real estate
mortgage loans owned by investors and late charge income. The servicing fees are
calculated based on the outstanding principal balances of the loans serviced and
are recognized together with late charge income when received.

Earnings per share

The Company adopted the provisions of SFAS No. 128, "Earnings Per Share" in
December 1997. SFAS No. 128 simplified the computation of earnings per share and
is intended to make

F-9
<PAGE>

the U.S. standard more compatible with existing international standards. The
adoption of SFAS No. 128 did not materially change the method by which the
Company computes its earnings per share but replaces the Company's historic
presentation of "primary earnings per share" and "fully diluted earnings per
share" with a presentation of "basic earnings per share" and "diluted earnings
per share".

Basic earnings per share amounts are based on the weighted average number
of Shares outstanding. In the basic earnings per share calculation, net income
is reduced by preferred stock dividends to arrive at earnings applicable to
common stock.

Diluted earnings per share amounts are based on the weighted average number
of Shares and potential dilutive Shares outstanding. Potential dilutive Shares
include stock options, warrants and preferred stock redeemable for Shares. In
the diluted earnings per share calculation, net income is reduced by preferred
stock dividends when the assumed redemption of preferred stock is anti-dilutive.

The following table outlines the Company's computation of earnings per
share for the years ended December 31, 1997, 1996 and 1995:

F-10
<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Basic earnings per share numerators (in millions):
After tax earnings $45.3 $ 4.9 $18.5
Dividends on preferred stock -- -- (3.8)
----------------------
After tax earnings applicable to common stock 45.3 4.9 14.7
Tax benefit from sale of discontinued operations -- -- 66.0
Loss on early extinguishment of debt, after tax (6.0) -- (.4)
----------------------
Net income available applicable to common stock $39.3 $ 4.9 $80.3
======================
Comprehensive net income applicable to common stock $95.6 $59.5 $98.5
- ----------------------------------------------------------------------------------=======================

Diluted earnings per share numerators (in million):
After tax earnings applicable to common stock $45.3 $ 4.9 $14.7
After tax dilution to earnings from unconsolidated insurance affiliates (.2) -- --
----------------------
Diluted after tax earnings available applicable to common stock 45.1 4.9 14.7
Tax benefit from sale of discontinued operations -- -- 66.0
Loss on early extinguishment of debt, after tax (6.0) -- (.4)
----------------------
Diluted net income available applicable to common stock $39.1 $ 4.9 $80.3
======================
Diluted comprehensive net income applicable to common stock $95.4 $59.5 $98.5
- ----------------------------------------------------------------------------------=======================

Earnings per share denominators (in thousands):
Basic earnings per share numerator (average common shares outstanding) 6,570 7,429 7,794
Dilutive stock options and warrants to acquire common stock (a) 674 681 788
----------------------
Diluted earnings per share denominator 7,244 8,110 8,582
- ----------------------------------------------------------------------------------=======================

Basic earnings per share (in dollars):
After tax earnings $6.89 $ .66 $1.88
Tax benefit from sale of discontinued operations -- -- 8.47
Loss on early extinguishment of debt, after tax (.91) -- (.05)
----------------------
Net income applicable to common stock $5.98 $ .66 $10.30
======================
Comprehensive net income $14.55 $8.01 $12.64
- ----------------------------------------------------------------------------------=======================

Diluted earnings per share (in dollars):
After tax earnings $6.22 $ .60 $1.71
Tax benefit from sale of discontinued operations -- -- 7.70
Loss on early extinguishment of debt, after tax (.82) -- (.05)
----------------------
Net income applicable to common stock and assumed conversions $5.40 $ .60 $9.36
======================
Comprehensive net income $13.17 $7.33 $11.48
=========================================================================================================
</TABLE>

(a) See Note 11 for detailed information concerning the Company's outstanding
dilutive stock options and warrants to acquire common stock.

Future application of accounting standards

In December 1996 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125" which has further deferred the adoption of certain other
provisions of SFAS No. 125 to periods beginning

F-11
<PAGE>

after December 31, 1997. Fund American does not expect that the adoption of SFAS
No. 127 will have a material effect on its financial position or results of
operations.

In December 1997 the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") 97-3 "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments", which provides
guidance for determining when an insurance or other enterprise should recognize
a liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. The statement becomes effective in 1999
and allows for early application. Fund American does not expect the adoption of
this statement to have a material effect on its financial position or results of
operation.

In March 1998 the AICPA issued SOP 98-1 "Accounting for Internal Use
Software", which provides guidance for determining when internal use software
costs (whether acquired or internally developed) are expensed as incurred or
capitalized. The statement becomes effective in 1999 and allows for early
application. Fund American does not expect the adoption of this statement to
have a material effect on its financial position or results of operation.

NOTE 2. Insurance Operations

Consolidated insurance operations recently acquired and formed

On December 1, 1995, White Mountains acquired Valley and Charter for $41.7
million in cash less $3.0 million of purchase price adjustments. The purchase
price for Valley and Charter was paid with proceeds from sales of short-term
investments. Valley's wholly-owned subsidiary, VIC, is a Northwest-based
property and casualty company which writes personal and commercial lines through
independent agents. In 1997 and 1996, VIC had $77.7 million and $75.1 million of
net written premiums, respectively, primarily in Oregon, Washington and
California. Charter wrote $62.9 million and $69.9 million of non-standard
automobile insurance premiums in Texas during 1997 and 1996, respectively. The
purchase price paid for Valley and Charter was $.9 million less than the
aggregate book value and estimated fair value of the net assets of the companies
on the date of acquisition. The resulting negative goodwill is being amortized
to income on a straight-line basis over five years.

WMIC is currently licensed to write insurance in Maine, New Hampshire,
Vermont, Massachusetts and New York and is expected to expand its operations to
other states as additional regulatory approvals are obtained. WMIC had gross
written premiums during 1997 and 1996 of $5.2 million and $2.4 million ($4.7
million and $2.0 million of net written premiums), respectively. At December 31,
1997, WMIC had $31.4 million of total admitted assets and $29.1 million of
policyholders' surplus. WMIC is a wholly-owned subsidiary of VIC.

On January 19, 1996, VIC purchased Valley National for $13.2 million, net
of cash balances acquired. Valley National is licensed to write property and
casualty insurance in 48 states. Assets acquired pursuant to the Valley National
acquisition included an investment portfolio, consisting principally of fixed
maturity investments, totalling $6.7 million. Valley National wrote its first
policies in December 1996 and had $2.7 million in gross written premiums ($.3
million of net written premiums) during 1997. Valley National is expected to
further expand its operations to certain other states in which it is currently
licensed. The purchase price paid for Valley National exceeded the fair value of
the tangible assets received. The excess purchase price of $6.4 million is being
amortized over a five year period. Valley National is a wholly-owned subsidiary
of VIC.

On December 5, 1996, Valley's parent company formed Valley P&C to
specifically write property and casualty insurance within Oregon. Valley P&C
wrote its first policies in February

F-12
<PAGE>

1997 and had $5.2 million in net written premiums during 1997. At December 31,
1997, Valley P&C had $7.7 million of total admitted assets and $3.7 million of
policyholders' surplus.

F-13
<PAGE>

Loss and loss adjustment expense reserve activity

The following table summarizes Valley, Charter and WMIC's loss and loss
adjustment expense reserve activity for the years ended December 31, 1997 and
1996:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Millions Year Ended December 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Beginning balance $ 65.4 $ 44.1 $ --
Reserves acquired through the purchase of Valley and Charter -- -- 39.9
Losses and loss adjustment expenses incurred relating to:
Current year losses 99.6 82.4 5.2
Prior year losses (2.5) 3.5 3.0
Loss and loss adjustment expenses paid relating to:
Current year losses (58.7) (47.8) (4.0)
Prior year losses (30.0) (18.5) --
Changes in reinsurance and other (1.9) 1.7 --
----------------------------
Ending balance $ 71.9 $ 65.4 $ 44.1
===============================================================================================
</TABLE>

Additional insurance operations information

Total policyholders' surplus of Valley, Charter and WMIC, as reported to
various regulatory authorities, as of December 31, 1997 and 1996, was $93.8
million and $81.4 million, respectively. Statutory net income for the year ended
December 31, 1997 for Valley, Charter and WMIC totalled $11.0 million. For the
year ended December 31, 1996 and the one-month period ended December 31, 1995,
Valley, Charter and WMIC had a statutory net loss of $6.4 million and $2.3
million, respectively. The principal differences between Valley, Charter and
WMIC's statutory amounts and the amounts reported in accordance with GAAP are
not material and include deferred taxes, surplus debentures and deferred
acquisition costs. Valley, Charter and WMIC's statutory policyholders' surplus
at December 31, 1997 and 1996, was in excess of the minimum requirements of
relevant state insurance regulations.

Under the insurance laws of the various states under which Valley, Charter
and WMIC are incorporated or licensed to write business, an insurer is
restricted with respect to the amount of dividends it may pay without prior
approval by state regulatory authorities. Accordingly, there is no assurance
that dividends may be paid by Valley, Charter and WMIC in the future. At
December 31, 1997 and 1996, $87.9 million and $75.6 million, respectively, of
Valley, Charter and WMIC's statutory surplus was unavailable for the payment of
dividends to its shareholders without prior approval of regulatory authorities.

NOTE 3. Tax Benefit From Sale of Subsidiary

The conclusion in 1995 of IRS audits of Fund American's Federal income tax
returns for all years through December 31, 1985, resolved certain of the tax
matters affecting the amount of

F-14
<PAGE>

the Company's deductible tax loss from the sale of Fireman's Fund and the
Company, therefore, re-estimated its tax reserve. As a result of the reserve
re-estimation, the Company included in its 1995 income statement an additional
$66.0 million income tax benefit from the sale.

The amount of tax benefit from the sale of Fireman's Fund ultimately
realized by the Company may be significantly more or less than the Company's
current estimate due to possible changes in or new interpretations of tax rules,
possible amendments to Fund American's 1991 or prior years' Federal income tax
returns, the results of further IRS audits and other matters affecting the
amount of the deductible tax loss from the sale.

NOTE 4. Investment Securities

- --------------------------------------------------------------------------------
Year Ended December 31,
Millions 1997 1996 1995
- -------------------------------------------------------------------------------
Investment income:
Mortgage loans held for sale $43.1 $39.3 $35.9
Fixed maturity investments 11.3 10.4 9.0
Common equity securities 7.3 4.3 2.5
Short-term investments 3.9 6.6 6.6
Other -- (2.3) 1.7
------------------------------
Total investment income 65.6 58.3 55.7
Less investment expenses and other charges (.5) (1.0) (.3)
------------------------------
Net investment income, before tax $65.1 $57.3 $55.4
===============================================================================

Total net investment gains, before tax, associated with Fund American's
investment portfolio consisted of the following:

- -------------------------------------------------------------------------------
Year Ended December 31,
Millions 1997 1996 1995
- -------------------------------------------------------------------------------
Gross realized investment gains $ 98.6 $ 43.3 $46.3
Gross realized investment losses (1.9) (4.8) (7.5)
------------------------------
Net realized investment gains 96.7 38.5 38.8
Net unrealized investment (losses) gains (a) (10.1) 68.0 20.0
------------------------------
Total net investment gains, before tax $ 86.6 $106.5 $58.8
===============================================================================

(a) Excludes net unrealized investment gains and losses recorded from Fund
American's investments in unconsolidated insurance affiliates.

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

F-15
<PAGE>

- -------------------------------------------------------------------------------
December 31,
Millions 1997 1996
- -------------------------------------------------------------------------------
Investment securities:
Gross unrealized investment gains $112.1 $121.0
Gross unrealized investment losses (2.0) (.8)
--------------------
Net unrealized gains from investment securities 110.1 120.2
Net unrealized gains from investments in
unconsolidated insurance affiliates 118.8 22.1
--------------------
Total net unrealized investment gains, before tax $228.9 $142.3
===============================================================================

F-16
<PAGE>

The cost or amortized cost, gross unrealized investment gains and losses,
and carrying values of Fund American's fixed maturity investments as of December
31, 1997 and 1996, were as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997
-----------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U S WEST, Inc. redeemable preferred stock $ 49.4 $ -- $ -- $ 49.4
Municipal obligations 33.3 .6 -- 33.9
Debt securities issued by industrial corporations 32.4 1.0 (.7) 32.7
U. S. Government and agency obligations 32.3 .9 -- 33.2
GNMA Mortgage-backed securities 15.4 1.0 -- 16.4
Aggregate of holdings less than $10 million 2.6 .1 -- 2.7
-----------------------------------------------------------
Total fixed maturity investments $165.4 $3.6 $ (.7) $168.3
===================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996
-----------------------------------------------------------
Cost or Gross Gross
amortized unrealized unrealized Carrying
Millions cost gains losses value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Government and agency obligations $ 63.6 $ .8 $ (.1) $ 64.3
U S WEST, Inc. redeemable preferred stock 49.1 -- -- 49.1
Debt securities issued by industrial corporations 31.3 .3 (.1) 31.5
GNMA Mortgage-backed securities 9.1 -- -- 9.1
Aggregate of holdings less than $10 million 1.4 -- -- 1.4
-----------------------------------------------------------
Total fixed maturity investments $154.5 $1.1 $(.2) $155.4
===================================================================================================================
</TABLE>

The cost or amortized cost and carrying value of Fund American's fixed
maturity investments at December 31, 1997 and 1996, are presented below by
contractual maturity. Actual maturities could differ from contractual maturities
because borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.

Sales of investments, excluding short-term investments, totalled $300.4
million, $363.3 million and $270.4 million for the years ended December 31,
1997, 1996 and 1995, respectively. Non-cash exchanges of investment securities
totalling $2.3 million and $90.4 million during 1996

F-17
<PAGE>

and 1995, respectively, are not reflected in the Consolidated Statements of Cash
Flows. There were no non-cash exchanges of investment securities during 1997.

Fund American adopted the provisions of SFAS No. 130 during 1997 and now
reports the change in net unrealized investment gains, after tax, on its income
statement to arrive at comprehensive net income. All prior period income
statements have been restated to reflect application of this statement. The
components of the change in net unrealized investment gains, after tax, are as
follows:

Net unrealized investment gains arising during the year, after tax (a) 119.2 79.6 43.4
Net unrealized gains reclassed to realized gains for investments sold (62.9) (25.0) (25.2)
---------------------------------------
Change in net unrealized investment gains, after tax $ 56.3 $54.6 $18.2
===================================================================================================================
</TABLE>
(a) Net of income tax expense of $64.2 million, $42.9 million and $23.4
million for the years ended December 31, 1997, 1996 and 1995, respectively.

NOTE 5. Capitalized Mortgage Servicing

Source One estimates the fair values of its mortgage servicing rights by
calculating the present value of the expected future net cash flows associated
with such rights. In making those estimates, Source One incorporates assumptions
that market participants would use in their estimates of future servicing income
and expense.

To measure impairment of capitalized mortgage servicing rights, Source One
stratifies its owned mortgage loan servicing portfolio based on the portfolio's
predominant risk characteristics which have been determined to be prepayment,
default and operational risks. Accordingly, Source One has stratified its owned
mortgage loan servicing portfolio by interest rate, loan type (investor),
original term to maturity and principal recourse. In estimating the fair value
of its owned mortgage loan servicing portfolio, Source One uses market consensus
prepayment rates and discounts future net cash flows using representative market
interest rates which were 10.5% for conventional loans, 12.0% for insured loans,
and for 1997 and 1996, 21.0% for recourse loans. The fair value of each stratum
is computed and compared to its recorded book value to determine if an
impairment valuation allowance, or recovery of a previously established
valuation allowance, is required. In 1996, as a result of the contracted sale of
$17.0 billion of nonrecourse mortgage servicing rights, Source One valued the
portfolio to be sold as one stratum using the contract price.

After the 1997 servicing sale, Source One's recourse portfolio became a
more significant component of its total remaining owned servicing portfolio.
Included in Source One's calculation for measuring impairment of its capitalized
servicing asset is an $8.2 million and $7.3 million pretax reserve for estimated
recourse losses on the corresponding loans in determining the fair value of its
principal recourse portfolio as of December 31, 1997 and 1996, respectively.

The discount rate and prepayment assumptions are significant factors used
in estimating the fair value of Source One's mortgage servicing rights.
Accordingly, the value of mortgage servicing rights can be significantly
impacted by changes in interest rates.

Source One adopted certain provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
in the 1997 first quarter. SFAS

F-18
<PAGE>

No. 125 served to eliminate the distinction between "normal" servicing rights
and excess servicing receivables. Source One estimated the fair value of its
portfolio during 1997 in accordance with SFAS No. 125 which did not materially
effect Source One's 1997 results.

Prior to the adoption of SFAS No. 125, Source One estimated the fair value
of its capitalized excess servicing asset by discounting the anticipated future
cash flows over the estimated life of the related loans. Source One uses
"interest only strip" interest rates to determine the appropriate discount rates
and prepayment speed assumption rates that are based on interest rates, loan
types (investor) and original term to maturity. The discount rate used to
capitalize excess servicing for the year ended December 31, 1996, ranged from
12.0% to 12.6% and was 12.0% for the year ended December 31, 1995. For the years
ended December 31, 1996 and 1995, the weighted average discount rates inherent
in the carrying amount of the capitalized excess servicing asset were 10.4% and
10.0%, respectively.

The following table summarizes the fair value of mortgage servicing rights
and certain characteristics of Source One's servicing portfolio related to such
mortgage servicing rights by loan type as of December 31, 1997:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fair value Principal Weighted Weighted Weighted
of mortgage balance average average average
servicing rights serviced (a) interest maturity service
(millions) (millions) rate (months) fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan Type:
Insured $ 102.2 $ 5,314 8.85% 291 .46%
Conventional 44.9 2,515 8.13 273 .39
Recourse 28.7 2,413 8.60 205 .49
Adjustable 12.4 418 7.09 326 .53
--------------------------------
Total servicing portfolio $188.2 $10,660 8.56% 269 .46%
===================================================================================================================
</TABLE>

(a) Excludes $773 million of principal balance of mortgage servicing rights not
capitalized prior to the adoption of an accounting standard implemented by
Source One as of January 1, 1995.

The following table summarizes changes in Source One's capitalized
servicing asset:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Deferred
gain on Total
Mortgage Valuation sale of capitalized
Millions servicing allowance Subservicing servicing servicing
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $ 547.7 $ -- $ -- $ (17.2) $ 530.5
Additions 102.8 -- -- -- 102.8
Scheduled amortization (52.8) -- -- -- (52.8)
Impairment/unscheduled amortization (.5) (28.0) -- -- (28.5)
Amortization of deferred gain -- -- -- 4.2 4.2
Sales (159.1) -- -- -- (159.1)
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 438.1 (28.0) -- (13.0) 397.1
Additions 125.5 -- -- -- 125.5
</TABLE>

F-19
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C>
Scheduled amortization (69.9) -- -- -- (69.9)
Impairment/unscheduled amortization (1.1) (.9) -- -- (2.0)
Amortization of deferred gain -- -- -- 6.1 6.1
Sales (45.9) -- -- -- (45.9)
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 446.7 (28.9) -- (6.9) 410.9
Additions 90.4 (1.2) -- -- 89.2
Scheduled amortization (37.5) -- (8.9) -- (46.4)
Impairment/unscheduled amortization -- (17.3) (.5) -- (17.8)
Amortization of deferred gain -- -- -- 6.9 6.9
Sales (273.7) 2.3 9.6 -- (261.8)
- -------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 225.9 $ (45.1) $ .2 $ -- $ 181.0
===================================================================================================================
</TABLE>

F-20
<PAGE>

During 1997 Source One sold the rights to service $17.0 billion of
nonrecourse mortgage loans for adjusted proceeds of $266.9 million, resulting in
a pretax loss of $4.3 million. As part of the servicing sale, Source One
retained the right to subservice these loans until 1998. Source One recorded an
additional pretax loss of $3.7 million during 1997 in connection with the
extension of its subservicing responsibilities for these loans for one
additional year at less favorable terms than the original agreement provided.
The subservicing asset associated with Source One's subservicing
responsibilities is being amortized on a straight-line basis over the
subservicing period and is tested for impairment. During 1996 Source One sold
the rights to service $3.3 billion of mortgage loans for net proceeds of $55.9
million, resulting in a pretax gain of $10.1 million. During 1995 Source One
sold the rights to service $11.0 billion of mortgage loans for net proceeds of
$199.1 million, resulting in a pretax gain of $40.0 million.

During 1994 Source One sold the rights to service $3.9 billion of mortgage
loans to a third party and retained the rights to subservice those loans
pursuant to a subservicing agreement. In connection with the servicing sale, a
pretax gain of $19.9 million was deferred in 1994 and was to be recognized as
income over the five-year life of the subservicing agreement. In 1996, the third
party sold the rights to service approximately $1.0 billion of these loans
subserviced by Source One which resulted in Source One recognizing $2.4 million
of the deferred gain on an accelerated basis. In 1997, the third party sold the
remainder of the loans subserviced by Source One which resulted in Source One
recognizing the remaining balance of the deferred gain during 1997.

NOTE 6. Mortgage Servicing

Source One services loans throughout the United States. Source One's
portfolio of mortgage loans serviced (including loans subserviced, interim
servicing contracts and portfolios under contract to acquire but excluding loans
sold but not transferred) totalled $26.5 billion and $29.2 billion as of
December 31, 1997 and 1996, respectively. The following table summarizes the
mortgage loan servicing portfolio as of December 31, 1997:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Weighted average
--------------------------------------------------------------
Principal Remaining
balance Loan Net contractual
serviced balance Interest servicing fee life
Loan type (millions) (thousands) rate rate (months)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
Conventional $ 5,521 $ 68 8.37% .424% 240
FHA 3,916 57 8.80 .427 297
VA 2,124 62 8.42 .403 298
Commercial 66 889 7.45 .176 163
-------------
Owned servicing portfolio $11,627 $ 63 8.52% .420% 269
Subservicing portfolio 14,919
-------------
Total mortgage servicing portfolio $26,546 $ 61 8.45% n/m 249
===================================================================================================================
n/m - not meaningful
</TABLE>

The servicing fee rates in the preceding table are shown after deducting
applicable guarantee fees. Guarantee fees, when applicable, range from 6 basis
points for governmental loans to approximately 30 basis points for certain
conventional loans. Certain loans sold to private investors have no guarantee
fees.

The following tables summarize Source One's owned mortgage loan servicing
portfolio by interest rate range and by location of property:

F-21
<PAGE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------------------------- -------------------------------------------
Aggregate Weighted Aggregate Weighted
Number principal average Number principal average
Interest rate of balance interest of balance interest
range loans (millions) rate loans (millions) rate
- --------------------- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5.99% and lower 843 $ 66 5.41% 1,239 $ 87 5.50%
6.00% - 6.49% 1,823 159 6.13 5,449 288 6.22
6.50% - 6.99% 4,166 319 6.66 15,369 1,111 6.68
7.00% - 7.49% 12,968 729 7.17 42,363 2,395 7.11
7.50% - 7.99% 29,240 2,455 7.63 58,622 4,104 7.60
8.00% - 8.49% 27,989 2,280 8.13 60,852 4,337 8.10
8.50% - 8.99% 32,178 1,867 8.59 77,061 4,047 8.58
9.00% - 9.49% 13,452 722 9.07 37,714 2,052 9.06
9.50% - 9.99% 29,142 1,420 9.55 69,548 3,618 9.57
10% and above 32,488 1,610 10.49 83,585 4,371 10.49
------------------------------------------- -------------------------------------------
Total 184,289 $11,627 8.52% 451,802 $26,410 8.59%
===================================================================================================================

<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------------------------- -------------------------------------------
Aggregate Aggregate
Number principal Percentage Number principal Percentage
of balance of servicing of balance of servicing
State loans (millions) portfolio loans (millions) portfolio
- --------------------- ------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 20,459 $ 1,889 16.3% 60,547 $ 4,955 18.7%
New York 22,118 1,162 10.0 42,195 2,441 9.2
Texas 15,655 736 6.3 29,851 1,513 5.7
Washington 7,889 690 5.9 23,048 1,692 6.4
Florida 12,894 663 5.7 28,361 1,408 5.3
Michigan 10,773 520 4.5 25,553 1,019 3.9
New Jersey 7,088 503 4.3 13,689 895 3.4
Illinois 6,335 420 3.6 16,704 1,036 3.9
Maryland 5,020 362 3.1 8,966 534 2.0
Ohio 6,658 357 3.1 15,772 656 2.5
Other 69,400 4,325 37.2 187,116 10,261 39.0
------------------------------------------ --------------------------------------------
Total 184,289 $11,627 100.0% 451,802 $26,410 100.0%
===================================================================================================================
</TABLE>

Escrow funds of approximately $196.8 million, $207.8 million and $236.0
million as of December 31, 1997, 1996 and 1995, respectively, relating to
mortgages serviced and subserviced, were held in non-interest bearing accounts
at non-affiliated banks and are not included in the consolidated financial
statements.

F-22
<PAGE>

NOTE 7. Mortgage Loans Held For Sale and Pool Loan Purchases

The following tables summarize Source One's mortgage loans held for sale
and pool loan purchases:

- ------------------------------------------------------------------------------
December 31,
Millions 1997 1996
- ------------------------------------------------------------------------------
Adjustable rate mortgage loans, weighted average
interest rates of 6.36% and 6.60% $ 51.6 $ 35.1
Fixed rate 5 year through 25 year mortgage loans,
weighted average interest rates of 7.68% and 7.73% 60.4 51.2
Fixed rate 30 year mortgage loans, weighted average
interest rates of 7.76% and 8.19% 405.0 228.0
---------------------
Total principal amount 517.0 314.3
Net premiums 2.3 .6
---------------------
Total mortgage loans held for sale $519.3 $314.9
==============================================================================

- --------------------------------------------------------------------------------
December 31,
---------------------------------------------
Principal balance Number of loans
--------------------- --------------------
Dollars in Millions 1997 1996 1997 1996
- -------------------------------------------------------- --------------------
Loan type: FHA $103.1 $ 89.9 1,781 1,621
VA 43.3 35.3 669 592
Conventional 3.4 6.3 45 75
--------------------- --------------------
Total pool loan purchases $149.8 $131.5 2,495 2,288
================================================================================

NOTE 8. Debt

Short-term debt

Short-term debt outstanding consisted of the following:

- -------------------------------------------------------------------------------
December 31,
Millions 1997 1996
- -------------------------------------------------------------------------------
Charter: Notes payable and lease obligations $ 2.0 $ 1.7
-------------------------
Source One:
Credit agreement borrowings 569.5 45.0
Commercial paper and short-term borrowings -- 362.2
Less net discounts (.1) (1.0)
-------------------------
Total Source One 569.4 406.2
-------------------------
Total short-term debt $ 571.4 $ 407.9
===============================================================================

The weighted average interest rates of short-term debt outstanding during
the year ended December 31, 1997 and 1996 were as follows:

F-23
<PAGE>

- --------------------------------------------------------------------------------
Year Ended December 31,
1997 1996
- --------------------------------------------------------------------------------
White Mountains: Credit facility 6.04% --
Parent Company: Revolving credit facility -- 5.82%
Charter: Notes payable 6.50% 6.50%
Source One:
Credit agreements borrowings 6.34% 6.19%
Commercial paper and short-term borrowings 5.81% 5.69%
================================================================================

Source One has a $650.0 million domestic commercial paper program. In
November 1997 Source One's commercial paper rating was downgraded by Moody's to
"Not Prime" and by Standard & Poor's to "A-3". As a result of the 1997 ratings
downgrades, Source One has not issued fresh commercial paper and has supplanted
its commercial paper borrowings with its $600.0 million credit agreement
facility. As of December 31, 1996, there was $347.2 million of commercial paper
outstanding. The weighted average number of days to maturity of commercial paper
outstanding at December 31, 1996 was 23 days.

F-24
<PAGE>

ability to pay dividends or make distributions of its capital in excess of
preferred stock dividends and subordinated debt interest requirements each year.
Source One is currently in compliance with all such covenants.

F-25
<PAGE>

Long-term debt

Long-term debt outstanding consisted of the following:

- -------------------------------------------------------------------------------
December 31,
Millions 1997 1996
- -------------------------------------------------------------------------------
Parent Company:
Medium-term notes $116.3 $116.2
Less net discounts (.7) (.8)
----------------------------
Total Parent Company 115.6 115.4
----------------------------
Source One:
Medium-term notes, 8.875% due in 2001 18.7 138.4
Debentures, 9.0% due in 2012 100.0 100.0
Subordinate debentures, 9.375% due in 2025 56.0 56.0
Less net discounts (2.1) (2.8)
----------------------------
Total Source One 172.6 291.6
----------------------------
Valley: Medium-term notes 15.0 15.0
Charter: Notes payable in 1998 and 1999 1.1 2.2
----------------------------
Total long-term debt $304.3 $424.2
===============================================================================

In 1993 the Company issued $150.0 million in principal amount of
medium-term notes for net cash proceeds of $148.0 million after related costs.
During 1995 and 1994 the Company repurchased $8.8 million and $24.9 million,
respectively, in principal amount of the notes due in February 2003. At December
31, 1997, the $116.3 million of remaining outstanding notes had an average
maturity of 5.4 years and a yield to maturity of 7.82%.

In 1991 Source One issued $160.0 million of 8.875% medium-term notes due in
2001 of which $138.4 million remained outstanding at December 31, 1996. During
1997 Source One repurchased and retired in principal amount $119.7 million of
these notes which resulted in a $6.0 million after tax extraordinary loss on
early extinguishment of debt.

In December 1995, Source One exchanged and retired 2,239,061 shares of
Source One Preferred Stock for $56.0 million in principal amount of 9.375%
subordinated debentures. The subordinated debentures are due in 2025. The
subordinated debentures are redeemable at the option of Source One, in whole or
part, at any time on or after May 1, 1999. The non-cash portion of the exchange
of subordinated debentures for Source One Preferred Stock is not reflected in
the Consolidated Statements of Cash Flows.

F-26
<PAGE>

Total interest paid by Fund American for both short-term and long-term debt
was $51.9 million, $51.5 million and $47.9 million in 1997, 1996 and 1995,
respectively.

Fund American's long-term debt maturities, including current portion of
long-term debt, for 1998, 1999, 2000, 2001, 2002 and beyond are $1.1 million,
$1.1 million, $4.0 million, $18.7 million, $15.0 million and $268.3 million,
respectively.

NOTE 9. Income Taxes

The Company and its qualifying subsidiaries file a consolidated Federal
income tax return. The Federal income tax provision is computed on the
consolidated taxable income of the Company and those subsidiaries.

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

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

F-27
<PAGE>

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 used for income tax return purposes. Significant
components of Fund American's net deferred Federal income tax asset and
liability follow:

- -------------------------------------------------------------------------------
December 31,
Millions 1997 1996
- -------------------------------------------------------------------------------
Deferred tax assets related to:
Employee compensation and benefit accruals $ 39.1 $ 32.8
Capitalized mortgage servicing 26.2 18.4
Unearned insurance premiums 5.3 4.9
Allowance for mortgage loan losses 4.8 4.8
Discounting of loss reserves 2.9 2.7
Other items 10.1 10.1
------------------------
Total deferred tax assets 88.4 73.7
- -------------------------------------------------------------------------------
Deferred tax liabilities related to:
Net unrealized investment gains 79.3 49.0
Earnings from insurance affiliates 11.8 6.7
Purchase accounting adjustments 5.5 6.2
Deferred acquisition costs 5.0 4.6
Unrealized gains on financial instruments 4.6 .9
Other items 9.7 7.6
------------------------
Total deferred tax liabilities 115.9 75.0
- -------------------------------------------------------------------------------
Net deferred Federal income tax liability $ (27.5) $ (1.3)
===============================================================================

A reconciliation of taxes calculated using the 35% Federal statutory rate
to the income tax provision on pretax earnings follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended December 31,
Millions 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at Federal statutory rate $ 26.1 $ 8.3 $ 12.3
Differences in taxes resulting from:
Dividends received deduction (3.1) (2.3) (1.9)
Nonconventional fuel source tax credits (2.4) -- --
Tax reserve adjustments 5.1 4.2 2.3
State income taxes 1.8 .5 --
Minority interest dividends 1.3 1.3 2.7
Write-off of goodwill and other intangible assets -- 8.1 --
</TABLE>

F-28
<PAGE>

<TABLE>
<S> <C> <C> <C>
Other, net .6 (1.2) 1.3
-------------------------------
Total income tax provision on pretax earnings $ 29.4 $ 18.9 $ 16.7
=======================================================================================
</TABLE>

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, 1997 and 1996.

NOTE 10. Retirement and Post-Retirement Plans

In 1993 the Company and certain of its subsidiaries established an
unfunded, nonqualified defined contribution plans for a select group of
management employees for the purpose of providing retirement and postretirement
benefits (the "Deferred Benefit Plans"). The amount of annual contributions to
the Deferred Benefit Plans are determined using actuarial assumptions; however,
participants in the Deferred Benefit Plans may choose between various investment
options for their plan balances. At December 31, 1997 and 1996, Fund American's
liability to participants pursuant to the Deferred Benefit Plans was $3.9
million and $2.9 million, respectively.

In 1993 the Company and certain of its subsidiaries also established an
unfunded, nonqualified plans for a select group of management employees for the
purpose of deferring current compensation for retirement savings (the "Deferred
Compensation Plans"). Pursuant to the Deferred Compensation Plans, participants
may voluntarily defer all or a portion of qualifying remuneration payable by
Fund American. Participants in the Deferred Compensation Plans may choose
between various investment options for their plan balances. At December 31, 1997
and 1996, Fund American's liability to participants pursuant to the Deferred
Compensation Plans was $37.6 million and $21.8 million, respectively.

Through December 1, 1995, substantially all the employees of Valley and
Charter were covered under a defined benefit pension plan sponsored by the
former parent of Valley and Charter. Coverage for employees under that plan was
terminated as of December 31, 1995. Valley established a new defined
contribution plan for the benefit of substantially all Valley and Charter
employees as of January 1, 1996. The new plan provides Valley and Charter
employees with full credit for prior service. The pension cost and funding
status of the new plan are not material to Fund American's financial statements.

Source One established a defined benefit pension plan as of July 1, 1986,
for the benefit of its employees. Benefits under the Source One plan are based
on years of service and each employee's highest average eligible compensation
over five consecutive years in his or her last ten years of employment. Funding
of retirement costs complies with the minimum funding requirements specified by
the Employee Retirement Income Security Act. Cash contributions made by Source
One to the plan for the years ended December 31, 1997, 1996 and 1995, totalled
$.6 million, $1.3 million and $1.7 million, respectively.

Source One also has a supplemental pension plan which is a nonqualified,
unfunded benefit plan designed to provide supplementary retirement benefits for
employees whose pensionable compensation exceeds statutory limits.

Total accrued postretirement benefit costs included in accounts payable and
other liabilities for Source One employees was $3.7 million and $3.5 million at
December 31, 1997 and 1996, respectively.

NOTE 11. Employee Stock Plans

F-29
<PAGE>

At the Company's 1995 Annual Meeting shareholders approved certain
amendments to the Fund American Long-Term Incentive Plan (the "Incentive Plan").
The Incentive Plan provides for granting to executive officers and other key
employees of the Company (and certain of its subsidiaries) various types of
stock-based incentive awards including stock options and performance shares. At
December 31, 1997, 377,000 Shares remained available for grants under the
Incentive Plan.

Performance shares are conditional grants of a specified maximum number of
Shares or an equivalent amount of cash. The grants are generally payable,
subject to the attainment of a specified return on equity at the end of three to
five year periods or as otherwise determined by the Compensation Committee of
the Board. The Compensation Committee consists solely of non-management
directors.

Pursuant to the Incentive Plan 50,000, 73,000 and 56,429 performance shares
were granted in 1997, 1996 and 1995, respectively, of which 400, 3,000 and 1,800
of the performance shares granted, respectively, remain unallocated to
participants as of December 31, 1997 and are not deemed to be outstanding.
During 1997, 1996 and 1995, 22,944, 0, and 0 performance shares were canceled,
respectively, and 86,156, 10,650 and 0 performance shares were paid in cash,
respectively. At December 31, 1997, 174,229 performance shares were outstanding.
The financial goal for full payment of the performance shares is the achievement
of a 13% to 15% annual return on equity as measured over the applicable
performance periods.

Stock options are rights to purchase a specified number of Shares at or
above the fair market value of Shares at the time an option is granted. Stock
options generally vest over a four year period and expire no later than ten
years after the date on which they are granted. As of December 31, 1997, 1996
and 1995 there were 2,000, 3,000 and 7,000 stock options outstanding,
respectively, which had exercise prices ranging from $24.82 to $32.60 per Share.
All Fund American stock options outstanding during the three year period ended
December 31, 1997, were fully vested and exercisable. No new stock options have
been issued to Fund American employees since 1991.

In 1985 the Company's Chairman purchased warrants (the "Warrants") from
American Express Company ("American Express") entitling him to buy 1,700,000
Shares for $25.75 per Share. Warrants to purchase 420,000 Shares, 130,000 Shares
and 150,000 Shares were exercised by the Chairman during 1992, 1994 and 1995,
respectively, leaving Warrants to purchase 1,000,000 Shares outstanding at
December 31, 1995. Pursuant to a proposal approved by shareholders at the
Company's 1995 Annual Meeting, the expiration date with respect to the Warrants
was extended from January 2, 1996, to January 2, 2002. In accordance with APB
No. 25, the extension of the Warrants resulted in a $46.2 million pretax charge
to compensation expense which was recorded in the second quarter of 1995. No
Warrants were exercised by the Chairman during 1997 and 1996. Pursuant to
certain anti-dilution adjustments related to the distribution of White River
Shares to the Company's shareholders, the exercise price for the Warrants to
purchase Fund American Shares was reduced to $21.66 per Share.

All employees (other than employees of Source One and FAE) are eligible to
participate in an employee savings plan qualified under Section 401(k) of the
IRC (the "Valley 401(k) Plan"). Contributions to the Valley 401(k) Plan can be
invested in various investment options including Shares. There is an employer
match provision to the Valley 401(k) Plan which is equal to 50% of the first 6%
of employee compensation contributed to the plan, subject to IRC limits.
Employees of the Company and White Mountains became eligible to participate in
the Valley 401(k) Plan beginning January 1, 1997. Fund American added Shares to
the investment options offered under the Valley 401(k) Plan as of July 1, 1997.
As of December 31, 1997 participants of the Valley 401(k) Plan owned a total of
1,825 Shares.

F-30
<PAGE>

Source One also has a qualified employee stock plan. Contributions to this
plan are determined at the discretion of Source One's Board of Directors. In
October 1996 Source One amended this plan to add an employee savings plan
feature qualified under Section 401(k) of the IRC (the "Source One 401(k)
Plan"). Contributions to the plan can be invested in various investments
including Shares. In 1997, Source One added a matching contribution feature to
the Source One 401(k) Plan which is equal to a certain percentage of employee
contributions, up to a maximum of 5%, dependent upon Source One's return on
equity. As of December 31, 1997 participants of the Source One 401(k) Plan owned
a total of 44,502 Shares.

Source One has various long-term incentive plans which provide for the
granting, to key senior management employees of Source One, stock-based and cash
incentive awards. Awards made pursuant to the plans are payable upon the
achievement of specified financial goals over multi-year periods.

SFAS No. 123, "Accounting for Stock Based Compensation," was issued in
October 1995. That standard requires significantly more disclosure regarding all
employee stock options and encourages companies to recognize compensation
expense for stock-based awards based on the fair value of such awards on the
date of grant. Alternatively, companies may continue following existing
accounting standards provided that disclosures are made regarding the net income
and earnings per share impact as if the value recognition and measurement
criteria of SFAS No. 123 had been adopted. Fund American has not adopted the
recognition and measurement criteria of SFAS No. 123 and alternatively has
chosen to disclose the pro forma effects of SFAS No. 123 as it relates to
outstanding Warrants and performance shares granted in 1997, 1996 and 1995, as
follows:

- -------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
Millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------
Net income:
As reported $ 39.3 $ 4.9 $ 84.1
Pro forma 39.4 - 108.6
- -------------------------------------------------------------------------------
Basic net income per share:
As reported $ 5.98 $ .66 $ 10.30
Pro forma 5.99 - 13.44
- -------------------------------------------------------------------------------
Diluted net income per share:
As reported $ 5.40 $ .60 $ 9.36
Pro forma 5.41 - 12.21
===============================================================================

SFAS No. 123 provides for the expense of Warrants, stock options and
performance shares over the life of the award. In determining the pro forma
effects of SFAS No. 123, the Company recognizes the pro forma expense of the
Warrants over time and assumes that the $46.2 million pretax charge associated
with the extension of the Warrants recognized in 1995 did not occur. The pro
forma net income figures disclosed above may not be representative of the
effects on reported net income to be reported in future years.

NOTE 12. Minority Interest - Preferred Stock of Subsidiary

In 1994 Source One issued 4,000,000 shares of 8.42% Source One Preferred
Stock, having a liquidation preference of $25.00 per share, for net cash
proceeds of $96.8 million. On December 8, 1995, Source One exchanged and retired
2,239,061 shares of Source One Preferred Stock for $56.0 million in principal
amount of subordinated debentures. The Source

F-31
<PAGE>

One Preferred Stock is not redeemable prior to May 1, 1999. In consolidation,
dividends on the Source One Preferred Stock are included as a component of Fund
American's interest expense.

NOTE 13. Shareholders' Equity

Series D preferred stock

On July 31, 1995, the Company redeemed all 20,833 remaining shares of the
Series D Preferred Stock for $75.0 million of cash, an amount equal to the
stock's liquidation preference.

Common share repurchases

During 1997, 1996 and 1995 the Company repurchased 924,739 Shares, 779,077
Shares and 877,868 Shares, respectively, for $103.7 million, $66.3 million and
$65.4 million, respectively. All such Shares repurchased from 1995 to 1997 have
been retired. At December 31, 1997, the Company had outstanding authorization to
purchase an additional 193,417 Shares.

Loan for common stock issued

On December 30, 1992, pursuant to a request from the Board, the Company's
Chairman agreed to an early exercise of stock options and Warrants to purchase
1,000,000 Shares. The Board's request reflected concerns regarding proposed tax
legislation which could have limited or eliminated the Company's tax benefits
from certain employee stock options and Warrants exercised in 1993 and
thereafter. To encourage exercise of the stock options and Warrants, the Company
provided a $30.0 million 4% secured loan to the Chairman. The loan was fully
repaid on its maturity date, October 23, 1995.

Common stock dividends

In the fourth quarter of 1995 the Board of Directors reinstated and paid a
$.20 regular quarterly dividend per Share. During 1996 and 1997 the Company
declared and paid regular quarterly cash dividends of $.20 per Share.

F-32
<PAGE>

NOTE 14. Industry Segments

Revenues, pretax earnings (loss) and ending identifiable assets for Fund
American's industry segments are shown below:

- -----------------------------------------------------------------------------
Year Ended December 31,
Millions 1997 1996 1995
- -----------------------------------------------------------------------------
Revenues:
Mortgage banking operations $ 118.2 $ 184.9 $ 178.6
Insurance operations 188.0 140.1 32.6
Other 8.0 7.5 11.1
-------------------------------------------
Total $ 314.2 $ 332.5 $ 222.3
- ----------------------------------===========================================
Pretax earnings (loss):
Mortgage banking operations $ (26.6) $ (2.1) $ 35.3
Insurance operations 32.6 .2 18.9
Other 68.7 25.7 (19.0)
-------------------------------------------
Total $ 74.7 $ 23.8 $ 35.2
- ----------------------------------===========================================
Ending assets:
Mortgage banking operations $1,084.9 $1,131.1 $1,138.5
Insurance operations 748.3 586.2 373.7
Other 199.7 263.3 359.7
-------------------------------------------
Total $2,032.9 $1,980.6 $1,871.9
=============================================================================

NOTE 15. Investments in Unconsolidated Affiliates

Investment in FSA

Fund American owned 3,460,200, 3,460,200 and 2,460,200 shares of FSA Common
Stock at December 31, 1997, 1996 and 1995. This represented approximately 12.1%,
11.5% and 7.8%, respectively, of the total shares of FSA Common Stock
outstanding at those times. Fund American had voting rights to an additional
3,893,940 shares of FSA Common Stock at December 31, 1997, 1996 and 1995,
raising Fund American's voting control of FSA to approximately 24.0%, 23.0% and
19.0%, respectively. At December 31, 1997, 1996 and 1995, Fund American also
owned FSA Options and Preferred Stock which, in total, give Fund American the
right to acquire up to 4,560,607 additional shares of FSA Common Stock for
aggregate consideration of $125.7 million. As of December 31, 1997, 1996 and
1995, Fund American's economic interest in FSA was 26.2%, 25.1% and 21.0%,
respectively.

Fund American's investment in FSA Common Stock is accounted for using the
equity method. FSA Common Stock is publicly traded on the NYSE. The market value
of the FSA Common Stock as of December 31, 1997 and 1996, as quoted on the NYSE,
exceeded Fund American's carrying value of the FSA Common Stock on the equity
method. Fund American's investments in FSA Options and Preferred Stock are
accounted for under the provisions of SFAS No. 115 whereby the investments are
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 comprehensive net income.

F-33
<PAGE>

The following table summarizes financial information for FSA:

- --------------------------------------------------------------------------------
Millions 1997 1996 1995
- --------------------------------------------------------------------------------
FSA balance sheet data:
Total investments $1,431.6 $1,154.4 $1,110.7
Total assets 1,900.6 1,537.7 1,490.3
Deferred premium revenue 595.2 511.2 463.9
Loss and loss adjustment expense reserve 75.4 72.1 111.8
Preferred shareholder's equity .7 .7 .7
Common shareholders' equity 881.7 800.6 777.2
FSA income statement data:
Gross premiums written $ 236.4 $ 177.0 $ 110.7
Net premiums written 172.9 121.0 77.6
Net premiums earned 109.5 90.4 69.3
Net investment income 72.1 65.1 49.0
Net income 100.5 80.8 55.0

- --------------------------------------------------------------------------------
Amounts recorded by Fund American:
Investment in FSA Common Stock $ 104.3 $ 92.3 $ 60.0
Investment in FSA Options and Preferred Stock 87.8 19.8 2.5
-------- -------- --------
Total Investment in FSA $ 192.1 $ 112.1 $ 62.5
======== ======== ========
Equity in earnings from FSA Common Stock (a) $ 11.4 $ 7.8 $ 5.4
Equity in net unrealized investment gains
(losses) from FSA's investment
portfolio, before tax (b) 2.1 (1.0) 4.5
Unrealized investment gains on FSA Options and
Preferred Stock, before tax (b) 68.0 17.3 .3
================================================================================

(a) Recorded net of related amortization of goodwill.

(b) Recorded directly to shareholders' equity (after tax) with related changes
in net unrealized investment gains and losses (after tax) reported on the
income statement as a component of comprehensive net income.

At December 31, 1997 and 1996, Fund American's consolidated retained
earnings included $24.1 million and $13.8 million, respectively, of
undistributed earnings of FSA.

Investment in MSA

At December 31, 1997, 1996 and 1995, Fund American owned 90,606 shares of
MSA Common Stock. This represented approximately and 33.1% of the total shares
of MSA Common Stock outstanding at those times. Fund American's investment in
MSA is accounted for using the equity method.

F-34
<PAGE>

The following tables summarize financial information for MSA:

- ------------------------------------------------------------------------------
Millions 1997 1996 1995
- ------------------------------------------------------------------------------
MSA balance sheet data:
Total investments $280.1 $249.4 $240.8
Total assets 337.2 316.2 309.6
Unearned premium reserve 71.8 64.0 58.4
Loss and loss adjustment expense reserves 123.7 120.1 116.2
Shareholders' equity 120.6 101.4 92.0
MSA income statement data:
Net premiums written $156.6 $147.2 $130.9
Net premiums earned 148.7 141.6 127.7
Net investment income 15.4 14.9 15.0
Net income 11.9 9.7 12.4
- ------------------------------------------------------------------------------
Amounts recorded by Fund American:
Investment in MSA Common Stock $ 40.9 $ 34.7 $ 33.7
Equity in earnings from MSA Common Stock (a) 3.8 1.5 4.0
Equity in net unrealized investment gains (losses)
from MSA's investment portfolio, before tax (b) 2.4 (.5) 3.2
==============================================================================

(a) Recorded net of related amortization of goodwill.

At December 31, 1997 and 1996, Fund American's consolidated retained
earnings included $10.9 million and $6.5 million, respectively, of undistributed
earnings of MSA.

Investment in Folksamerica

White Mountains owned 6,920,000 shares of Folksamerica Preferred Stock at
December 31, 1997 and 1996. White Mountains owned 1,563,907 shares of
Folksamerica Common Stock at December 31, 1997. White Mountains ownership
percentage of Folksamerica at December 31, 1997 and 1996 represented 50.0% of
the total Folksamerica voting shares outstanding at that time. At December 31,
1997 and 1996, White Mountains also owned ten year Folksamerica Warrants to
purchase up to 6,920,000 shares of Folksamerica Common Stock for aggregate
consideration of $79.4 million. Fund American acquired its investment in
Folksamerica Preferred Stock and Folksamerica Warrants on June 19, 1996. White
Mountains acquired its investment in Folksamerica Common Stock on November 20,
1997.

White Mountains' investment in Folksamerica Common Stock is accounted for
using the equity method. Fund American's investment in Folksamerica Preferred
Stock and Folksamerica Warrants are accounted for under the provisions of SFAS
No. 115 whereby the investments are 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 comprehensive net income.
Dividends earned on the Folksamerica Preferred Stock are recorded as earnings
from unconsolidated insurance affiliates on the income statement.

F-35
<PAGE>

The following table summarizes financial information for Folksamerica:

- --------------------------------------------------------------------------------
Millions 1997 1996
- --------------------------------------------------------------------------------
Folksamerica balance sheet data:
Total investments $ 926.2 $711.4
Total assets 1,213.6 994.8
Unearned premium reserve 96.5 61.5
Loss and loss adjustment expense reserve 739.1 628.9
Preferred shareholder's equity 79.4 79.4
Common shareholders' equity 175.6 88.2
Folksamerica income statement data:
Gross premiums written $ 251.0 $187.2
Net premiums written 232.4 171.9
Net premiums earned 238.0 181.4
Net investment income 46.7 32.4
Net income 35.9 17.1

- --------------------------------------------------------------------------------
Amounts recorded by Fund American:
Investment in Folksamerica Common Stock $ 23.5 $ --
Investment in Folksamerica Preferred Stock 78.0 77.9
Investment in Folksamerica Warrants 24.6 2.2
-------- ------
Total Investment in Folksamerica $ 126.1 $ 80.1
-------- ------
Equity in earnings from Folksamerica Common Stock (a) $ .9 $ --
Dividends from Folksamerica Preferred Stock (a) 5.2 2.7
Equity in net unrealized investment gains from
Folksamerica's investment portfolio, before tax (b) 1.8 --
Unrealized investment gains on Folksamerica Warrants
and Preferred Stock, before tax (b) 22.4 .2
================================================================================

(a) Recorded net of related amortization of goodwill and accretion of discount.

At December 31, 1997 and 1996, Fund American's consolidated retained
earnings included $1.0 million and $0 million of undistributed earnings of
Folksamerica.

Investment in Murray Lawrence

At December 31, 1997 White Mountains owned 38,651,270 shares of Murray
Lawrence Common Stock which it had acquired on December 8, 1997 for $23.6
million. This represented approximately 15.8% of the total shares of Murray
Lawrence Common Stock outstanding at that time. White Mountains' carrying value
of the Murray Lawrence investment was equal to its cost of $23.6 million at
December 31, 1997.

NOTE 16. Financial Instruments With Off-Balance-Sheet Risk

Source One utilizes derivative financial instruments in the management of
interest rate risk. Source One's use of derivative financial instruments is
primarily limited to (i) commitments to extend credit, (ii) mandatory forward
commitments and (iii) interest rate floor contracts and principal-only swap
agreements. Although SFAS No. 115 requires that these financial instruments be
classified as held for trading purposes, Fund American does not consider these
investments to be speculative holdings.

F-36
<PAGE>

Source One is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its exposure to fluctuations in interest rates. These financial
instruments primarily include commitments to extend credit and mandatory forward
commitments. Those instruments involve, to varying degrees, elements of credit
and market interest rate risk in excess of the amounts recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of risk Source One has related to the
instruments.

Source One's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit is represented by the contractual
notional amount of those commitments. Source One's locked mortgage loan
commitments expected to close totalled $284.5 million and $175.7 million at
December 31, 1997 and 1996, respectively. Fixed rate commitments result in
Source One having market interest rate risk as well as credit risk. Variable
rate commitments result primarily in credit risk. The amount of collateral
required upon extension of credit is based on management's credit evaluation of
the mortgagor and consists of the mortgagor's residential property.

Source One obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities to hedge the market interest rate risk associated
with a substantial portion of the Pipeline that is expected to close and all
mortgage loans receivable. At December 31, 1997 and 1996, Source One had $776.8
million and $454.6 million, respectively, of mandatory forward commitments
outstanding. If secondary market interest rates decline after Source One commits
to an interest rate for a loan, the loan may not close and Source One may incur
a loss from the cost of covering its obligations under a related mandatory
forward commitment. If secondary market interest rates increase after Source One
commits to an interest rate for a loan and Source One has not obtained a forward
commitment, Source One may incur a loss when the loan is subsequently sold.

Source One's risk management function closely monitors the Pipeline to
determine appropriate forward commitment coverage on a daily basis in order to
manage the risk inherent in these off-balance-sheet financial instruments. In
addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers with no dealer having
in excess of 20% of current commitments.

Source One sells loans through mortgage-backed securities issued pursuant
to programs of GNMA, FNMA and FHLMC, or through institutional investors. Most
loans are aggregated in pools of $1.0 million or more which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
Substantially all GNMA securities are sold by Source One without recourse for
loss of principal in the event of a subsequent default by the mortgagor due to
the FHA and VA insurance underlying such securities. Prior to December 1992,
substantially all conventional securities were sold with recourse to Source One,
to the extent of insufficient proceeds from private mortgage insurance,
foreclosure and other recoveries. Since December 1992 all conventional loans
have been sold without recourse to Source One.

Servicing agreements relating to mortgage-backed securities issued pursuant
to programs of GNMA, FNMA or FHLMC require Source One to advance funds to make
the required payments to investors in the event of a delinquency by the
borrower. Source One expects that it would recover most funds advanced upon cure
of default by the borrower or foreclosure. However, funds advanced in connection
with VA partially guaranteed loans and certain conventional loans (which are at
most partially insured by private mortgage insurers) may not be fully recovered
due to potential declines in collateral value. Source One is subject to limited
amounts of risk with respect to these loans since the insurer has the option to
reimburse the servicer for the lower of fair value of the property or the
mortgage loan outstanding, in addition to the VA guarantee on the loan. In
addition, most of Source One's servicing agreements for mortgage-backed
securities typically require the payment to investors of a full month's interest

F-37
<PAGE>

on each loan although the loan may be paid off (by optional prepayment or
foreclosure) other than on a month-end basis. In this instance, Source One is
obligated to pay the investor interest at the pass-thru rate from the date of
loan payoff through the end of the calendar month without reimbursement.

At December 31, 1997 and 1996, Source One serviced approximately $5.4
billion and $13.5 billion of GNMA loans (without substantial recourse),
respectively, and $2.5 billion and $2.9 billion of conventional loans (with
recourse), respectively.

To cover loan losses that may result from these servicing arrangements and
other losses, Source One has provided an allowance for loan losses of $12.8
million and $15.4 million at December 31, 1997 and 1996, respectively. In
addition, the valuation allowance for Source One's capitalized servicing asset
related to its principal recourse portfolio includes an $8.2 million and $7.3
million reserve for estimated losses at December 31, 1997 and 1996,
respectively. Source One's management believes the allowance for loan losses is
adequate to cover unreimbursed foreclosure advances and principal losses,
including losses on loans with recourse.

In order to offset changes in the value of Source One's capitalized
servicing asset and to mitigate the effect on earnings of higher amortization
and impairment of such rights which results from increased prepayment activity,
Source One invests in various financial instruments. As interest rates decline,
prepayment activity increases, thereby reducing the value of the capitalized
servicing asset, while the value of the financial instrument increases.
Conversely, as interest rates increase, the value of the capitalized servicing
asset increases while the value of the financial instrument decreases. The
financial instruments utilized by Source One include interest rate floor
contracts and principal-only swap transactions.

The interest rate floor contracts derive their value from differences
between the floor rate specified in the contract and market interest rates. The
floor strike rates range from 4.00% to 6.14%. To the extent that market interest
rates increase, the value of the floors declines. However, Source One is not
exposed to losses in excess of its initial investment in the floors. The
interest rate floor contracts are carried at fair value with unrealized gains
and losses recorded in net gain on financial instruments on the consolidated
income statements. As of December 31, 1997 and 1996, the carrying value of
Source One's open interest rate floor contracts totalled $8.2 million and $4.8
million, respectively, with a total notional principal amount of $.7 billion and
$1.0 billion, respectively. The floors have terms ranging from 3 to 5 years.

The value of the principal-only swaps is determined by changes in the value
of referenced principal-only strips. As of December 31, 1997 and 1996, the
carrying value of Source One's principal-only swap transactions totalled $12.5
million and $3.2 million, respectively, with an original notional principal
amount of $98.1 million and $50.0 million, respectively. The principal-only
swaps have remaining terms of 3 to 4 years.

White Mountains' insurance subsidiaries extend credit to their
policyholders in the normal course of business, perform credit evaluations and
maintain allowances for potential credit losses. Concentration of credit risk
with respect to receivables is limited due to the large number of policyholders
and their dispersion across a multi-state area.

NOTE 17. Fair Value of Financial Instruments

The estimated fair values of Fund American's financial instruments have
been determined by using appropriate market information and valuation
methodologies. Considerable judgement is required to develop the estimates of
fair value. Therefore, the estimates provided herein are not necessarily
indicative of the amounts that could be realized in a current market exchange.

F-38
<PAGE>

Carrying value equals or approximates fair value for common equity securities,
fixed maturity investments, derivative instruments, short-term investments,
cash, other financial assets and other financial liabilities. For each other
class of financial instrument for which it is practicable to estimate fair
value, the following methods and assumptions were used to estimate such value:

Other Investments. For 1997, mortgage loans held for investment were
carried at fair value. For 1996, the fair value of mortgage loans held for
investment were estimated using quoted market prices for securities backed by
similar loans. Fair values of REMICs are estimated using discounted cash flow
analyses reflecting interest only strip and LIBOR interest rates, and
"Prepayment Speed Assumption" rates, taking into consideration the
characteristics of the related collateral. For interest rate floor contracts and
principal-only swap transactions, fair value is estimated based on quoted market
prices for those or similar investments and equals carrying value. For all other
securities classified as other investments, fair values have been determined
using quoted market values or internal appraisal techniques.

Capitalized Excess Mortgage Servicing. Prior to 1997, the fair value of
Source One's excess mortgage servicing asset was estimated by computing the
anticipated revenue to be received over the life of the related loans based on
market consensus prepayment rates, discounted using quoted interest only strip
interest rates.

Mortgage Loans Held for Sale. Fair values are estimated using quoted market
prices for securities backed by similar loans.

Pool Loan Purchases. Fair values are estimated based on discounted cash
flow analyses using Source One's short-term incremental borrowing rate, quoted
market prices for securities backed by similar loans or actual prices at which
the loans were subsequently sold..

Mortgage Claims Receivable. Fair values are estimated by discounting
anticipated future cash flows using Source One's short-term incremental
borrowing rate.

Debt. Fair value is estimated by discounting future cash flows using
incremental borrowing rates for similar types of borrowing arrangements or
quoted market prices.

Off-Balance-Sheet Financial Instruments. Fair value for commitments to sell
mortgage loans is based on current settlement values for those commitments, net
of the face amounts of the commitments. Fair value for commitments to extend
credit is based on current quoted market prices for securities backed by similar
loans, net of the principal amounts of the commitments.

The carrying amounts and estimated fair values of Fund American's financial
instruments were as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------- ------------------------
Carrying Fair Carrying Fair
Millions amount value amount value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Common equity securities $104.2 $104.2 $160.8 $160.8
Fixed maturity investments 168.3 168.3 155.4 155.4
Other investments (excluding derivative instruments) 151.1 160.6 168.5 168.4
Derivative instruments:
Interest rate floor contracts 8.2 8.2 4.8 4.8
Principal-only swaps 12.5 12.5 3.2 3.2
Short-term investments 62.8 62.8 67.5 67.5
Cash 7.0 7.0 4.8 4.8
Capitalized excess mortgage servicing (a) - - 38.7 39.6
Mortgage loans held for sale 519.3 529.3 314.9 315.9
Pool loan purchases 149.8 150.2 131.5 135.8
Mortgage claims receivable, net (b) 35.6 34.9 38.4 37.7
Other financial assets 43.4 43.4 35.9 35.9
</TABLE>

F-39
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Financial liabilities:
Short-term debt 571.4 571.4 407.9 407.9
Long-term debt 304.3 326.5 424.2 460.2
Other financial liabilities 22.3 22.3 18.3 18.3
Off-balance-sheet financial instruments:
Mandatory forward commitments - 1.6 - (.2)
Commitments to extend credit expected to close - 6.5 - 1.9
===================================================================================================================
</TABLE>

(a) Not applicable for 1997 due to the adoption of SFAS No. 125. See Note 5.

(b) Excludes $5.6 million and $13.1 million of real estate owned in 1997 and
1996, respectively.

Other financial assets includes investment income receivable, accounts
receivable from securities sales, notes receivable and White River Shares held
for delivery upon exercise of existing employee stock options.

Other financial liabilities includes accrued interest payable, accounts
payable on securities purchases, dividends payable to shareholders and liability
for existing employee stock options to purchase White River Shares.

Fund American's investments in FSA Options and Preferred Stock,
Folksamerica Preferred Stock and Folksamerica Warrants are not presented in the
table above. These financial instruments are accounted for under the provisions
of SFAS No. 115 and are carried on the balance sheet at fair value. See Note 15.

The estimated fair value amounts for Fund American's financial instruments
have been determined using available market information and valuation
methodologies. Such estimates provided herein are not necessarily indicative of
the amounts that would be potentially realized in a current market exchange.

NOTE 18. Related Party Transactions

For corporate travel purposes Fund American jointly owns two short-range
aircraft with Haverford Utah, LLC ("Haverford"). Messrs. Jack Byrne, Patrick
M. Byrne, a director of the Company and White Mountains, and Kemp are
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 Haverford bears the full costs of its usage and maintenance
of the aircraft pursuant to a Joint Ownership Agreement dated September 16,
1996.

Prior to the Joint Ownership Agreement, Fund American was a party to a "dry
lease" agreement dated January 2, 1995, for the use of aircraft owned by
Haverford Transportation Inc. ("HTI") for corporate travel purposes. Messrs.
Jack Byrne and Kemp are the sole shareholders of HTI. During 1996 and 1995 Fund
American paid HTI a total of $279,739 and $183,563, respectively, pursuant to
the dry lease arrangement. The terms of the agreement provided for the use of
HTI's aircraft (excluding pilot and fuel) for a fixed hourly charge of $200 for
a single engine piston aircraft and $800 to $1,000 for a twin engine turbine
aircraft. Based on the Company's experience in operating comparable aircraft,
the hourly operating charges incurred pursuant to the HTI dry lease are
considered to be representative of the actual hourly costs of operating HTI's
aircraft.

Through December 22, 1993, White River was a wholly-owned subsidiary of the
Company. The Company currently owns 1,014,750 White River Shares, or
approximately 20.8% of the outstanding White River Shares of which 295,932
shares, or 6.0% of the outstanding White River Shares, have been reserved by
Fund American for delivery upon exercise of existing employee stock options.
White River had outstanding the $50.0 million Term Note and the $40.0 million
Revolver payable to the Company which were repaid on various dates during 1995.
Mr. Gordon S. Macklin, a director of the Company, is Chairman, President and
Chief

F-40
<PAGE>

Executive Officer of White River. Mr. Patrick M. Byrne is also a director of
White River.

Mr. Howard Clark, Jr., a director of the Company, is Vice Chairman of
Lehman Brothers Inc. Lehman Brothers Inc. has, from time to time, provided
various services to Fund American including investment banking services,
brokerage services, underwriting of debt and equity securities and financial
consulting services.

Mr. Robert P. Cochran, a director of the Company, is Chairman and Chief
Executive Officer of FSA. FSA has been retained by Fund American to manage
portions of its fixed maturity portfolio.

Mr. George J. Gillespie, III, a director of the Company, is a Partner in
the firm Cravath, Swaine & Moore, which has been retained by Fund American from
time to time to perform legal services.

Mr. Arthur Zankel, a director of the Company, is Co-Managing Partner of
First Manhattan Co. First Manhattan Co. has provided brokerage, discretionary
investment management and non-discretionary investment advisory services to Fund
American from time to time.

Fund American believes that all the above transactions were on terms that
were reasonable and competitive. Additional transactions of this nature may be
expected to take place in the ordinary course of business in the future.

F-41
<PAGE>

REPORT ON MANAGEMENT'S RESPONSIBILITIES

The financial information included in this annual report, including the
audited consolidated financial statements, has been prepared by the management
of Fund American. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include amounts based on informed estimates and judgments. 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 annual report is consistent with that shown in the financial
statements.

Fund American 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. Fund American's business ethics policies require
adherence to the highest ethical standards in the conduct of its business.
Compliance with these controls, policies and procedures is continuously
maintained and monitored by management.

KPMG Peat Marwick LLP have audited the consolidated financial statements of
Fund American as of December 31, 1997 and for the year then ended, and issued
their unqualified report thereon dated January 29, 1998, which appears on page
F-43. Ernst & Young LLP served as Fund American's independent auditors as of
December 31, 1996 and 1995, and for the years then ended, and issued their
unqualified report thereon dated March 21, 1997, which appears on page F-45.
Coopers & Lybrand L.L.P. served as independent auditors of Valley as of December
31, 1996 and for the year then ended. Their unqualified report thereon, dated
February 14, 1997, has been included as an exhibit to this annual report.

In connection with their audits, the independent auditors provide an
objective, independent review and evaluation of the structure of internal
controls to the extent they consider necessary. Management reviews all
recommendations of the independent auditors 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
non-management directors, has general responsibility for the oversight and
surveillance of the accounting, reporting and financial control practices of
Fund American. The Audit Committee, which reports to the full Board, annually
reviews the effectiveness of the independent auditors, Fund American's internal
auditors and management with respect to the financial reporting process and the
adequacy of internal controls. Both the internal auditors and the independent
auditors have, at all times, 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.

F-42
<PAGE>

K. Thomas Kemp
Director, President
and Chief Executive Officer

Raymond Barrette
Executive Vice President
and Chief Financial Officer

Michael S. Paquette
Senior Vice President
and Controller

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.

We have audited the accompanying consolidated balance sheet of Fund American
Enterprises Holdings, Inc. and Subsidiaries (the "Company") as of December 31,
1997 and the related consolidated income statement, and consolidated statements
of shareholders' equity and cash flows for the year then ended (collectively the
"consolidated financial statements"). In connection with our audit of the
consolidated financial statements, we also have audited the 1997 financial
information in Schedule I Condensed Financial Information of the Registrant (the
"financial statement schedule"). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. We did not audit
the consolidated financial statements of Financial Security Assurance Holdings
Ltd. ("FSA") (a 12.1 percent owned equity investee company). The Company's
equity investment in FSA at December 31, 1997 was $104.3 million and its equity
in earnings of FSA was $11.4 million for the year ended 1997. The consolidated
financial statements of FSA were audited by other auditors, Coopers and Lybrand
L.L.P., whose report has been furnished to us, and, our opinion, insofar as it
relates to the amounts included for FSA is based solely on the report of the
other auditors.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fund American Enterprises Holdings,
Inc. and Subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the 1997
information in the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

F-43
<PAGE>

KPMG Peat Marwick LLP
Hartford, Connecticut
January 29, 1998

F-44
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Fund
American Enterprises Holdings, Inc., as of December 31, 1996, and the related
consolidated income statements and statements of shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our audits also included the financial statement schedule listed
at Item 14(d). Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the
consolidated financial statements of Valley Group, Inc., a wholly-owned
subsidiary, representing substantially all of the Company's consolidated
insurance operations, which statements reflect total assets of $288.0 million
as of December 31, 1996 and total revenues of $126.9 million for the year
then ended, and the consolidated financial statements of Financial Security
Assurance Holdings Ltd. ("FSA"), an equity method investee. The Company's
equity method investment in FSA represents $92.3 million of assets at
December 31, 1996 and its equity in FSA's earnings represents $7.8 million of
total revenues for the year then ended. Those statements were audited by
other auditors, Coopers and Lybrand L.L.P., whose reports have been furnished
to us, and our opinion, insofar as it relates to data included for Valley
Group, Inc. and FSA, with respect to the amounts in the preceding sentence,
is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Fund American Enterprises
Holdings, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statements schedule
when considered in relation to the basic financial statements taken as a
whole present fairly in all material respects the information set forth
therein.

As discussed in the Notes to Consolidated Financial Statements, in 1995 the
Company changed its method of accounting for originated mortgage servicing
rights.

F-45
<PAGE>

Ernst & Young LLP
New York, New York
March 21, 1997

F-46
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

Selected quarterly financial data for 1997 and 1996 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.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 Three Months Ended (a) 1996 Three Months Ended (b)
---------------------------------- -----------------------------------
Millions, except per share amounts Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 82.8 $ 79.4 $ 70.3 $81.7 $ 72.8 $89.9 $ 82.6 $ 87.2
Expenses 92.8 78.7 82.7 82.0 120.1 81.2 76.9 69.0
--------------------------------------------------------------------------
Pretax operating earnings (loss) (10.0) .7 (12.4) (.3) (47.3) 8.7 5.7 18.2
Net realized investment gains (losses) 49.1 21.8 16.2 9.6 10.4 (1.6) 1.4 28.3
--------------------------------------------------------------------------
Pretax earnings (loss) 39.1 22.5 3.8 9.3 (36.9) 7.1 7.1 46.5
Income tax provision (benefit) 14.7 7.1 3.2 4.4 (5.8) 3.4 3.6 17.7
--------------------------------------------------------------------------
After tax earnings (loss) 24.4 15.4 .6 4.9 (31.1) 3.7 3.5 28.8
Loss on early extinguishment of debt,
after tax -- -- (6.0) -- -- -- -- --
--------------------------------------------------------------------------
Net income (loss) 24.4 15.4 (5.4) 4.9 (31.1) 3.7 3.5 28.8
Change in net unrealized gains,
after tax (18.1) 36.3 44.5 (6.4) 36.5 18.5 16.5 (16.9)
--------------------------------------------------------------------------
Comprehensive net income (loss) $ 6.3 $ 51.7 $ 39.1 $(1.5) $ 5.4 $22.2 $ 20.0 $ 11.9
==========================================================================

Basic earnings per share:
After tax earnings (loss) $ 3.89 $ 2.41 $ .09 $ .71 $(4.37) $ .50 $ .45 $ 3.75
Net income (loss) 3.89 2.41 (.80) .71 (4.37) .50 .45 3.75
Comprehensive net income (loss) 1.01 8.09 5.82 (.22) .76 3.05 2.61 1.55
Diluted earnings per share:
After tax earnings (loss) 3.50 2.18 .08 .65 (4.37) .46 .42 3.45
Net income (loss) 3.50 2.18 (.73) .65 (4.37) .46 .42 3.45
Comprehensive net income (loss) .90 7.31 5.29 (.20) .76 2.79 2.40 1.42
====================================================================================================================
</TABLE>

(a) The quarterly amounts for the three month period ended June 30, 1997
include a $9.2 million pretax loss on early extinguishment of Source One's
debt which served to decrease second quarter 1997 net income by $6.0
million. The quarterly amounts for the three month period ended December
31, 1997 include $49.1 million of pretax realized investment gains which
served to increase fourth quarter 1997 net income by $31.9 million.
(b) The quarterly amounts for the three month period ended March 31, 1996
include a $20.0 million pretax recovery of the valuation allowance for the
impairment of Source One's capitalized mortgage servicing rights which
served to

F-47
<PAGE>

increase first quarter 1996 net income by $13.0 million. The quarterly
amounts for the three month period ended December 31, 1996 include a $32.6
million pretax write-off of all Source One's existing goodwill and certain
other intangible assets and $28.4 million of pretax impairment of Source
One's capitalized mortgage servicing asset. These two items served to
decrease fourth quarter 1996 net income by $48.5 million.

SCHEDULE I

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company Only)

CONDENSED BALANCE SHEETS

- --------------------------------------------------------------------------------
December 31,
-----------------------
Millions 1997 1996
- --------------------------------------------------------------------------------
Assets:
Fixed maturity investments $ -- $ 46.0
Common equity securities and other investments 49.2 100.1
Short-term investments, at amortized cost 2.3 .3
Other assets 40.4 18.1
Investments in unconsolidated insurance affiliates -- 27.7
Investments in consolidated affiliates 857.8 725.2
-----------------------
Total assets $949.7 $ 917.4
- ---------------------------------------------------------=======================
Liabilities:
Long-term debt with third parties $115.6 $ 115.4
Intercompany borrowings 30.0 --
Accounts payable and other liabilities 130.5 115.0
-----------------------
Total liabilities 276.1 230.4
Shareholders' equity 673.6 687.0
-----------------------
Total liabilities and shareholders' equity $949.7 $ 917.4
================================================================================

CONDENSED INCOME STATEMENTS

- -------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
Millions 1997 1996 1995
- -------------------------------------------------------------------------------
Revenues $ 8.5 $ 11.7 $ 28.7

FS-1
<PAGE>

Expenses 21.2 15.5 68.9
-----------------------------
Pretax operating loss (12.7) (3.8) (40.2)
Net realized investment gains (losses) 44.2 (3.1) 12.6
-----------------------------
Pretax earnings (loss) 31.5 (6.9) (27.6)
Income tax provision (benefit) 16.3 .5 (8.7)
-----------------------------
Parent company only operating income (loss) 15.2 (7.4) (18.9)
Earnings from consolidated affiliates 24.1 12.3 37.4
Tax benefit from sale of discontinued operations -- -- 66.0
Loss on early extinguishment of debt, after tax -- -- (.4)
-----------------------------
Consolidated net income $ 39.3 $ 4.9 $ 84.1
Consolidated change in net unrealized
investment gains, after tax 56.3 54.6 18.2
-----------------------------
Consolidated comprehensive net income $ 95.6 $ 59.5 $ 102.3
===============================================================================

FS-2
<PAGE>

SCHEDULE I
(continued)

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
Millions 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 39.3 $ 4.9 $ 84.1
Charges (credits) to reconcile net income to net cash from operations:
Net realized investment (gains) losses (44.2) 3.1 (12.6)
Earnings from consolidated subsidiaries (24.1) (12.3) (37.4)
Undistributed earnings from unconsolidated insurance affiliates (.4) (1.1) (9.0)
Changes in current income taxes receivable and payable 5.1 28.4 2.9
Deferred income tax (benefit) provision (3.7) .1 (13.5)
Dividends and return of capital distributions received from subsidiaries -- 65.0 233.3
Tax benefit from sale of discontinued operations -- -- (66.0)
Compensation expense resulting from warrant extension -- -- 46.2
Other, net 2.4 (15.9) (3.7)
-----------------------------
Net cash (used for) provided from operations (25.6) 72.2 224.3
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in short-term investments (2.0) 28.2 34.3
Sales of investment securities 119.4 134.4 45.1
Purchases of investment securities -- (108.9) (41.3)
Investments in consolidated affiliates (12.7) (25.2) (77.2)
Investments in unconsolidated affiliates -- (27.7) (33.8)
Purchases of fixed assets -- (.8) --
-----------------------------
Net cash provided from (used for) investing activities 104.7 -- (72.9)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchases of common stock retired (103.8) (66.3) (65.5)
Proceeds from issuances of common stock from treasury -- -- 3.3
Intercompany borrowings from subsidiaries 30.0 -- --
Repayments of long-term debt -- -- (7.9)
Redemption of preferred stock -- -- (75.0)
Dividends paid to shareholders (5.3) (5.9) (6.4)
-----------------------------
Net cash used for financing activities (79.1) (72.2) (151.5)
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash during year -- -- (.1)
Cash balance at beginning of year -- -- .1
- ----------------------------------------------------------------------------------------------------------
Cash balance at end of year $ -- $ -- $ --
==========================================================================================================
</TABLE>

FS-3

<PAGE>
Exhibit 10(d)

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

$35,000,000

CREDIT AGREEMENT

AMONG

FUND AMERICAN ENTERPRISES HOLDINGS, INC.,

as Borrower,

FUND AMERICAN ENTERPRISES, INC.,

as Subsidiary Borrower,

THE LENDERS NAMED HEREIN

and

THE FIRST NATIONAL BANK OF CHICAGO,

as Agent

DATED AS OF

July 31, 1997

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

<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II THE CREDITS . . . . . . . . . . . . . .. . . . . . . . . . .15
2.1. Advances . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.2. Ratable Loans. . . . . . . . . . . . . . . . . . . . . . . .15
2.3. Types of Advances. . . . . . . . . . . . . . . . . . . . . .15
2.4. Facility Fee; Reductions in Aggregate Commitment . . . . . .15
2.5. Minimum Amount of Each Advance . . . . . . . . . . . . . . .16
2.6. Optional Principal Payments. . . . . . . . . . . . . . . . .16
2.7. Method of Selecting Types and Interest Periods for
New Advances . . . . . . . . . . . . . . . . . . . . . . . .16
2.8. Conversion and Continuation of Outstanding Advances. . . . .17
2.9. Changes in Interest Rate, etc. . . . . . . . . . . . . . . .17
2.10. Rates Applicable After Default . . . . . . . . . . . . . . .18
2.11. Method of Payment. . . . . . . . . . . . . . . . . . . . . .18
2.12. Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
2.13. Interest Payment Dates; Interest and Fee Basis . . . . . . .18
2.14. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions. . . . . . . . . . . . . . . . . . . .19
2.15. Lending Installations. . . . . . . . . . . . . . . . . . . .19
2.16. Non-Receipt of Funds by the Agent. . . . . . . . . . . . . .19
2.17. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.18. Agent's Fees . . . . . . . . . . . . . . . . . . . . . . . .20

ARTICLE III CHANGE IN CIRCUMSTANCES. . . . . . . . . . . . . . . . . . .21
3.1. Yield Protection . . . . . . . . . . . . . . . . . . . . . .21
3.2. Changes in Capital Adequacy Regulations. . . . . . . . . . .21
3.3. Availability of Types of Advances. . . . . . . . . . . . . .22
3.4. Funding Indemnification. . . . . . . . . . . . . . . . . . .22
3.5. Lender Statements; Survival of Indemnity . . . . . . . . . .22

ARTICLE IV CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . .23
4.1. Initial Loans. . . . . . . . . . . . . . . . . . . . . . . .23
4.2. Each Future Advance. . . . . . . . . . . . . . . . . . . . .24

ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . .25
5.1. Corporate Existence and Standing . . . . . . . . . . . . . .25
5.2. Authorization and Validity . . . . . . . . . . . . . . . . .25
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
5.3. Compliance with Laws and Contracts . . . . . . . . . . . . .25
5.4. Governmental Consents. . . . . . . . . . . . . . . . . . . .26
5.5. Financial Statements . . . . . . . . . . . . . . . . . . . .26
5.6. Material Adverse Change. . . . . . . . . . . . . . . . . . .26
5.7. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
5.8. Litigation and Contingent Obligations. . . . . . . . . . . .27
5.9. Capitalization . . . . . . . . . . . . . . . . . . . . . . .27
5.10. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5.11. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . .28
5.12. Federal Reserve Regulations. . . . . . . . . . . . . . . . .28
5.13. Investment Company . . . . . . . . . . . . . . . . . . . . .28
5.14. Certain Fees . . . . . . . . . . . . . . . . . . . . . . . .28
5.15. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . .28
5.16. Material Agreements. . . . . . . . . . . . . . . . . . . . .28
5.17. Environmental Laws . . . . . . . . . . . . . . . . . . . . .29
5.18. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .29
5.19. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . .29

ARTICLE VI COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . .29
6.1. Financial Reporting. . . . . . . . . . . . . . . . . . . . .30
6.2. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . .31
6.3. Notice of Default. . . . . . . . . . . . . . . . . . . . . .31
6.4. Conduct of Business. . . . . . . . . . . . . . . . . . . . .31
6.5. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
6.6. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .32
6.7. Compliance with Laws . . . . . . . . . . . . . . . . . . . .32
6.8. Maintenance of Properties. . . . . . . . . . . . . . . . . .32
6.9. Inspection . . . . . . . . . . . . . . . . . . . . . . . . .32
6.10. Dividends. . . . . . . . . . . . . . . . . . . . . . . . . .32
6.11. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . .33
6.12. Merger . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.13. Contingent Obligations . . . . . . . . . . . . . . . . . . .34
6.14. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . .34
6.15. Affiliates . . . . . . . . . . . . . . . . . . . . . . . . .35
6.16. Environmental Matters. . . . . . . . . . . . . . . . . . . .36
6.17. Change in Corporate Structure; Fiscal Year . . . . . . . . .36
6.18. Inconsistent Agreements. . . . . . . . . . . . . . . . . . .36
6.19. Financial Covenants. . . . . . . . . . . . . . . . . . . . .36
6.19.1. Minimum Net Worth. . . . . . . . . . . . . . . . . . . . . .36
6.19.2. Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . .36
6.19.3. Finance Assets Ratio . . . . . . . . . . . . . . . . . . . .36
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
6.20. Tax Consolidation. . . . . . . . . . . . . . . . . . . . . .36
6.21. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . .37

ARTICLE VII DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . .37

ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES . . . . . . .39
8.1. Acceleration . . . . . . . . . . . . . . . . . . . . . . . .39
8.2. Amendments . . . . . . . . . . . . . . . . . . . . . . . . .39
8.3. Preservation of Rights . . . . . . . . . . . . . . . . . . .40

ARTICLE IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . .40
9.1. Survival of Representations. . . . . . . . . . . . . . . . .40
9.2. Governmental Regulation. . . . . . . . . . . . . . . . . . .40
9.3. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.4. Headings . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . .40
9.6. Several Obligations; Benefits of this Agreement. . . . . . .41
9.7. Expenses; Indemnification. . . . . . . . . . . . . . . . . .41
9.8. Numbers of Documents . . . . . . . . . . . . . . . . . . . .41
9.9. Accounting . . . . . . . . . . . . . . . . . . . . . . . . .41
9.10. Severability of Provisions . . . . . . . . . . . . . . . . .41
9.11. Nonliability of Lenders. . . . . . . . . . . . . . . . . . .41
9.12. CHOICE OF LAW. . . . . . . . . . . . . . . . . . . . . . . .42
9.13. CONSENT TO JURISDICTION. . . . . . . . . . . . . . . . . . .42
9.14. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . .42
9.15. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . .43
9.16. Counterparts . . . . . . . . . . . . . . . . . . . . . . . .43
9.17. Certain Notices. . . . . . . . . . . . . . . . . . . . . . .43
9.18. Treatment of Certain Information: Confidentiality. . . . . .43

ARTICLE X THE AGENT. . . . . . . . . . . . . . . . . . . . . . . . . .44
10.1. Appointment. . . . . . . . . . . . . . . . . . . . . . . . .44
10.2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . .44
10.3. General Immunity . . . . . . . . . . . . . . . . . . . . . .44
10.4. No Responsibility for Loans, Recitals, etc.. . . . . . . . .44
10.5. Action on Instructions of Lenders. . . . . . . . . . . . . .44
10.6. Employment of Agents and Counsel . . . . . . . . . . . . . .45
10.7. Reliance on Documents; Counsel . . . . . . . . . . . . . . .45
10.8. Agent's Reimbursement and Indemnification. . . . . . . . . .45
10.9. Notice of Default. . . . . . . . . . . . . . . . . . . . . .45
10.10. Rights as a Lender . . . . . . . . . . . . . . . . . . . . .45
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C>
10.11. Lender Credit Decision . . . . . . . . . . . . . . . . . . .46
10.12. Successor Agent. . . . . . . . . . . . . . . . . . . . . . .46

ARTICLE XI SETOFF; RATABLE PAYMENTS . . . . . . . . . . . . . . . . . .47
11.1. Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . .47
11.2. Ratable Payments . . . . . . . . . . . . . . . . . . . . . .47

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS. . . . . .47
12.1. Successors and Assigns . . . . . . . . . . . . . . . . . . .47
12.2. Participations . . . . . . . . . . . . . . . . . . . . . . .48
12.2.1. Permitted Participants; Effect . . . . . . . . . . . . . . .48
12.2.2. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . .48
12.2.3. Benefit of Setoff . . . . . . . . . . . . . . . . . . . . .48
12.3. Assignments. . . . . . . . . . . . . . . . . . . . . . . . .48
12.3.1. Permitted Assignments . . . . . . . . . . . . . . . . . . .48
12.3.2. Effect; Effective Date . . . . . . . . . . . . . . . . . . .49
12.4. Dissemination of Information . . . . . . . . . . . . . . . .49
12.5. Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . .49

ARTICLE XIII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . .49
13.1. Giving Notice. . . . . . . . . . . . . . . . . . . . . . . .49
13.2. Change of Address. . . . . . . . . . . . . . . . . . . . . .50

ARTICLE XIV BORROWER GUARANTY. . . . . . . . . . . . . . . . . . . . . .50

ARTICLE XV SUBSIDIARY GUARANTY. . . . . . . . . . . . . . . . . . . . .53

ARTICLE XVI SALE OF SUBSIDIARY BORROWER. . . . . . . . . . . . . . . . .56
</TABLE>

<PAGE>

8
<PAGE>

EXHIBITS

Exhibit A (Article 1) Note
Exhibit B (Section 6.1(c)) Compliance Certificate
Exhibit C (Section 12.3.1) Assignment Agreement

SCHEDULES

Schedule 5.3 - Approvals and Consents
Schedule 5.8 - Material Contingent Obligations
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.16 - Material Restrictions
Schedule 6.14 - Liens

9
<PAGE>

CREDIT AGREEMENT

This Credit Agreement, dated as of July 31, 1997, is among FUND AMERICAN
ENTERPRISES HOLDINGS, INC., a Delaware corporation, FUND AMERICAN ENTERPRISES,
INC. (formerly known as Fund American Enterprises II, Inc.), a Delaware
corporation, the Lenders and THE FIRST NATIONAL BANK OF CHICAGO, individually
and as Agent.

R E C I T A L S:

A. The Borrowers have requested the Lenders to make financial
accommodations to them in the aggregate principal amount of $35,000,000, the
proceeds of which the Borrowers will use for the working capital and general
corporate needs of the Borrowers and their Subsidiaries; and

B. The Lenders are willing to extend such financial accommodations on the
terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrowers, the Lenders and the
Agent hereby agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement:

"ABR Advance" means an Advance which bears interest at the Alternate Base
Rate.

"Advance" means a borrowing pursuant to Section 2.1 consisting of the
aggregate amount of the several Loans made on the same Borrowing Date by the
Lenders to the Relevant Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.

"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 20% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.

<PAGE>

"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to Article X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to Article X.

"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders hereunder. The initial Aggregate Commitment is $35,000,000.

"Agreement" means this Credit Agreement, as it may be amended, modified or
restated and in effect from time to time.

"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; provided, however, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
financial statements furnished to the Lenders pursuant to Section 5.5 hereof.

"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (a) the Corporate Base Rate for such day, and (b) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum, in each
case changing when and as the Corporate Base Rate and the Federal Funds
Effective Rate, as the case may be, changes.

"Applicable Credit Rating" shall mean the highest rating level assigned by
S&P or Moody's, as the case may be, to any long-term senior debt of the Borrower
which ranks on parity, as to payment and security, with the Loans and the
obligations of the Borrower under Article XIV.

"Applicable Eurodollar Margin" means the applicable percentage set forth
below based upon the Level then in effect:

Level Margin

Level I .175%
Level II .190%
Level III .230%
Level IV .270%
Level V .300%
Level VI .375%
Level VII .550%

<PAGE>

"Applicable Facility Fee Margin" means the applicable percentage set forth
below based upon the Level then in effect:

Level Margin

Level I .050%
Level II .060%
Level III .070%
Level IV .080%
Level V .100%
Level VI .125%
Level VII .200%

"Article" means an article of this Agreement unless another document is
specifically referenced.

"Authorized Officer" means, with respect to the Borrower or the Subsidiary
Borrower, any of the chief executive officer, president, chief financial
officer, treasurer or controller thereof, acting singly.

"Bankruptcy Code" means Title 11, United States Code, sections 1 et seq.,
as the same may be amended from time to time, and any successor thereto or
replacement therefor which may be hereafter enacted.

"Benefit Plan" means any deferred benefit plan for the benefit of present,
future or former employees, whether or not such benefit plan is a Plan.

"Borrower" means Fund American Enterprises Holdings, Inc., a Delaware
corporation, and its successors and assigns.

"Borrowers" means, collectively, the Borrower and the Subsidiary Borrower.

"Borrowing Date" means a date on which an Advance is made hereunder.

"Borrowing Notice" is defined in Section 2.7.

"Business Day" means (a) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open

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<PAGE>

in Chicago for the conduct of substantially all of their commercial lending
activities and on which dealings in United States dollars are carried on in the
London interbank market, and (b) for all other purposes, a day (other than a
Saturday or Sunday) on which banks generally are open in Chicago for the conduct
of substantially all of their commercial lending activities.

"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.

"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.

"Change" is defined in Section 3.2.

"Change in Control" means (a) the acquisition by any "person" or "group"
(as such terms are used in Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended) (other than John J. Byrne or any Plan or any Benefit
Plan of the Borrower or any of its Subsidiaries), including without limitation
any acquisition effected by means of any transaction contemplated by Section
6.12, of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended) of 25% or more of the outstanding shares of voting stock of the
Borrower or of the Subsidiary Borrower, or (b) during any period of 12
consecutive calendar months, commencing on the date of the Agreement, the
ceasing of those individuals (the "Continuing Directors") who (i) were directors
of the Borrower or of the Subsidiary Borrower, as the case may be, on the first
day of each such period or (ii) subsequently became directors of the Borrower or
of the Subsidiary Borrower, as the case may be, and whose initial election or
initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Borrower or of the Subsidiary Borrower, as the case may be, to constitute a
majority of the board of directors of the Borrower or of the Subsidiary
Borrower, as the case may be, or (c) during any period of 12 consecutive
calendar months, commencing on the date of this Agreement, the ceasing of
individuals who hold an office possessing the title Senior Vice President or
such title that ranks senior to a Senior Vice President (collectively, "Senior
Management") of the Borrower or of the Subsidiary Borrower, as the case may be,
on the first day of each such period to constitute a majority of the Senior
Management of the Borrower or of the Subsidiary Borrower, as the case may be;
provided, however, that (x) the provisions of this definition shall not apply to
the Subsidiary Borrower in connection with a transaction permitted by Section
6.12(d)(ii) and (y) clauses (b) and (c) of this definition shall not apply to
the Subsidiary Borrower during the time the Subsidiary Borrower is a
Wholly-Owned Subsidiary of the Borrower

"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise

4
<PAGE>

modified from time to time.

"Commitment" means, for each Lender, the obligation of such Lender to make
Loans not exceeding the amount set forth opposite its signature below and as set
forth in any Notice of Assignment relating to any assignment which has become
effective pursuant to Section 12.3.2, as such amount may be modified from time
to time pursuant to the terms hereof.

"Consolidated" or "consolidated", when used in connection with any
calculation, means a calculation to be determined on a consolidated basis for a
Person and its Subsidiaries in accordance with Agreement Accounting Principles.

"Consolidated Person" means, for the taxable year of reference, each Person
which is a member of the affiliated group of the Borrower if Consolidated
returns are or shall be filed for such affiliated group for federal income tax
purposes or any combined or unitary group of which the Borrower is a member for
state income tax purposes.

"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract or application for a Letter of Credit,
excluding however (a) insurance policies and insurance contracts issued in the
ordinary course of business and (b) any financial guarantees issued by Financial
Security Assurance Holdings Ltd.

"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Code.

"Conversion/Continuation Notice" is defined in Section 2.8.

"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest publicly announced by First Chicago from time to time,
changing when and as said corporate base rate changes. The Corporate Base Rate
is a reference rate and does not necessarily represent the lowest or best rate
of interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.

"Default" means an event described in Article VII.

"Environmental Laws" is defined in Section 5.18.

5
<PAGE>

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.

"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the rate determined by the Agent to be the rate at
which deposits in U.S. dollars are offered by First Chicago to first-class banks
in the London interbank market at approximately 11 a.m. (London time) two
Business Days prior to the first day of such Interest Period, in the approximate
amount of First Chicago's relevant Eurodollar Advance and having a maturity
approximately equal to such Interest Period.

"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
(b) the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to
the next higher multiple of 1/100 of 1% if the rate is not such a multiple.

"Facility Fee" is defined in Section 2.4(a).

"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.

"Finance Assets" means each of the following: (a) investments in
securities issued or fully guaranteed by the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States of America is pledged in support thereof), (b) investments in
equity securities traded on the New York Stock Exchange, the American Stock
Exchange or NASDAQ and securities convertible in to such equity securities, (c)
investments in Investment Grade Obligations, (d) investments in money market
funds substantially all the assets of which are comprised of securities of the
types described in clauses (a) through (c) above and (e) so long as put rights
with respect thereto are available to the Borrowers, investments in US West
Preferred Stock; provided, that Finance Assets shall not include any securities
pledged to secure any obligation (contingent or otherwise).

6
<PAGE>

"Finance Assets Ratio" means, at any time, the ratio of (a) Finance Assets
of the Borrower and the Subsidiary Borrower at such time to (b) the sum of (i)
Funded Indebtedness of the Borrower and the Subsidiary Borrower at such time
minus (ii) cash and Money Market Investments of the Borrower and the Subsidiary
Borrower at such time. For purposes of this definition, Finance Assets shall be
valued, without duplication, at fair market value to the extent there exists a
readily ascertainable fair market value for such Finance Asset or, in the event
there exists no such readily ascertainable fair market value for such Finance
Asset, at book value, as calculated in accordance with Agreement Accounting
Principles.

"Financial Statements" is defined in Section 5.5.

"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.

"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.

"Fiscal Year" means the twelve-month accounting period ending December 31
of each year.

"Funded Indebtedness" means Indebtedness of the type described in clauses
(a), (d), (e) and (h) of the definition "Indebtedness".

"Governmental Authority" means any government (foreign or domestic) or any
state or other political subdivision thereof or any governmental body, agency,
authority, department or commission (including without limitation any taxing
authority or political subdivision) or any instrumentality or officer thereof
(including without limitation any court or tribunal) exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any corporation, partnership or other entity directly or
indirectly owned or controlled by or subject to the control of any of the
foregoing.

"Hazardous Materials" is defined in Section 5.18.

"Indebtedness" of a Person means such Person's (a) obligations for borrowed
money, (b) obligations representing the deferred purchase price of Property or
services (other than accounts payable arising in the ordinary course of such
Person's business payable on terms customary in the trade), (c) obligations,
whether or not assumed, secured by Liens or payable out of the proceeds or
production from Property now or hereafter owned or acquired by such Person, (d)
obligations which are evidenced by notes, acceptances, or similar instruments,
(e) Capitalized Lease Obligations, (f) Rate Hedging Obligations, (g) Contingent
Obligations, (h) obligations for which such Person is obligated pursuant to or
in respect of a Letter of Credit and (i) repurchase obligations or liabilities
of such Person with respect to accounts or notes receivable sold by such Person;
provided that

7
<PAGE>

financial guarantees entered into in the ordinary course of business by
Financial Security Assurance Holdings Ltd. or its subsidiaries shall not be
included within "Indebtedness" for purposes of Section 6.19.2 (if Financial
Security Assurance Holdings Ltd. shall become a Subsidiary).

"Insurance Subsidiaries" means Subsidiaries which are engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.

"Interest Period" means, with respect to a Eurodollar Advance, a period of
one, two, three or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two, three or
six months thereafter; provided, however, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day; provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.

"Investment Grade Obligations" means, as of any date, investments having a
National Association of Insurance Commissioners investment rating of 1 or 2, or
a S&P rating within the range of ratings from AAA to BBB-, or a Moody=s rating
within the range of ratings from Aaa to Baa3.

"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.

"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.

"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.

"Level" means, and includes, Level I, Level II, Level III, Level IV,
Level V, Level VI or Level VII, whichever is in effect at the relevant time.

"Level I" shall exist at any time the Applicable Credit Rating of S&P is
equal to or greater than A+ or the Applicable Credit Rating of Moody's is equal
to or greater than A1.

"Level II" shall exist at any time (a) the Applicable Credit Rating of S&P
is equal to or greater than A or the Applicable Credit Rating of Moody's is
equal to or greater than A2 and (b)

8
<PAGE>

Level I does not exist.

"Level III" shall exist at any time (a) the Applicable Credit Rating of S&P
is equal to or greater than A- or the Applicable Credit Rating of Moody's is
equal to or greater than A3 and (b) Levels I and II do not exist.

"Level IV" shall exist at any time (a) the Applicable Credit Rating of S&P
is equal to or greater than BBB+ or the Applicable Credit Rating of Moody's is
equal to or greater than Baa1 and (b) Levels I, II and III do not exist.

"Level V" shall exist at any time (a) the Applicable Credit Rating of S&P
is equal to or greater than BBB or the Applicable Credit Rating of Moody's is
equal to or greater than Baa2 and (b) Levels I, II, III and IV do not exist.

"Level VI" shall exist at any time the Applicable Credit Rating of S&P is
BBB- and the Applicable Credit Rating of Moody's is Baa3.

"Level VII" shall exist at any time the Applicable Credit Rating of S&P is
less than BBB- or the Applicable Credit Rating of Moody's is less than Baa3 or
at any time neither S&P nor Moody's assigns an Applicable Credit Rating.

"Leverage Ratio" means, at any time, the ratio of (a) the combined Funded
Indebtedness of the Borrower and the Subsidiary Borrower at such time to (b) the
sum of the combined Funded Indebtedness of the Borrower and the Subsidiary
Borrower at such time plus the Borrower's Net Worth at such time, in all cases
determined in accordance with Agreement Accounting Principles.

"Lien" means any security interest, lien (statutory or other), mortgage,
pledge, hypothecation, assignment, deposit arrangement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including, without limitation, the interest of a
vendor or lessor under any conditional sale, Capitalized Lease or other title
retention agreement), save in respect of liabilities and obligations arising out
of the underwriting of insurance policies and contracts of insurance.

"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.

"Loan Documents" means this Agreement, the Notes and the other documents
and agreements contemplated hereby and executed by either of the Borrowers in
favor of the Agent or any Lender.

"Margin Stock" has the meaning assigned to that term under Regulation U.

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<PAGE>

"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of the Borrower and its Subsidiaries taken as a whole
or of the Subsidiary Borrower and its Subsidiaries taken as a whole, (b) the
ability of either of the Borrowers or any Subsidiary to perform its obligations
under the Loan Documents, or (c) the validity or enforceability of any of the
Loan Documents or the rights or remedies of the Agent or the Lenders thereunder.

"Maturity Date" means January 29, 1999.

"Money Market Investments" means (a) direct obligations of the United
States of America, or of any agency thereof, or obligations guaranteed as to
principal and interest by the United States of America, or of any agency
thereof, in either case maturing not more than one year from the date of
acquisition thereof; (b) certificates of deposit issued by any bank or trust
company organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than 90 days from the date of acquisition
thereof; (c) commercial paper rated A-1 or better or P-1 or better by S&P or
Moody's, respectively, maturing not more than 90 days from the date of
acquisition thereof; and (d) shares in an open-end management investment company
with U.S. dollar denominated investments in fixed income obligations, including
repurchase agreements, fixed time deposits and other obligations, with a dollar
weighted average maturity of not more than one year, and for the calculation of
this dollar weighted average maturity, certain instruments which have a variable
rate of interest readjusted no less frequently than annually are deemed to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.

"Moody's" means Moody's Investors Services, Inc., and any successor
thereto.

"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.

"Net Worth" means, with respect to any Person, at any date the consolidated
shareholders' equity of such Person and its Consolidated Subsidiaries determined
in accordance with Agreement Accounting Principles (but excluding the effect of
Statement of Financial Accounting Standards No. 115).

"Non-Excluded Taxes" is defined in Section 2.17(a).

"Note" means a promissory note in substantially the form of Exhibit A
hereto, with appropriate insertions, duly executed and delivered to the Agent by
each of the Borrowers and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.

10
<PAGE>

"Notice of Assignment" is defined in Section 12.3.2.

"Obligations" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of the Borrowers to the Lenders or to any
Lender, the Agent or any indemnified party hereunder arising under any of the
Loan Documents.

"Participants" is defined in Section 12.2.1.

"Payment Date" means the last day of each March, June, September and
December.

"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.

"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization, or
any government or political subdivision or any agency, department or
instrumentality thereof.

"Plan" means an employee pension benefit plan, as defined in Section 3(2)
of ERISA, as to which the Borrower or any member of the Controlled Group may
have any liability.

"Proceeding" is defined in Section 5.18.

"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.

"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage of the Aggregate Commitment or if the Aggregate
Commitment has been terminated, its percentage of the aggregate principal amount
of outstanding Advances.

"Purchasers" is defined in Section 12.3.1.

"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buy backs, reversals, terminations or

11
<PAGE>

assignments of any of the foregoing.

"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to depositary institutions.

"Regulation G" means Regulation G of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or official interpretation of said Board of Governors relating
to the extension of credit by Persons other than banks, brokers and dealers for
the purpose of purchasing or carrying margin stocks applicable to such Persons.

"Regulation T" means Regulation T of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or official interpretation of such Board of Governors relating
to the extension of credit by securities brokers and dealers for the purpose of
purchasing or carrying margin stocks applicable to such Persons.

"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to such Persons.

"Regulation X" means Regulation X of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or official interpretation of said Board of Governors relating
to the extension of credit by the specified lenders for the purpose of
purchasing or carrying margin stocks applicable to such Persons.

"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq.

"Relevant Borrower" means, with respect to any outstanding or requested
Loan or Advance, whichever of the Borrowers is the existing or proposed primary
obligor in respect of such Loan or Advance.

"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event; provided, that a failure to meet the minimum
funding standard of Section 412 of the Code and of Section 302 of ERISA shall be
a Reportable Event regardless of the issuance of any such waiver of the notice
requirement in accordance with

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<PAGE>

either Section 4043(a) of ERISA or Section 412(d) of the Code.

"Required Lenders" means Lenders in the aggregate having at least 66-2/3%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66-2/3% of the aggregate unpaid
principal amount of the outstanding Loans.

"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.

"Revolver Termination Date" means July 30, 1998.

"Risk-Based Capital Guidelines" is defined in Section 3.2.

"S&P" means Standard & Poor's Ratings Group, and any successor thereto.

"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.

"Significant Subsidiary" shall mean and include, at any time, the
Subsidiary Borrower and each other Subsidiary of the Borrower to the extent that
the Net Worth of such Subsidiary is equal to or greater than $5,000,000.

"Single Employer Plan" means a Plan subject to Title IV of ERISA maintained
by the Borrower or any member of the Controlled Group for employees of the
Borrower or any member of the Controlled Group, other than a Multiemployer Plan.

"Solvent" means, when used with respect to a Person, that (a) the fair
saleable value of the assets of such Person is in excess of the total amount of
the present value of its liabilities (including for purposes of this definition
all liabilities (including loss reserves as determined by such Person), whether
or not reflected on a balance sheet prepared in accordance with Agreement
Accounting Principles and whether direct or indirect, fixed or contingent,
secured or unsecured, disputed or undisputed), (b) such Person is able to pay
its debts or obligations in the ordinary course as they mature and (c) such
Person does not have unreasonably small capital to carry out its business as
conducted and as proposed to be conducted. "Solvency" shall have a correlative
meaning.

"SOMSC" means Source One Mortgage Services Corporation, a Delaware
corporation.

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<PAGE>

modified from time to time (and, subsequent to the termination thereof, as in
effect on the date of such termination).

"Stock Transfers" means, collectively, (a) any repurchase by the Borrower
of its capital stock and (b) any extraordinary dividend or distribution declared
and paid or made by the Borrower to the holders of its capital stock, including,
without limitation, any distribution by the Borrower of the shares of capital
stock of any of its Subsidiaries.

"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(b) any partnership, association, joint venture, limited liability company or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.

"Subsidiary Borrower" means Fund American Enterprises, Inc., a Delaware
corporation.

"Subsidiary Guarantor" means the Subsidiary Borrower in its capacity as a
guarantor pursuant to Article XV.

"Termination Event" means, with respect to a Plan which is subject to Title
IV of ERISA, (a) a Reportable Event, (b) the withdrawal of the Borrower or any
other member of the Controlled Group from such Plan during a plan year in which
the Borrower or any other member of the Controlled Group was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under
Section 4068(f) of ERISA, (c) the termination of such Plan, the filing of a
notice of intent to terminate such Plan or the treatment of an amendment of such
Plan as a termination under Section 4041 of ERISA, (d) the institution by the
PBGC of proceedings to terminate such Plan or (e) any event or condition which
might constitute grounds under Section 4042 of ERISA for the termination of, or
appointment of a trustee to administer, such Plan.

"Transferee" is defined in Section 12.4.

"Type" means, with respect to any Advance, its nature as an ABR Advance or
Eurodollar Advance.

"Unfunded Liability" means the amount (if any) by which the present value
of all vested and unvested accrued benefits under a Single Employer Plan exceeds
the fair market value of assets allocable to such benefits, all determined as of
the then most recent valuation date for such Plans using PBGC actuarial
assumptions for single employer plan terminations.

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<PAGE>

"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.

"Unrestricted Subsidiary" means SOMSC and any Subsidiary thereof.

"US West Preferred Stock" means the US West Series B cumulative redeemable
preferred stock $1.00 par value per share purchased by the Borrower pursuant to
and subject to the terms of the Securities Purchase Agreement dated April 10,
1994 among the Borrower, US West, Inc., US West Capital Corporation and
Financial Security Assurance Holdings Ltd. (as such agreement may be amended
from time to time).

"Valley Credit Agreement" means the Amended and Restated Credit Agreement,
dated as of July 30, 1997, among Valley Group, Inc., the financial institutions
from time to time party thereto and First Chicago, as agent, as the same may be
amended, supplemented or otherwise modified from time to time (and, subsequent
to the termination thereof, as in effect on the date of such termination).

"White Mountains" means White Mountains Holdings, Inc., a Delaware
corporation formerly known as Fund American Enterprises, Inc. and the survivor
of a merger with White Mountains Holdings, Inc., a New Hampshire corporation.

"White Mountains Credit Agreement" means the Amended and Restated Credit
Agreement, dated as of July 30, 1997, among White Mountains, the financial
institutions from time to time party thereto and First Chicago, as agent, as the
same may be amended, supplemented or other wise modified from time to time (and,
subsequent to the termination thereof, as in effect on the date of such
termination).

"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the
outstanding voting securities of which (other than directors' qualifying or
similar shares) shall at the time be owned or controlled, directly or
indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such
Person, or by such Person and one or more Wholly-Owned Subsidiaries of such
Person, or (b) any partnership, association, joint venture, limited liability
company or similar business organization 100% of the ownership interests having
ordinary voting power of which (other than directors' qualifying shares) shall
at the time be so owned or controlled.

The foregoing definitions (other than the definitions of "Borrower" and
"Borrowers") shall be equally applicable to both the singular and plural forms
of the defined terms.

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ARTICLE II

THE CREDITS

2.1. Advances. (a) From and including the date hereof to but excluding
the Revolver Termination Date, each Lender severally (and not jointly) agrees,
on the terms and conditions set forth in this Agreement, to make Advances to the
Borrowers from time to time in amounts not to exceed in the aggregate at any one
time outstanding the amount of its pro-rata share of the Aggregate Commitment
existing at such time. Subject to the terms of this Agreement, the Borrowers
may borrow, repay and reborrow Advances at any time prior to the Revolver
Termination Date. The Commitments to lend hereunder shall expire on the
Revolver Termination Date. Principal payments made after the Revolver
Termination Date may not be reborrowed.

(b) The Borrowers hereby agree that if at any time, prior to the
Revolver Termination Date, as a result of reductions in the Aggregate Commitment
pursuant to Section 2.4 or otherwise, the aggregate balance of the Loans exceeds
the Aggregate Commitment, they shall repay, or cause to be repaid, immediately
outstanding Loans in such amount as may be necessary to eliminate such excess.

(c) The Borrowers' obligation to pay the principal of, and interest
on, the Loans shall be evidenced by the Notes. Although the Notes shall be
dated the date of this Agreement, interest in respect thereof shall be payable
only for the periods during which the Loans evidenced thereby are outstanding
and, although the stated amount of each Note shall be equal to the applicable
Lender's Commitment, each Note shall be enforceable, with respect to the
Relevant Borrower's obligation to pay the principal amount thereof, only to the
extent of the unpaid principal amount of the Loans at the time evidenced
thereby.

(d) All Advances and all Loans shall mature, and the principal amount
thereof and the unpaid accrued interest thereon shall be due and payable in
full, on the Maturity Date.

2.2. Ratable Loans. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.

2.3. Types of Advances. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance with
Sections 2.7 and 2.8.

2.4. Facility Fee; Reductions in Aggregate Commitment. (a) The Borrower
agrees to pay to the Agent for the account of each Lender a facility fee
("Facility Fee") in an amount equal to the Applicable Facility Fee Margin per
annum times the daily average Commitment (or, on and after

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<PAGE>

the Revolver Termination Date, times the aggregate outstanding principal amount
of the Loans) of such Lender from the date hereof to and including the Maturity
Date, payable on each Payment Date hereafter and on the Maturity Date. All
accrued Facility Fees shall be payable on the effective date of any termination
of the obligations of the Lenders to make Loans hereunder.

(b) The Borrower may permanently reduce the Aggregate Commitment in
whole, or in part ratably among the Lenders in a minimum aggregate amount of
$2,000,000, upon at least three (3) Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction; provided, however,
that the amount of the Aggregate Commitment may not be reduced below the
aggregate principal amount of the outstanding Advances.

2.5. Minimum Amount of Each Advance. Each Advance shall be in the minimum
amount of $2,000,000 (and in integral multiples of $500,000 if in excess
thereof), provided, however, that (a) any ABR Advance may be in the amount of
the unused Aggregate Commitment and (b) in no event shall more than six (6)
Eurodollar Advances be permitted to be outstanding at any time.

2.6. Optional Principal Payments. The Borrowers may from time to time pay,
without penalty or premium, all outstanding ABR Advances, or, in a minimum
aggregate amount of $2,000,000, any portion of the outstanding ABR Advances,
upon two Business Days' prior notice to the Agent. Subject to Section 3.4 and
upon like notice, a Eurodollar Advance may be paid prior to the last day of the
applicable Interest Period in a minimum amount of $2,000,000 or an integral
multiple of $500,000 in excess thereof.

2.7. Method of Selecting Types and Interest Periods for New Advances. The
Borrower shall select the Type of Advance and, in the case of each Eurodollar
Advance, the Interest Period applicable to each Advance from time to time;
provided, however, that in the event Loans are incurred on the date of this
Agreement, all Loans incurred on such date shall be ABR Advances. The Borrower
shall give the Agent irrevocable notice (a "Borrowing Notice") not later than
10:00 a.m. (Chicago time) on the Borrowing Date of each ABR Advance and at least
three (3) Business Days before the Borrowing Date for each Eurodollar Advance,
specifying:

(a) the Borrowing Date of such Advance, which shall be a Business
Day;

(b) the Relevant Borrower which is to receive such Advance;

(d) the Type of Advance selected;

(e) in the case of each Eurodollar Advance, the Interest Period
applicable thereto,

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<PAGE>

which shall end on or prior to the Maturity Date; and

(f) any changes to money transfer instructions previously delivered
to the Agent.

Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago, to
the Agent at its address specified pursuant to Article XIII. The Agent will
make the funds so received from the Lenders available to the Borrower at the
Agent's aforesaid address or at such account at such other institution in the
United States of America as the Borrower may indicate in the Borrowing Notice.

2.8. Conversion and Continuation of Outstanding Advances. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances. Each Eurodollar Advance shall continue as a
Eurodollar Advance until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Advance shall be automatically converted
into an ABR Advance unless the Borrower shall have given the Agent a
Conversion/Continuation Notice requesting that, at the end of such Interest
Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or
another Interest Period. Subject to the terms of Section 2.5, the Borrower may
elect from time to time to convert all or any part of an Advance of any Type
into any other Type or Types of Advances; provided, however, that any conversion
of any Eurodollar Advance shall be made on, and only on, the last day of the
Interest Period applicable thereto. The Borrower shall give the Agent
irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an
ABR Advance or continuation of a Eurodollar Advance not later than 10:00 a.m.
(Chicago time) on the conversion date, in the case of a conversion into an ABR
Advance, or at least three (3) Business Days, in the case of a conversion into
or continuation of a Eurodollar Advance, prior to the date of the requested
conversion or continuation, specifying:

(a) the requested date of such conversion or continuation, which
shall be a Business Day;

(b) the Relevant Borrower with respect to such Advance;

(d) the amount and Type(s) of Advance(s) into which such Advance
is to be converted or continued and, in the case of a
conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto, which
shall end on or prior to the Maturity Date.

2.9. Changes in Interest Rate, etc. Each ABR Advance shall bear interest
at the

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<PAGE>

Alternate Base Rate from and including the date of such Advance or the date on
which such Advance was converted into an ABR Advance to (but not including) the
date on which such ABR Advance is paid or converted to a Eurodollar Advance.
Changes in the rate of interest on that portion of any Advance maintained as an
ABR Advance will take effect simultaneously with each change in the Alternate
Base Rate. Each Eurodollar Advance shall bear interest from and including the
first day of the Interest Period applicable thereto to, but not including, the
last day of such Interest Period at the Eurodollar Rate determined as applicable
to such Eurodollar Advance plus the Applicable Eurodollar Margin. Changes in
the Applicable Eurodollar Margin will take effect simultaneously with each
change in a Level. No Interest Period may end after the Revolver Termination
Date.
2.10. Rates Applicable After Default. Notwithstanding anything to the
contrary contained in Section 2.7 or 2.8, no Advance may be made as, converted
into or continued as a Eurodollar Advance (except with the consent of the Agent
and the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of Section 8.2
requiring unanimous consent of the Lenders to changes in interest rates),
declare that each Eurodollar Advance and ABR Advance shall bear interest (for
the remainder of the applicable Interest Period in the case of Eurodollar
Advances) at a rate per annum equal to the rate otherwise applicable plus two
percent (2%) per annum; provided, however, that such increased rate shall
automatically and without action of any kind by the Lenders become and remain
applicable until revoked by the Required Lenders in the event of a Default
described in Section 7.6 or 7.7.

2.11. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower (at least two Business Days in advance),
by noon (Chicago time) on the date when due and shall be applied ratably by the
Agent among the Lenders. Each payment delivered to the Agent for the account of
any Lender shall be delivered promptly by the Agent to such Lender in the same
type of funds that the Agent received at its address specified pursuant to
Article XIII or at any Lending Installation specified in a notice received by
the Agent from such Lender. The Agent is hereby authorized to charge the
account of the Borrower maintained with the Agent for each payment of principal,
interest and fees as it becomes due hereunder.

2.12. Notes. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to its
Note; provided, however, that neither the failure to so record nor any error in
such recordation shall affect the Relevant Borrower's obligations under such
Note.

2.13. Interest Payment Dates; Interest and Fee Basis. Interest accrued
on each ABR Advance shall be payable on each Payment Date, commencing with the
first such date to occur after the date hereof, on any date on which an ABR
Advance is prepaid, whether due to acceleration or

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<PAGE>

otherwise, and at maturity. Interest accrued on that portion of the outstanding
principal amount of any ABR Advance converted into a Eurodollar Advance on a day
other than a Payment Date shall be payable on the date of conversion. Interest
accrued on each Eurodollar Advance shall be payable on the last day of its
applicable Interest Period, on any date on which the Eurodollar Advance is
prepaid, whether by acceleration or otherwise, and at maturity. Interest
accrued on each Eurodollar Advance having an Interest Period longer than three
months shall also be payable on the last day of each three-month interval during
such Interest Period. Interest and commitment fees shall be calculated for
actual days elapsed on the basis of a 360-day year. Interest shall be payable
for the day an Advance is made but not for the day of any payment on the amount
paid if payment is received prior to noon (Chicago time) at the place of
payment. If any payment of principal of or interest on an Advance shall become
due on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.

2.14. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice received
by it hereunder. The Agent will notify each Lender of the interest rate
applicable to each Eurodollar Advance promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Alternate Base Rate.

2.15. Lending Installations. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.

2.16. Non-Receipt of Funds by the Agent. Unless the Borrowers or a
Lender, as the case may be, notifies the Agent prior to the date on which it
is scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrowers, a payment of
principal, interest or fees to the Agent for the account of the Lenders, that
it does not intend to make such payment, the Agent may assume that such
payment has been made. The Agent may, but shall not be obligated to, make
the amount of such payment available to the intended recipient in reliance
upon such assumption. If the Borrowers have not in fact made such payment to
the Agent, the Lenders shall, on demand by the Agent, repay to the Agent the
amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made
available by the Agent until the date the Agent recovers such amount at a
rate per annum equal to the Federal Funds Effective Rate for such day. If
any Lender has not in fact made such payment to the Agent, such Lender or the
Borrowers shall, on demand by the Agent, repay to the Agent the amount so
made available together with interest thereon in respect of each day

20
<PAGE>

during the period commencing on the date such amount was so made available by
the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) in the case of payment by a Lender, the Federal Funds Effective
Rate for such day, or (b) in the case of payment by the Borrowers, the
interest rate applicable to the relevant Loan.

2.17. Taxes. (a) Any payments made by the Borrowers under this
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes or any other tax based
upon any income imposed on the Agent or any Lender by the jurisdiction in which
the Agent or such Lender is incorporated or has its principal place of business
or maintains its Lending Installation. If any such non-excluded taxes, levies,
imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the Agent or any
Lender hereunder, the amounts so payable to the Agent or such Lender shall be
increased to the extent necessary to yield to the Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in or pursuant to this
Agreement; provided, however, that the Borrowers shall not be required to
increase any such amounts payable to any Lender that is not organized under the
laws of the U.S. or a state thereof if such Lender fails to comply with the
requirements of paragraph (b) of this Section 2.17. Whenever any Non-Excluded
Taxes are payable by the Borrowers, as promptly as practicable thereafter the
Borrowers shall send to the Agent for its own account or for the account of such
Lender, as the case may be, a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrowers fails to pay
any Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Agent the required receipts or other required documentary evidence,
the Borrowers shall indemnify the Agent and the Lenders for any incremental
taxes, interest or penalties that may become payable by any Agent or any Lender
as a result of any such failure. The agreements in this Section 2.17 shall
survive the termination of this Agreement and the payment of all other amounts
payable hereunder.

(b) At least five Business Days prior to the first date on which
interest or fees are payable hereunder for the account of any Lender, each
Lender that is not incorporated under the laws of the United States of America,
or a state thereof, agrees that it will deliver to each of the Borrowers and the
Agent two duly completed and properly executed copies of United States Internal
Revenue Service Form 1001 or 4224 (or a successor form), certifying in either
case that such Lender is entitled to receive payments under this Agreement and
the Notes without deduction or withholding of any United States federal income
taxes. Each Lender which so delivers a Form 1001 or 4224 (or a successor form)
further undertakes to deliver to each of the Borrower and the Agent two
additional duly completed and properly executed copies of such form (or a
successor form) on or before the date that such form expires (currently, three
successive calendar years for Form 1001 and each tax year for Form 4224) or
becomes obsolete or after the occurrence of any event requiring a change in

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<PAGE>

the most recent forms so delivered by it, and such amendments thereto or
extensions or renewals thereof as may be reasonably requested by the Borrowers
or the Agent, in each case certifying that such Lender is entitled to receive
payments under this Agreement and the Notes without deduction or withholding of
any United States federal income taxes, unless an event (including, without
limitation, any change in treaty, law or regulation) has occurred prior to the
date on which any such delivery would otherwise be required which renders all
such forms inapplicable or which would prevent such Lender from duly completing
and delivering any such form with respect to it and such Lender advises the
Borrowers and the Agent that it is not capable of receiving payments without any
deduction or withholding of United States federal income tax.

2.18. Agent's Fees. The Borrowers shall pay to the Agent those fees,
in addition to the Facility Fees referenced in Section 2.4(a), in the amounts
and at the times separately agreed to between the Agent and the Borrowers.

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<PAGE>

ARTICLE III

CHANGE IN CIRCUMSTANCES

3.1. Yield Protection. If, after the date hereof, the adoption of or any
change in any law or any governmental or quasi-governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law), or any
new interpretation thereof, or the compliance of any Lender with such adoption,
change or interpretation.

(a) subjects any Lender or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due from either
of the Borrowers (excluding taxation of the overall net income of any
Lender or applicable Lending Installation imposed by the jurisdiction in
which such Lender or Lending Installation is incorporated or has its
principal place of business), or changes the basis of taxation of
principal, interest or any other payments to any Lender or Lending
Installation in respect of its Loans or other amounts due it hereunder,
or

(b) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, any Lender or any applicable Lending Installation (other
than reserves and assessments taken into account in determining the
interest rate applicable to Eurodollar Advances), or

(c) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making,
funding or maintaining Loans or reduces any amount receivable by any
Lender or any applicable Lending Installation in connection with any
Loans, or requires any Lender or any applicable Lending Installation to
make any payment calculated by reference to the amount of Loans held, or
interest received by it, by an amount deemed material by such Lender,

then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or resulting in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.

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<PAGE>

Lender determines is attributable to this Agreement, its Loans or its obligation
to make Loans hereunder (after taking into account such Lender's policies as to
capital adequacy). "Change" means (a) any change after the date of this
Agreement in the Risk-Based Capital Guidelines, or (b) any adoption of or change
in any other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement which affects the amount of capital required or
expected to be maintained by any Lender or any Lending Installation or any
corporation controlling any Lender. "Risk-Based Capital Guidelines" means (a)
the risk-based capital guidelines in effect in the United States on the date of
this Agreement and (b) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory Practices
entitled "International Convergence of Capital Measurements and Capital
Standards" and any amendments to such regulations adopted prior to the date of
this Agreement.

3.3. Availability of Types of Advances. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available, or (b) the interest rate applicable to a Eurodollar Advance does not
accurately or fairly reflect the cost of making or maintaining such Advance,
then the Agent shall suspend the availability of Eurodollar Advances until such
circumstance no longer exists and require any Eurodollar Advances to be repaid.

3.4. Funding Indemnification. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Relevant Borrower for any
reason other than default by the Lenders, the Borrower will indemnify the Agent
and each Lender for any loss or cost incurred by it resulting therefrom,
including, without limitation, any loss or cost in liquidating or employing
deposits acquired to fund or maintain the Eurodollar Advance.

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<PAGE>

through the purchase of a deposit of the type and maturity corresponding to the
deposit used as a reference in determining the Eurodollar Rate applicable to
such Loan, whether in fact that is the case or not. Unless otherwise provided
herein, the amount specified in the written statement of any Lender shall be
payable on demand after receipt by the Borrower of the written statement. The
obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive
payment of the Obligations and termination of this Agreement.

ARTICLE IV

CONDITIONS PRECEDENT

4.1. Initial Loans. The Lenders shall not be required to make the initial
Advance hereunder unless the Borrower has furnished the following to the Agent
with sufficient copies for the Lenders and the other conditions set forth below
have been satisfied:

(a) Charter Documents; Good Standing Certificates. Copies of the
certificate of incorporation of the Borrower and the Subsidiary Borrower,
together with all amendments thereto, both certified by the appropriate
governmental officer in their respective jurisdictions of incorporation,
together with a good standing certificate issued by the Secretary of State
of their respective jurisdictions of incorporation and such other
jurisdictions as shall be reasonably requested by the Agent.

(b) By-Laws and Resolutions. Copies, certified by the Secretary or
Assistant Secretary of the Borrower and the Subsidiary Borrower, of their
respective by-laws and of their respective Board of Directors' resolutions
authorizing the execution, delivery and performance of the Loan Documents
to which the Borrower and the Subsidiary Borrower are a party.

(c) Secretary's Certificate. An incumbency certificate, executed by
the Secretary or Assistant Secretary of each of the Borrower and the
Subsidiary Borrower, which shall identify by name and title and bear the
signature of the officers of the Borrower and the Subsidiary Borrower
authorized to sign the Loan Documents and to make borrowings hereunder,
upon which certificate the Agent and the Lenders shall be entitled to rely
until informed of any change in writing by the Borrower and the Subsidiary
Borrower.

(di Officer's Certificate. A certificate signed by an Authorized
Officer of the Borrower and the Subsidiary Borrower, in form and substance
satisfactory to the Agent, to the effect that on the date hereof (both
before and after giving effect to the consummation of the other
transactions contemplated hereby and the making of any Loans hereunder on

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<PAGE>

such date): (i) no Default or Unmatured Default has occurred and is continuing;
(ii) no injunction or temporary restraining order which would prohibit the
making of the Loans or other litigation which could reasonably be expected to
have a Material Adverse Effect is pending or, to the best of such Person's
knowledge, threatened; (iii) all orders, consents, approvals, licenses,
authorizations, or validations of, or filings, recordings or registrations with,
or exemptions by, any Governmental Authority required in connection with the
execution, delivery and performance of this Agreement have been or, prior to the
time required, will have been, obtained, given, filed or taken and are or will
be in full force and effect (or the Borrowers have obtained effective judicial
relief with respect to the application thereof) and all applicable waiting
periods have expired; (iv) each of the representations and warranties set forth
in Article V of this Agreement is true and correct on and as of the date hereof;
and (v) since December 31, 1996, no event or change has occurred that has caused
or evidences a Material Adverse Effect.

(ei Legal Opinion. (i) A written opinion of Brobeck, Phleger &
Harrison LLP, counsel to the Borrowers, addressed to the Agent and the
Lenders in form and substance acceptable to the Agent and its counsel.

(fi Notes. Notes payable to the order of each of the Lenders duly
executed by each of the Borrowers.

(gi Loan Documents. Executed originals of this Agreement and each of
the Loan Documents, which shall be in full force and effect, together with
all schedules, exhibits, certificates, instruments, opinions, documents and
financial statements required to be delivered pursuant hereto and thereto.

(hi Letters of Direction. Written money transfer instructions with
respect to the initial Advances and to future Advances in form and
substance acceptable to the Agent and its counsel addressed to the Agent
and signed by an Authorized Officer, together with such other related money
transfer authorizations as the Agent may have reasonably requested.

(ii Solvency Certificate. A written solvency certificate from the
chief financial officer of the Borrower and the Subsidiary Borrower in form
and content satisfactory to the Agent with respect to the value, Solvency
and other factual information of, or relating to, as the case may be, the
Borrower, on a consolidated basis, and of the Subsidiary Borrower, on a
consolidated basis.

(ji Bank Payoff Letter. A bank payoff letter, or other evidence
of satisfaction, in form and substance acceptable to the Agent from The
First National Bank of Chicago, as agent, to the effect that the total
amount due under the Credit Agreement, dated as of November 26, 1996,
among the Borrower, Fund American Enterprises, Inc., The First

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<PAGE>

National Bank of Chicago, individually and as agent, and Fleet National
Bank howsoever due and owing (whether as principal or interest) shall be
satisfied (and such agreements terminated) upon payment of an amount
certain and such amount shall have been paid.

(ki Other. Such other documents as the Agent, any Lender or their
counsel may have reasonably requested.

4.2. Each Future Advance. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:

(ai There exists no Default or Unmatured Default and none would
result from such Advance;

(bi The representations and warranties contained in Article V are
true and correct as of such Borrowing Date (except to the extent such
representations and warranties are expressly made as of a specified date,
in which event such representations and warranties shall be true and
correct as of such specified date);

(ci A Borrowing Notice shall have been properly submitted; and

(di All legal matters incident to the making of such Advance shall be
satisfactory to the Lenders and their counsel.

Each Borrowing Notice with respect to each such Advance shall constitute a
representation and warranty by the Borrowers that the conditions contained in
Section 4.2 (a), (b) and (c) have been satisfied. Any Lender may require a duly
completed compliance certificate in substantially the form of Exhibit B hereto
as a condition to making an Advance.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Borrowers represent and warrant to the Lenders that:

5.1. Corporate Existence and Standing. Each of the Borrower and each
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and is
duly qualified and in good standing as a foreign corporation and is duly
authorized to conduct its business in each jurisdiction in which its business is
conducted or proposed to be conducted, except where the failure to be so
qualified could not

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reasonably be expected to have a Material Adverse Effect. As of the date of
this Agreement, the Subsidiary Borrower is a Wholly-Owned Subsidiary of White
Mountains.

5.2. Authorization and Validity. Each of the Borrowers has all requisite
power and authority (corporate and otherwise) and legal right to execute and
deliver each of the Loan Documents to which it is a party and to perform its
obligations thereunder. The execution and delivery by each of the Borrower of
the Loan Documents to which it is a party and the performance of their
respective obligations thereunder have been duly authorized by proper corporate
proceedings and the Loan Documents constitute legal, valid and binding
obligations of the Borrowers, as applicable, enforceable against the Borrowers,
as applicable, in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally.

5.3. Compliance with Laws and Contracts. The Borrower and its Subsidiaries
have complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof, having jurisdiction over the conduct of
their respective businesses or the ownership of their respective properties,
except where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect. Neither the execution and delivery by the Borrowers of
the Loan Documents to which it is a party, the application of the proceeds of
the Loans or the consummation of the transactions contemplated in the Loan
Documents, nor compliance with the provisions of the Loan Documents will, or at
the relevant time did, (a) violate any law, rule, regulation (including
Regulations G, T, U and X), order, writ, judgment, injunction, decree or award
binding on the Borrower or any Subsidiary or the Borrower's or any Subsidiary's
charter, articles or certificate of incorporation or by-laws, (b) violate the
provisions of or require the approval or consent of any party to any indenture,
instrument or agreement to which the Borrower or any Subsidiary is a party or is
subject, or by which it, or its property, is bound, or conflict with or
constitute a default thereunder, or result in the creation or imposition of any
Lien (other than Liens permitted by, the Loan Documents) in, of or on the
property of the Borrower or any Subsidiary pursuant to the terms of any such
indenture, instrument or agreement, or (c) require any consent of the
stockholders of any Person, except for approvals or consents which will be
obtained on or before the initial Advance and are disclosed on Schedule 5.3,
except for any violation of, or failure to obtain an approval or consent
required under, any such indenture, instrument or agreement that could not
reasonably be expected to have a Material Adverse Effect.

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<PAGE>

Documents. Neither the Borrower nor any Subsidiary is in default under or in
violation of any foreign, federal, state or local law, rule, regulation, order,
writ, judgment, injunction, decree or award binding upon or applicable to the
Borrower or such Subsidiary, in each case the consequences of which default or
violation could reasonably be expected to have a Material Adverse Effect.

5.5. Financial Statements. The Borrower has heretofore furnished to each
of the Lenders (a) the December 31, 1996 audited consolidated financial
statements of the Borrower and its Subsidiaries, and (b) the unaudited
consolidated financial statements of the Borrower and its Subsidiaries through
March 31, 1997 (collectively, the "Financial Statements"). Each of the
Financial Statements was prepared in accordance with Agreement Accounting
Principles and fairly presents the consolidated financial condition and
operations of the Borrower and its Subsidiaries at such dates and the
consolidated results of their operations for the respective periods then ended
(except, in the case of such unaudited statements, for normal year-end audit
adjustments).

5.6. Material Adverse Change. No material adverse change in the business,
Property, condition (financial or otherwise), performance, prospects or results
of operations of the Borrower and its Subsidiaries or of the Subsidiary Borrower
and its Subsidiaries has occurred since December 31, 1996.

5.7. Taxes. The Borrower and its Subsidiaries have filed or caused to be
filed on a timely basis and in correct form all United States federal and
applicable foreign, state and local tax returns and all other tax returns which
are required to be filed and have paid all taxes due pursuant to said returns or
pursuant to any assessment received by the Borrower or any Subsidiary, except
such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided in accordance with Agreement Accounting
Principles and as to which no Lien exists. As of the date hereof, the United
States income tax returns of the Borrower on a consolidated basis have been
audited by the Internal Revenue Service through its fiscal period ending
December 31, 1985, and all tax years beginning on or after January 1, 1986 are
currently being audited or are subject to audit. No tax liens have been filed
and no claims are being asserted with respect to any such taxes which could
reasonably be expected to have a Material Adverse Effect. The charges, accruals
and reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are in accordance with Agreement Accounting
Principles.

5.8. Litigation and Contingent Obligations. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any Subsidiary or any of their respective properties which could
reasonably be expected to have a Material Adverse Effect or to prevent,
enjoin or unduly delay the making of the Loans under this Agreement. Neither
the Borrower nor any Subsidiary has any material contingent obligations
incurred outside of the ordinary course of its business except as set forth
on Schedule 5.8 or disclosed in the Financial Statements or in financial
statements required to be delivered under Sections 6.1(a) and (b) and as
permitted under this

29
<PAGE>

Agreement.

5.9. Capitalization. Schedule 5.9 hereto contains (a) an accurate
description of the Borrower's capitalization as of March 31, 1997 and (b) an
accurate list of all of the existing Subsidiaries as of the date of this
Agreement, setting forth their respective jurisdictions of incorporation and the
percentage of their capital stock owned by the Borrower or other Subsidiaries.
All of the issued and outstanding shares of capital stock of the Borrower and of
each Subsidiary have been duly authorized and validly issued, are fully paid and
non-assessable, and are free and clear of all Liens.

5.10. ERISA. Except as disclosed on Schedule 5.10, neither the
Borrower nor any other member of the Controlled Group maintains any Single
Employer Plans, and no Single Employer Plan has any Unfunded Liability. Neither
the Borrower nor any other member of the Controlled Group maintains, or is
obligated to contribute to, any Multiemployer Plan or has incurred, or is
reasonably expected to incur, any withdrawal liability to any Multiemployer
Plan. Each Plan complies in all material respects with all applicable
requirements of law and regulations other than any such failure to comply which
could not reasonably be expected to have a Material Adverse Effect. Neither the
Borrower nor any member of the Controlled Group has, with respect to any Plan,
failed to make any contribution or pay any amount required under Section 412 of
the Code or Section 302 of ERISA or the terms of such Plan. There are no
pending or, to the knowledge of the Borrower, threatened claims, actions,
investigations or lawsuits against any Plan, any fiduciary thereof, or the
Borrower or any member of the Controlled Group with respect to a Plan. Neither
the Borrower nor any member of the Controlled Group has engaged in any
prohibited transaction (as defined in Section 4975 of the Code or Section 406 of
ERISA) in connection with any Plan which would subject such Person to any
material liability. Within the last five years neither the Borrower nor any
member of the Controlled Group has engaged in a transaction which resulted in a
Single Employer Plan with an Unfunded Liability being transferred out of the
Controlled Group which could reasonably be expected to have a Material Adverse
Effect. No Termination Event has occurred or is reasonably expected to occur
with respect to any Plan which is subject to Title IV of ERISA which could
reasonably be expected to have a Material Adverse Effect.

5.11. Defaults. No Default or Unmatured Default has occurred and is
continuing.

5.12. Federal Reserve Regulations. Neither the Borrower nor any
Subsidiary is engaged, directly or indirectly, principally, or as one of its
important activities, in the business of extending, or arranging for the
extension of, credit for the purpose of purchasing or carrying Margin Stock. No
part of the proceeds of any Loan will be used in a manner which would violate,
or result in a violation of, Regulation G, Regulation T, Regulation U or
Regulation X. Neither the making of any Advance hereunder nor the use of the
proceeds thereof will violate or be inconsistent with the provisions of
Regulation G, Regulation T, Regulation U or Regulation X.

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<PAGE>

5.13. Investment Company. Neither the Borrower nor any Subsidiary is,
or after giving effect to any Advance will be, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

5.14. Certain Fees. No broker's or finder's fee or commission was, is
or will be payable by the Borrower or any Subsidiary with respect to any of the
transactions contemplated by this Agreement, except as described in Section 9.5.
The Borrowers hereby jointly and severally agree to indemnify the Agent and the
Lenders against, and agree that they will hold each of them harmless from, any
claim, demand or liability for broker's or finder's fees or commissions alleged
to have been incurred by the Borrowers in connection with any of the
transactions contemplated by this Agreement and any expenses (including, without
limitation, attorneys' fees and time charges of attorneys for the Agent or any
Lender, which attorneys may be employees of the Agent or any Lender) arising in
connection with any such claim, demand or liability. No other similar fee or
commissions will be payable by the Borrower or any Subsidiary for any other
services rendered to the Borrower or any Subsidiary ancillary to any of the
transactions contemplated by this Agreement.

5.15. Solvency. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by the Borrower or its
Subsidiaries with respect to the transactions contemplated by the Loan Documents
and the Loans incurred by the Borrowers under this Agreement, each of the
Borrower and the Subsidiary Borrower, each on a consolidated basis, is Solvent.

5.16. Material Agreements. Except as set forth in Schedule 5.16 and
except for agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries or agreements of any Unrestricted Subsidiary, neither the
Borrower nor any Subsidiary is a party to any agreement or instrument or subject
to any charter or other corporate restriction which could reasonably be expected
to have a Material Adverse Effect or which restricts or imposes conditions upon
the ability of any Subsidiary to (a) pay dividends or make other distributions
on its capital stock (b) make loans or advances to the Borrower, (c) repay loans
or advances from Borrower or (d) grant Liens to the Agent to secure the
Obligations. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect.

5.17. Environmental Laws. There are no claims, investigations,
litigation, administrative proceedings, notices, requests for information (each
a "Proceeding"), whether pending or threatened, or judgments or orders asserting
violations of applicable federal, state and local environmental, health and
safety statutes, regulations, ordinances, codes, rules, orders, decrees,
directives and standards ("Environmental Laws") or relating to any toxic or
hazardous waste, substance or chemical or any pollutant, contaminant, chemical
or other substance defined or regulated pursuant to any Environmental Law,
including, without limitation, asbestos, petroleum, crude oil or any fraction

31
<PAGE>

thereof ("Hazardous Materials") asserted against the Borrower or any of its
Subsidiaries other than in connection with an insurance policy issued in the
ordinary course of business to any Person (other than the Borrower or any
Subsidiary of the Borrower) which, in any case, could reasonably be expected to
have a Material Adverse Effect. As of the date hereof, the Borrower and its
Subsidiaries do not have liabilities exceeding $500,000 in the aggregate for all
of them with respect to compliance by them with applicable Environmental Laws or
related to the generation, treatment, storage, disposal, release, investigation
or cleanup by them of Hazardous Materials, and no facts or circumstances exist
which could give rise to such liabilities with respect to compliance with
applicable Environmental Laws and the generation, treatment, storage, disposal,
release, investigation or cleanup of Hazardous Materials.

5.18. Insurance. The Borrower and its Subsidiaries maintain with
financially sound and reputable insurance companies insurance on their Property
in such amounts and covering such risks as is consistent with sound business
practice.

5.19. Disclosure. No information, exhibit or report furnished by either
Borrower or any of its Subsidiaries to the Agent or to any Lender in connection
with the negotiation of, or compliance with, the Loan Documents contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
There is no fact known to the Borrowers (other than matters of a general
economic or political nature) that has had or could reasonably be expected to
have a Material Adverse Effect and that has not been disclosed herein or in such
other documents, certificates and statements furnished to the Lenders for use in
connection with the transactions contemplated by this Agreement.

ARTICLE VI

COVENANTS

During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:

6.1. Financial Reporting. The Borrower will maintain, for itself and each
Subsidiary, a system of accounting established and administered in accordance
with generally accepted accounting principles, consistently applied, and furnish
to the Lenders:

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<PAGE>

certified by such accountants) for itself and its Subsidiaries, including
balance sheets as of the end of such period and related statements of income,
retained earnings and cash flows.

(bi As soon as practicable and in any event within 60 days after the
close of each of the first three Fiscal Quarters of each of its Fiscal
Years, for itself and its Subsidiaries, consolidated and consolidating
unaudited balance sheets as at the close of each such period and
consolidated and consolidating statements of income, retained earnings and
cash flows for the period from the beginning of such Fiscal Year to the end
of such quarter, all certified by its chief financial officer.

(ci Together with the financial statements required by clauses (a)
and (b) above, a compliance certificate in substantially the form of
Exhibit B hereto signed by its chief financial officer showing the
calculations necessary to determine compliance with this Agreement and
stating that no Default or Unmatured Default exists, or if any Default or
Unmatured Default exists, stating the nature and status thereof.

(di Promptly after available after the close of each Fiscal Year, a
statement of the Unfunded Liabilities of each Single Employer Plan,
certified as correct by an actuary enrolled under ERISA.

(ei As soon as possible and in any event within 10 days after the
Borrower knows that any Termination Event has occurred with respect to any
Plan, a statement, signed by the chief financial officer of the Borrower,
describing said Termination Event and the action which the Borrower
proposes to take with respect thereto.

(fi As soon as possible and in any event within 10 days after receipt
by either Borrower, a copy of (i) any notice, claim, complaint or order to
the effect that the Borrower or any of its Subsidiaries is or may be liable
to any Person as a result of the release by the Borrower or any of its
Subsidiaries of any Hazardous Materials into the environment or requiring
that action be taken to respond to or clean up a Release of Hazardous
Materials into the environment, and (ii) any notice, complaint or citation
alleging any violation of any Environmental Law or Environmental Permit by
the Borrower or any of its Subsidiaries. Within ten days of the Borrower
or any Subsidiary having knowledge of the enactment or promulgation of any
Environmental Law which could reasonably be expected to have a Material
Adverse Effect, the Borrower shall provide the Agent with written notice
thereof.

(gi Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements
so furnished.

(hi Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which
the Borrower or any of its

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<PAGE>

Subsidiaries files with the Securities and Exchange Commission.

(ii Promptly and in any event within ten (10) days after learning
thereof, notification of (i) any tax assessment, demand, notice of proposed
deficiency or notice of deficiency received by the Borrower or any other
Consolidated Person or (ii) the filing of any tax Lien or commencement of
any judicial proceeding by or against any such Consolidated Person, if any
such assessment, demand, notice, Lien or judicial proceeding relates to tax
liabilities in excess of ten percent (10%) of the net worth (determined
according to generally accepted accounting standards and without reduction
for any reserve for such liabilities) of the Borrower and its Subsidiaries
taken as a whole.

(ji Promptly after the same becomes available, any management letter
prepared by the accountants conducting the audit of the financial
statements delivered pursuant to Section 6.1 (a).

(ki As soon as possible and in any event within 2 Business Days after
either Borrower obtains knowledge thereof, notice of any change in the
Applicable Credit Rating of S&P or Moody's.

(li Such other information (including non-financial information) as
the Agent or any Lender may from time to time reasonably request.

6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances to meet the working capital and general
corporate needs of the Borrower and its Subsidiaries, including but not limited
to the purchase of Finance Assets. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances in a manner which
would violate, or result in a violation of, Regulation G, Regulation T,
Regulation U or Regulation X, or to finance the Purchase of any Person which has
not been approved and recommended by the board of directors (or functional
equivalent thereof) of such Person.

6.3. Notice of Default. The Borrower will give prompt notice in writing to
the Lenders of the occurrence of (a) any Default or Unmatured Default and (b) of
any other event or development, financial or other, relating specifically to the
Borrower or any of its Subsidiaries (and not of a general economic or political
nature) which could reasonably be expected to have a Material Adverse Effect.

6.4. Conduct of Business. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of as it is presently conducted, to
not conduct any significant business except for financial services, and to do
all things necessary to remain duly incorporated, validly existing and in good
standing as a domestic corporation in its jurisdiction of incorporation and
maintain all requisite authority to

34
<PAGE>

conduct its business in each jurisdiction in which its business is conducted.
The Borrower shall cause the Subsidiary Borrower to remain a Wholly-Owned
Subsidiary unless and until the Subsidiary Borrower shall have irrevocably
waived its right to be a borrower hereunder and shall have repaid all
outstanding Advances and other Obligations of such Subsidiary Borrower.

6.5. Taxes. The Borrower will, and will cause each Subsidiary to, timely
file complete and correct United States federal and applicable foreign, state
and local tax returns required by applicable law and pay when due all taxes,
assessments and governmental charges and levies upon it or its income, profits
or Property, except those which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside.

6.6. Insurance. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all their Property in such amounts and covering such risks as is consistent with
sound business practice, and the Borrower will furnish to the Agent and any
Lender upon request full information as to the insurance carried.

6.7. Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, the
failure to comply with which could reasonably be expected to have a Material
Adverse Effect.

6.8. Maintenance of Properties. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.

6.9. Inspection. The Borrower will, and will cause each Subsidiary to, at
reasonable times during normal business hours and upon reasonable notice, permit
the Agent and the Lenders, by their respective representatives and agents, to
inspect any of the Property, corporate books and financial records of the
Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their respective officers at such
reasonable times and intervals as the Lenders may designate. The Borrower will
keep or cause to be kept, and cause each Subsidiary to keep or cause to be kept,
appropriate records and books of account in which complete entries are to be
made reflecting its and their business and financial transactions, such entries
to be made in accordance with Agreement Accounting Principles.

35
<PAGE>

respect thereof at any time outstanding, except that so long as no Default or
Unmatured Default exists before or after giving effect to the declaration or
payment of such dividends or distributions or repurchase or redemption of such
stock or other transaction, the Borrower may declare and pay dividends, and make
distributions, on its common stock and repurchase and redeem and otherwise
acquire or retire its common stock and any options or other rights in respect
thereof.

6.11. Indebtedness. The Borrower will not, nor will it permit any
Subsidiary (other than an Unrestricted Subsidiary) to, create, incur or suffer
to exist any Indebtedness, except:

(ai the Loans;

(bi Indebtedness existing on the date hereof and any renewals,
extensions, refundings or refinancings of such Indebtedness;

(c) Indebtedness owing by (x) the Borrower or the Subsidiary Borrower
to any Wholly-Owned Subsidiary and (y) any Wholly-Owned Subsidiary to a
Wholly-Owned Subsidiary, the Subsidiary Borrower or the Borrower;

(d) Indebtedness (other than Indebtedness of the Subsidiary Borrower
and its Subsidiaries) permitted under the White Mountains Credit Agreement
and the Valley Credit Agreement; and

(e) other Indebtedness, so long as after giving effect to the
incurrence of any such Indebtedness the covenants contained in Section 6.19
shall be complied with on a pro forma basis as of the date such
Indebtedness was incurred.

6.12. Merger. The Borrower will not, nor will it permit any
Significant Subsidiary to, merge or consolidate with or into any other Person,
except that:

(a) a Wholly-Owned Subsidiary may merge into the Borrower or any
Wholly-Owned Subsidiary of the Borrower;

(b) a Significant Subsidiary (other than the Subsidiary
Borrower) may merge or consolidate with any Person so long as either (x)
(i) no Default or Unmatured Default shall have occurred or be continuing
before and after giving effect to such merger or consolidation and (ii)
such Significant Subsidiary is the continuing or surviving corporation or
(y) neither the Borrower, the Subsidiary Borrower nor any of their
Subsidiaries hold any capital stock of such Significant Subsidiary after
giving effect to such merger or consolidation;

(c) the Borrower may merge or consolidate with any other Person,
so long as immediately thereafter (and after giving effect thereto), (i) no
Default or Unmatured Default

36
<PAGE>

exists, (ii) the Borrower is the continuing or surviving corporation and
(iii) the covenants contained in Section 6.19 shall be complied with on
a pro forma basis on the date of, and after giving effect to, such
merger or consolidation; and

(d) the Subsidiary Borrower may merge or consolidate with any other
Person, so long as immediately thereafter (and after giving effect
thereto), (i) whether or not the Loans attributable to the Subsidiary
Borrower are outstanding on the date of the consummation of such merger or
consolidation, (x) no Default of Unmatured Default exists, (y) the
Subsidiary Borrower is the continuing or surviving corporation and (z) the
covenants contained in Section 6.19 shall be complied with on a pro forma
basis on the date of, and after giving effect to, such merger or
consolidation or (ii) in the event no Loans attributable to the Subsidiary
Borrower are outstanding on the date of the consummation of such merger or
consolidation, (x) no Default or Unmatured Default exists, (y) the
Subsidiary Borrower shall have delivered written notice to the Lenders at
least 15 days prior to the date of the consummation of such merger or
consolidation and (z) the Subsidiary Borrower shall have delivered a
certificate (in form and substance acceptable to the Agent and executed by
an Authorized Officer) to the Agent on, and dated, the date of the
consummation of such merger or consolidation (A) stating that it
relinquishes its rights to request Loans under this Agreement and (B)
confirming that the Subsidiary Borrower has paid in full all amounts then
due and owing to any Lender under Sections 3.5 or 9.7 and under Section 15
to the extent the Borrower incurred Obligations of the type described in
Sections 3.5 or 9.7 on or prior to the date of the consummation of such
merger or consolidation, it being understood and agreed that upon the
delivery of such certificate the Subsidiary Borrower shall cease to be one
of the Borrowers hereunder and shall have no rights, duties or obligations
under this Agreement and references to the Subsidiary Borrower as such in
this Agreement shall be deemed to be deleted.

6.13. Contingent Obligations. The Borrower will not, nor will it
permit any Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer
to exist any Contingent Obligation (including, without limitation, any
Contingent Obligation with respect to the obligations of a Subsidiary), except
(a) the issuance of financial guarantees in the ordinary course of business and
consistent with past practices, (b) by endorsement of instruments for deposit or
collection in the ordinary course of business, (c) for insurance policies issued
in the ordinary course of business, (d) the issuance of intercompany guarantees
so long as the primary obligation is permitted pursuant to this Agreement and
(e) Contingent Obligations (other than Contingent Obligations of the Subsidiary
Borrower and its Subsidiaries) permitted pursuant to the White Mountains Credit
Agreement and the Valley Credit Agreement.

6.14. Liens. The Borrower will not, nor will it permit any Subsidiary
to, create, incur, or suffer to exist any Lien in, of or on the Property (other
than Margin Stock) of the Borrower or any of its Subsidiaries (other than an
Unrestricted Subsidiary), except:

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<PAGE>

(ai Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or thereafter
can be paid without penalty, or are being contested in good faith and by
appropriate proceedings and for which adequate reserves in accordance with
generally accepted principles of accounting shall have been set aside on
its books;

(bi Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business which secure the payment of obligations not more than 60 days past
due or which are being contested in good faith by appropriate proceedings
and for which adequate reserves shall have been set aside on its books;

(ci Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;

(di Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties of a similar character and which do not
in any material way affect the marketability of the same or interfere with
the use thereof in the business of the Borrower or its Subsidiaries;

(ei Liens existing on the date hereof and described in Schedule 6.14
hereto;

(fi Liens in, of or on Property acquired after the date of this
Agreement (by purchase, construction or otherwise), each of which Liens
either (1) existed on such Property before the time of its acquisition and
was not created in anticipation thereof, or (2) was created solely for the
purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including the cost of construction) of such
Property; provided that no such Lien shall extend to or cover any Property
of the Borrower or such Subsidiary other than the Property so acquired and
improvements thereon; and provided, further, that the principal amount of
Indebtedness secured by any such Lien shall at the time the Lien is
incurred not exceed 75% of the fair market value (as determined in good
faith by a financial officer of the Borrower and, in the case of such
Property having a fair market value in excess of $500,000, certified by
such officer to the Agent, with a copy for each Lender) of the Property at
the time it was so acquired;

(gi Liens not otherwise permitted by the foregoing clauses (a)
through (f) securing any Indebtedness of the Borrowers, provided that the
aggregate principal amount of Indebtedness secured by Liens permitted by
this clause (g) shall not exceed $5,000,000 at any time; and

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(hi Liens (other than Liens upon the assets of the Subsidiary
Borrower and its Subsidiaries) permitted under the White Mountains Credit
Agreement and the Valley Credit Agreement.

6.15. Affiliates. The Borrower will not, and will not permit any
Subsidiary to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliate (other than a Wholly-Owned Subsidiary),
except in the ordinary course of business and pursuant to the reasonable
requirements of the Borrower's or such Subsidiary's business and upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary than the
Borrower or such Subsidiary would obtain in a comparable arms-length
transaction, except that any Unrestricted Subsidiary may make loans to the
Borrower.

6.16. Environmental Matters. The Borrower shall and shall cause each
of its Subsidiaries to (a) at all times comply in all material respects with all
applicable Environmental Laws and (b) promptly take any and all necessary
remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by the Borrower or any of its Subsidiaries.

6.17. Change in Corporate Structure; Fiscal Year. The Borrower shall
not, nor shall it permit any Subsidiary to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders or (b)
change its Fiscal Year to end on any date other than December 31 of each year.

6.18. Inconsistent Agreements. The Borrower shall not, nor shall it
permit any Subsidiary (other than an Unrestricted Subsidiary) to, enter into
any indenture, agreement, instrument or other arrangement which by its terms,
(a) other than pursuant to the White Mountains Credit Agreement or the Valley
Credit Agreement or pursuant to agreements or arrangements with regulatory
agencies with regard to Insurance Subsidiaries, directly or indirectly
contractually prohibits or restrains, or has the effect of contractually
prohibiting or restraining, or contractually imposes materially adverse
conditions upon, the incurrence of the Obligations, the granting of Liens to
secure the Obligations, the amending of the Loan Documents or the ability of any
Subsidiary to (i) pay dividends or make other distributions on its capital
stock, (ii) make loans or advances to the Borrower or (iii) repay loans or
advances from the Borrower or (b) contains any provision which would be violated
or breached by the making of Advances or by the performance by the Borrower or
any Subsidiary of any of its obligations under any Loan Document.

6.19. Financial Covenants.

6.19.1. Minimum Net Worth. The Borrower shall at all times after the date
hereof, maintain a minimum Net Worth at least equal to

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the sum of (a) $537,300,000 minus (b) an amount equal to the aggregate reduction
in Net Worth attributable to all Stock Transfers made after March 31, 1997, plus
(c) an amount equal to 90% of the cash and non-cash proceeds of any equity
securities issued by the Borrower after March 31, 1997.

6.19.2. Leverage Ratio. The Borrower shall at all times after the date
hereof maintain a Leverage Ratio of not greater than 25%.

6.19.3. Finance Assets Ratio. At any time Loans are outstanding and the
aggregate sum of cash and Money Market Investments of the Borrower and the
Subsidiary Borrower at such time is less than the aggregate outstanding
principal amount of Funded Indebtedness of the Borrower and the Subsidiary
Borrower at such time, the Finance Assets Ratio shall not be less than 1.5:1.0.

6.20. Tax Consolidation. The Borrower will not and will not permit any
of its Subsidiaries to (a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than the Borrower
and its Subsidiaries or (b) amend, terminate or fail to enforce any existing tax
sharing agreement or similar arrangement if such action would cause a Material
Adverse Effect.

6.21. ERISA Compliance.

With respect to any Plan, neither the Borrower nor any Subsidiary
shall:

(ai engage in any "prohibited transaction" (as such term is defined
in Section 406 of ERISA or Section 4975 of the Code) for which a civil
penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section
4975 of the Code in excess of $500,000 could be imposed;

(bi incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) in excess of $500,000, whether or not
waived, or permit any Unfunded Liability to exceed $500,000;

(ci permit the occurrence of any Termination Event which could result
in a liability to the Borrower or any other member of the Controlled Group
in excess of $500,000;

(di be an "employer" (as such term is defined in Section 3(5) of
ERISA) required to contribute to any Multiemployer Plan or a "substantial
employer" (as such term in defined in Section 4001(a)(2) of ERISA) required
to contribute to any Multiple Employer Plan; or

(ei permit the establishment or amendment of any Plan or fail to
comply with the applicable provisions of ERISA and the Code with respect to
any Plan which could result in liability to the Borrower or any other
member of the Controlled Group which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.

<PAGE>

ARTICLE VII

DEFAULTS

The occurrence of any one or more of the following events shall constitute
a Default:

7.1. Any representation or warranty made or deemed made by or on behalf of
the Borrower or any of its Subsidiaries to the Lenders or the Agent under or in
connection with this Agreement, any other Loan Document, any Loan, or any
certificate or information delivered in connection with this Agreement or any
other Loan Document shall be false in any material respect on the date as of
which made.

7.2. Nonpayment of (a) any principal of any Note when due, or (b) any
interest upon any Note or any commitment fee or other fee or obligations under
any of the Loan Documents within five days after the same becomes due.

7.3. The breach by either of the Borrowers of any of the terms or
provisions of Section 6.2, Section 6.3(a) or Sections 6.10 through 6.15 or
Section 6.17 through 6.21.

7.4. The breach by either of the Borrowers (other than a breach which
constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or
provisions of this Agreement which is not remedied within twenty (20) days after
written notice from the Agent or any Lender.

7.5. The default by the Borrower or any of its Subsidiaries in the
performance of any term, provision or condition contained in any agreement or
agreements under which any Funded Indebtedness aggregating in excess of
$10,000,000 ($20,000,000, or such lower cross-default threshold amount as is
provided in the SOMSC Credit Agreement, in the case of SOMSC) was created or is
governed, or the occurrence of any other event or existence of any other
condition, the effect of any of which is to cause, or to permit the holder or
holders of such Funded Indebtedness to cause, such Funded Indebtedness to become
due prior to its stated maturity; or any such Funded Indebtedness of the
Borrower or any of its Subsidiaries shall be declared to be due and payable or
required to be prepaid (other than by a regularly scheduled payment) prior to
the stated maturity thereof.

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Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (e) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 7.6, (f) fail to contest in good faith any appointment or proceeding
described in Section 7.7 or (g) become unable to pay, not pay, or admit in
writing its inability to pay, its debts generally as they become due.

7.7. Without the application, approval or consent of the Borrower or any of
its Significant Subsidiaries, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Borrower or any of its Significant
Subsidiaries or any substantial portion of its Property, or a proceeding
described in Section 7.6(d) shall be instituted against the Borrower or any of
its Significant Subsidiaries and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of sixty consecutive
days.

7.8. The Borrower or any of its Subsidiaries shall fail within thirty days
to pay, bond or otherwise discharge any judgment or order for the payment of
money in excess of $2,000,000 (or multiple judgments or orders for the payment
of an aggregate amount in excess of $10,000,000), which is not stayed on appeal
or otherwise being appropriately contested in good faith and as to which no
enforcement actions have been commenced.

7.9. Any Change in Control shall occur.

ARTICLE VIII

ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

8.1. Acceleration. If any Default described in Section 7.6 or 7.7 occurs
with respect to either of the Borrowers, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend the
obligations of the Lenders to make Loans hereunder, or declare the Obligations
to be due and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which the Borrowers hereby expressly waive.

If, within ten Business Days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default

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(other than any Default as described in Section 7.6 or 7.7 with respect to
either of the Borrowers) and before any judgment or decree for the payment of
the Obligations due shall have been obtained or entered, the Required Lenders
(in their sole discretion) shall so direct, the Agent shall, by notice to the
Borrower, rescind and annul such acceleration and/or termination.

8.2. Amendments. Subject to the provisions of this Article VIII, the
Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrowers may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrowers hereunder or waiving
any Default hereunder; provided, however, that no such supplemental agreement
shall, without the consent of each Lender:

(a) Extend the final maturity of any Loan or Note or reduce the
principal amount thereof, or reduce the rate or, subject to Section
2.10, extend the time of payment of interest or fees thereon;

(b) Reduce the percentage specified in the definition of Required
Lenders;

(d) Extend the Revolver Termination Date or the Maturity Date;

(e) Amend this Section 8.2;

(f) Permit any assignment by either of the Borrowers of its
Obligations or its rights hereunder;
(g) Release the Borrower from its obligations under Article XIV; or

(h) Except as permitted by Section 6.12(d)(ii), release the
Subsidiary Borrower from its obligations under Article XV.

No amendment of any provision of this Agreement relating to the Agent shall be
effective without the written consent of the Agent. The Agent may waive payment
of the fee required under Section 12.3.2 without obtaining the consent of any
other party to this Agreement.

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amendment or other variation of the terms, conditions or provisions of the Loan
Documents whatsoever shall be valid unless in writing signed by the Lenders
required pursuant to Section 8.2, and then only to the extent in such writing
specifically set forth. All remedies contained in the Loan Documents or by law
afforded shall be cumulative and all shall be available to the Agent and the
Lenders until the Obligations have been paid in full.

ARTICLE IX

GENERAL PROVISIONS

9.1. Survival of Representations. All representations and warranties of
the Borrowers contained in this Agreement or of the Borrower or any Subsidiary
contained in any Loan Document shall survive delivery of the Notes and the
making of the Loans herein contemplated.

9.2. Governmental Regulation. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrowers in violation of any limitation or prohibition provided by any
applicable statute or regulation.

9.3. Taxes. Any stamp, documentary or similar taxes, assessments or
charges payable or ruled payable by any governmental authority in respect of the
Loan Documents shall be paid by the Borrowers, together with interest and
penalties, if any.

9.4. Headings. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.

9.5. Entire Agreement. The Loan Documents embody the entire agreement and
understanding among the Borrowers, the Agent and the Lenders and supersede all
prior agreements and understandings among the Borrowers, the Agent and the
Lenders relating to the subject matter thereof other than the fee letter, dated
July 28, 1997, in favor of First Chicago.

9.6. Several Obligations; Benefits of this Agreement. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any
of its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer
any right or benefit upon any Person other than the parties to this Agreement
and their respective successors and assigns.

9.7. Expenses; Indemnification. The Borrowers shall reimburse the Agent
for any reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time

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charges of attorneys for the Agent, which attorneys may be employees of the
Agent) paid or incurred by the Agent in connection with the preparation,
negotiation, execution, delivery, review, amendment, modification, and
administration of the Loan Documents. The Borrowers also agree to reimburse the
Agent and the Lenders for any reasonable costs, internal charges and
out-of-pocket expenses (including attorneys' fees and time charges of attorneys
for the Agent and the Lenders, which attorneys may be employees of the Agent or
the Lenders) paid or incurred by the Agent or any Lender in connection with the
collection and enforcement of the Loan Documents. The Borrowers further agree
to indemnify the Agent and each Lender, its directors, officers and employees
against all losses, claims, damages, penalties, judgments, liabilities and
expenses (including, without limitation, all expenses of litigation or
preparation therefor whether or not the Agent or any Lender is a party thereto)
which any of them may pay or incur arising out of or relating to this Agreement,
the other Loan Documents, the transactions contemplated hereby or thereby or the
direct or indirect application or proposed application of the proceeds of any
Loan hereunder arising from claims or assertions by third parties except to the
extent that they arise out of the gross negligence or willful misconduct of the
party seeking indemnification. The obligations of the Borrowers under this
Section shall survive the termination of this Agreement.

9.8. Numbers of Documents. All statements, notices, closing documents, and
requests hereunder shall be furnished to the Agent with sufficient counterparts
so that the Agent may furnish one to each of the Lenders.

9.9. Accounting. Except as provided to the contrary herein, all accounting
terms used herein shall be interpreted and all accounting determinations
hereunder shall be made in accordance with Agreement Accounting Principles.

9.10. Severability of Provisions. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.

9.11. Nonliability of Lenders. The relationship between the Borrowers
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
the Borrowers. Neither the Agent nor any Lender undertakes any responsibility
to the Borrowers to review or inform the Borrower of any matter in connection
with any phase of the Borrowers' business or operations. The Borrowers shall
rely entirely upon its own judgment with respect to its business, and any
review, inspection or supervision of, or information supplied to the Borrowers
by the Agent or the Lenders is for the protection of the Agent and the Lenders
and neither of the Borrowers nor any other Person is entitled to rely thereon.
Whether or not such damages are related to a claim that is subject to the waiver
effected above and whether or not such waiver is effective, neither the Agent
nor any Lender shall have any liability

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<PAGE>

with respect to, and the Borrowers hereby waive, release and agree not to sue
for, any special, indirect or consequential damages suffered by the Borrower in
connection with, arising out of, or in any way related to the Loan Documents or
the transactions contemplated thereby or the relationship established by the
Loan Documents, or any act, omission or event occurring in connection therewith.

9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE
OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

9.13. CONSENT TO JURISDICTION. THE BORROWERS HEREBY IRREVOCABLY SUBMIT
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY LOAN DOCUMENTS AND THE BORROWERS HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVE ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE
VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWERS IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERS AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER COURTS IF
JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS.

9.14. WAIVER OF JURY TRIAL. THE BORROWERS, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.15. Disclosure. The Borrowers and each Lender hereby (a) acknowledge
and agree that First Chicago and/or its Affiliates from time to time may hold
other investments in, make other loans to or have other relationships with the
Borrowers, including, without limitation, in connection with any interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability

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of First Chicago or such Affiliate to the Borrowers or any Lender, respectively,
arising out of or resulting from such investments, loans or relationships other
than liabilities arising out of the gross negligence or willful misconduct of
First Chicago or its Affiliates to the extent that such liability would not have
arisen but for First Chicago's status as Agent hereunder.

9.16. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by the
Borrower, the Agent and the Lenders and each party has notified the Agent that
it has taken such action.

9.17. Certain Notices. The Borrowers, the Agent and the Lenders agree
that notwithstanding any provisions herein to the contrary, (a) all notices and
directions permitted or required to be given hereunder by or to the Subsidiary
Borrower may be given by or to the Borrower, (b) the Agent and the Lenders may
rely and act upon all such notices and directions given by the Borrower
purportedly on behalf of the Subsidiary Borrower as if such notices and
directions had been given by the Subsidiary Borrower itself and (c) the Agent
may disburse the proceeds of Advances to the Subsidiary Borrower to the Borrower
for the account of the Subsidiary Borrower or as the Borrower may otherwise
direct.

9.18. Treatment of Certain Information: Confidentiality.

(a) Each Borrower acknowledges that (i) services may be offered or
provided to it (in connection with this Agreement or otherwise) by each Lender
or by one or more Subsidiaries or Affiliates of such Lender and (ii) information
delivered to each Lender by such Borrower and its Subsidiaries may be provided
to each such Subsidiary and Affiliate, it being understood that any such
Subsidiary or Affiliate receiving such information shall be bound by the
provisions of clause (b) below as if it were a Lender hereunder.

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confidential on substantially the terms set forth in this Section 9.18(b),
(viii) to any other Person as may be reasonably required in the course of the
enforcement of any Lender's rights or remedies hereunder or under any of such
Lender's Note, or (ix) to any other creditor of either Borrower or any of its
Subsidiaries at any time during the continuance of a Default; provided that in
no event shall any Lender or the Agent be obligated or required to return any
materials furnished by either Borrower.

ARTICLE X

THE AGENT

10.1. Appointment. First Chicago is hereby appointed Agent hereunder
and under each other Loan Document, and each of the Lenders authorizes the Agent
to act as the agent of such Lender. The Agent agrees to act as such upon the
express conditions contained in this Article X. The Agent shall not have a
fiduciary relationship in respect of the Borrowers or any Lender by reason of
this Agreement.

10.2. Powers. The Agent shall have and may exercise such powers under
the Loan Documents as are specifically delegated to the Agent by the terms of
each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder, except any action specifically provided
by the Loan Documents to be taken by the Agent.

10.3. General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrowers or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.

10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible for
or have any duty to ascertain, inquire into, or verify (a) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder, (b) the performance or observance of any of the covenants
or agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered to the Agent and not waived at
closing, or (d) the validity, effectiveness, sufficiency, enforceability or
genuineness of any Loan Document or any other instrument or writing furnished in
connection therewith. The Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by the Borrowers to the Agent
at such time, but is voluntarily furnished by the Borrowers to the Agent

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(either in its capacity as Agent or in its individual capacity).

10.5. Action on Instructions of Lenders. The Agent shall in all cases
be fully protected in acting, or in refraining from acting, hereunder and under
any other Loan Document in accordance with written instructions signed by the
Required Lenders (or, to the extent required by Section 8.2, all Lenders), and
such instructions and any action taken or failure to act pursuant thereto shall
be binding on all of the Lenders and on all holders of Notes. The Agent shall
be fully justified in failing or refusing to take any action hereunder and under
any other Loan Document unless it shall first be indemnified to its satisfaction
by the Lenders pro rata against any and all liability, cost and expense that it
may incur by reason of taking or continuing to take any such action.

10.6. Employment of Agents and Counsel. The Agent may execute any of
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.

10.7. Reliance on Documents; Counsel. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.

10.8. Agent's Reimbursement and Indemnification. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (a) for any amounts not
reimbursed by the Borrowers for which the Agent is entitled to reimbursement by
the Borrowers under the Loan Documents, (b) for any other expenses incurred by
the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents, and
(c) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby, or
the enforcement of any of the terms thereof or of any such other documents;
provided, that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Agent. The
obligations of the Lenders under this Section 10.8 shall survive payment of the
Obligations and termination of this Agreement.

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10.9. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrowers referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.

10.10. Rights as a Lender. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender, including, without limitation, pursuant to Article XII
hereof, and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of trust, debt, equity or other transaction, in addition to those contemplated
by this Agreement or any other Loan Document, with the Borrowers or any of their
respective Subsidiaries in which the Borrowers or such Subsidiary is not
restricted hereby from engaging with any other Person.

10.11. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrowers and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.

10.12. Successor Agent. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrowers, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, on behalf of the Lenders, a successor Agent, which
successor Agent, so long as no Default is continuing, shall be reasonably
acceptable to the Borrowers. If no successor Agent shall have been so appointed
by the Required Lenders and shall have accepted such appointment within thirty
days after the resigning Agent's giving notice of its intention to resign, then
the resigning Agent may appoint, on behalf of the Borrowers and the Lenders, a
successor Agent, which successor Agent, so long as no Default is continuing,
shall be reasonably acceptable to the Borrowers. If the Agent has resigned and
no successor Agent has been appointed, the Lenders may perform all the duties of
the Agent hereunder and the Borrowers shall make all payments in respect of the
Obligations to the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to be appointed
hereunder until such successor Agent has accepted the appointment. Any such
successor Agent shall be a commercial bank having capital and retained earnings
of at least $50,000,000 and with a Lending Installation in the United States

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of America. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the resigning
Agent. Upon the effectiveness of the resignation of the Agent, the resigning
Agent shall be discharged from its duties and obligations hereunder and under
the Loan Documents. After the effectiveness of the resignation of an Agent, the
provisions of this Article X shall continue in effect for its benefit in respect
of any actions taken or omitted to be taken by it while it was acting as the
Agent hereunder and under the other Loan Documents.

ARTICLE XI

SETOFF; RATABLE PAYMENTS

11.1. Setoff. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower or the Subsidiary Borrower
becomes insolvent, however evidenced, or any Default or Unmatured Default
occurs, any and all deposits (including all account balances, whether
provisional or final and whether or not collected or available) and any other
Indebtedness at any time held or owing by any Lender to or for the credit or
account of the Borrower or the Subsidiary Borrower may be offset and applied
toward the payment of the Obligations owing to such Lender, whether or not the
Obligations, or any part hereof, shall then be due.

11.2. Ratable Payments. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
Section 2.17, 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share
of such Loans, such Lender agrees, promptly upon demand, to purchase a portion
of the Loans held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrowers to a
Lender, other than Indebtedness evidenced by any of the Notes held by such
Lender, such amount shall be applied ratably to such other Indebtedness and to
the Indebtedness evidenced by such Notes.

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ARTICLE XII

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

12.1. Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (a) the
Borrowers shall not have the right to assign their respective rights or
obligations under the Loan Documents, and (b) any assignment by any Lender must
be made in compliance with Section 12.3. Notwithstanding clause (b) of the
preceding sentence, any Lender may at any time, without the consent of the
Borrowers or the Agent, assign all or any portion of its rights under this
Agreement and its Notes to a Federal Reserve Bank; provided, however, that no
such assignment to a Federal Reserve Bank shall release the transferor Lender
from its obligations hereunder. The Agent may treat the payee of any Note as
the owner thereof for all purposes hereof unless and until such payee complies
with Section 12.3 in the case of an assignment thereof or, in the case of any
other transfer, a written notice of the transfer is filed with the Agent. Any
assignee or transferee of a Note agrees by acceptance thereof to be bound by all
the terms and provisions of the Loan Documents. Any request, authority or
consent of any Person, who at the time of making such request or giving such
authority or consent is the holder of any Note, shall be conclusive and binding
on any subsequent holder, transferee or assignee of such Note or of any Note or
Notes issued in exchange therefor.

12.2. Participations.

12.2.1. Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrowers under this Agreement shall be determined as if
such Lender had not sold such participating interests, and the Borrowers and the
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.

12.2.2. Voting Rights. Each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment, modification or
waiver of any provision of the Loan Documents other than any amendment,
modification or waiver which effects any of the modifications referenced in
clauses (a) through (h) of Section 8.2.

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12.2.3. Benefit of Setoff. The Borrowers agree that each Participant
shall be deemed to have the right of setoff provided in Section 11.1 in respect
of its participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing directly
to it as a Lender under the Loan Documents; provided, that each Lender shall
retain the right of setoff provided in Section 11.1 with respect to the amount
of participating interests sold to each Participant. The Lenders agree to share
with each Participant, and each Participant, by exercising the right of setoff
provided in Section 11.1, agrees to share with each Lender, any amount received
pursuant to the exercise of its right of setoff, such amounts to be shared in
accordance with Section 11.2 as if each Participant were a Lender.

12.3. Assignments.

12.3.2. Effect; Effective Date. Upon (a) delivery to the Agent of a
notice of assignment, substantially in the form attached as Exhibit I to Exhibit
C hereto (a "Notice of Assignment"), together with any consents required by
Section 12.3.1, and (b) payment of a $3,000 fee to the Agent for processing such
assignment, such assignment shall become effective on the effective date
specified in such Notice of Assignment. On and after the effective date of such
assignment, (a) such Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the Lenders and shall have all
the rights and obligations of a Lender under the Loan Documents, to the same
extent as if it were an original party hereto, and (b) the transferor Lender
shall be released with respect to the percentage of the Aggregate Commitment and
Loans assigned to such Purchaser without any further consent or action by the
Borrowers, the Lenders or the Agent. Upon the consummation of any assignment to
a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Agent
and the Borrowers shall make appropriate arrangements so that replacement Notes
are issued to such transferor Lender and new Notes or, as appropriate,
replacement Notes, are issued to such Purchaser, in each case in principal
amounts reflecting their Commitment, as adjusted pursuant to such assignment.

12.4. Dissemination of Information. Subject to Section 9.18, the
Borrowers authorize each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in the

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Loan Documents by operation of law (each a "Transferee") and any prospective
Transferee any and all information in such Lender's possession concerning the
creditworthiness of the Borrower and its Subsidiaries.

12.5. Tax Treatment. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 2.17.

ARTICLE XIII

NOTICES

13.1. Giving Notice. All notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing, by facsimile, first class U.S. mail or overnight courier and addressed
or delivered to such party at its address set forth below its signature hereto
or at such other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with first class
postage prepaid, return receipt requested, shall be deemed given three (3)
Business Days after deposit in the U.S. mail; any notice, if transmitted by
facsimile, shall be deemed given when transmitted; and any notice given by
overnight courier shall be deemed given when received by the addressee.

13.2. Change of Address. The Borrowers, the Agent and any Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.

ARTICLE XIV

BORROWER GUARANTY

14.1. The Borrower hereby absolutely, irrevocably and
unconditionally guarantees prompt, full and complete payment when due, whether
at stated maturity, upon acceleration or otherwise, and at all times thereafter,
of (a) the principal of and interest on the Advances made by the Lenders to, and
the Notes held by the Lenders of, the Subsidiary Borrower and (b) all other
amounts from time to time owing to the Lenders by the Subsidiary Borrower under
this Agreement, the Notes and the other Loan Documents, including without
limitation all Obligations of the Subsidiary Borrower (solely for purposes of
this Article XIV, collectively referred to as the "Guaranteed Debt"). This is a
guaranty of payment, not a guaranty of collection.

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14.2. The Borrower waives notice of the acceptance of this Article
XIV (solely for purposes of this Article XIV, referred to as the "Guaranty") and
of the extension or incurrence of the Guaranteed Debt or any part thereof. The
Borrower further waives all setoffs and counterclaims and presentment, protest,
notice, filing of claims with a court in the event of receivership, bankruptcy
or reorganization of the Subsidiary Borrower, demand or action on delinquency in
respect of the Guaranteed Debt or any part thereof, including any right to
require the Agent or any Lender to sue the Subsidiary Borrower, or any other
person obligated with respect to the Guaranteed Debt or any part thereof, or
otherwise to enforce payment thereof against any collateral securing the
Guaranteed Debt or any part thereof.

14.3. The Borrower hereby agrees that, to the fullest extent
permitted by law, its obligations hereunder shall be continuing, absolute and
unconditional under any and all circumstances and not subject to any reduction,
limitation, impairment, termination, defense (other than indefeasible payment in
full), setoff, counterclaim or recoupment whatsoever (all of which are hereby
expressly waived by it to the fullest extent permitted by law), whether by
reason of any claim of any character whatsoever, including, without limitation,
any claim of waiver, release, surrender, alteration or compromise. The validity
and enforceability of this Guaranty shall not be impaired or affected by any of
the following: (a) any extension, modification or renewal of, or indulgence with
respect to, or substitution for, the Guaranteed Debt or any part thereof or any
agreement relating thereto at any time; (b) any failure or omission to perfect
or maintain any lien on, or preserve rights to, any security or collateral or to
enforce any right, power or remedy with respect to the Guaranteed Debt or any
part thereof or any agreement relating thereto, or any collateral securing the
Guaranteed Debt or any part thereof; (c) any waiver of any right, power or
remedy or of any default with respect to the Guaranteed Debt or any part thereof
or any agreement relating thereto or with respect to any collateral securing the
Guaranteed Debt or any part thereof; (d) any release, surrender, compromise,
settlement, waiver, subordination or modification, with or without
consideration, of any collateral securing the Guaranteed Debt or any part
thereof, any other guaranties with respect to the Guaranteed Debt or any part
thereof, or any other obligations of any person or entity with respect to the
Guaranteed Debt or any part thereof; (e) the enforceability or validity of the
Guaranteed Debt or any part thereof or the genuineness, enforceability or
validity of any agreement relating thereto or with respect to any collateral
securing the Guaranteed Debt or any part thereof; (f) the application of
payments received from any source to the payment of indebtedness other than the
Guaranteed Debt, any part thereof or amounts which are not covered by this
Guaranty even though the Agent or any Lender might lawfully have elected to
apply such payments to any part or all of the Guaranteed Debt or to amounts
which are not covered by this Guaranty; (g) any change of ownership of the
Subsidiary Borrower or the insolvency, bankruptcy or any other change in the
legal status of the Subsidiary Borrower; (h) any change in, or the imposition
of, any law, decree, regulation or other governmental act which does or might
impair, delay or in any way affect the validity, enforceability or the payment
when due of the Guaranteed Debt; (i) the failure of the Subsidiary Borrower to
maintain in full force, validity or effect or to obtain or renew when required
all governmental and other approvals, licenses or consents required in
connection with the Guaranteed Debt or this

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Guaranty, or to take any other action required in connection with the
performance of all obligations pursuant to the Guaranteed Debt or this Guaranty;
(j) the existence of any claim, setoff or other rights which the Borrower may
have at any time against the Subsidiary Borrower in connection herewith or with
any unrelated transaction; (k) the Agent's or a Lender's election, in any case
or proceeding instituted under chapter 11 of the Bankruptcy Code, of the
application of section 1111(b)(2) of the Bankruptcy Code; (l) any borrowing, use
of cash collateral, or grant of a security interest by the Subsidiary Borrower,
as debtor in possession, under section 363 or 364 of the Bankruptcy Code; (m)
the disallowance of all or any portion of the Agent's or a Lender's claims for
repayment of the Guaranteed Debt under section 502 or 506 of the Bankruptcy
Code; or (n) any other fact or circumstance which might otherwise constitute
grounds at law or equity for the discharge or release of the Borrower from its
obligations hereunder, all whether or not the Borrower shall have had notice or
knowledge of any act or omission referred to in the foregoing clauses (a)
through (n) of this paragraph. It is agreed that the Borrower's liability
hereunder is independent of any other guaranties or other obligations at any
time in effect with respect to the Guaranteed Debt or any part thereof and that
the Borrower's liability hereunder may be enforced regardless of the existence,
validity, enforcement or non-enforcement of any such other guaranties or other
obligations or any provision of any applicable law or regulation purporting to
prohibit payment by the Subsidiary Borrower of the Guaranteed Debt in the manner
agreed upon between the Agent, the Lenders and the Subsidiary Borrower.

14.4. Credit may be granted or continued from time to time by the
Agent and/or any Lender to the Subsidiary Borrower without notice to or
authorization from the Borrower regardless of the Subsidiary Borrower's
financial or other condition at the time of any such grant or continuation.
Neither the Agent nor any Lender shall have any obligation to disclose or
discuss with the Borrower its assessment of the financial condition of the
Subsidiary Borrower.

14.5. Until the irrevocable payment in full of the Obligations and
termination of all commitments which could give rise to any Obligation, the
Borrower shall have no right of subrogation with respect to the Guaranteed Debt
and hereby waives any right to enforce any remedy which the Agent and/or the
Lenders now has or may hereafter have against the Subsidiary Borrower, any
endorser or any other guarantor of all or any part of the Guaranteed Debt, and
the Borrower hereby waives any benefit of, and any right to participate in, any
security or collateral given to the Agent and/or the Lenders to secure payment
of the Guaranteed Debt or any part thereof or any other liability of the
Subsidiary Borrower to the Agent and/or the Lenders.

14.6. The Borrower authorizes the Agent and the Lenders to take
any action or exercise any remedy with respect to any collateral from time to
time securing the Guaranteed Debt, which the Agent and the Lenders in their sole
discretion (but subject, as applicable, to the terms of this Agreement and of
any documentation pursuant to which a Lien in such collateral is granted) shall
determine, without notice to the Borrower. Notwithstanding any reference herein
to any collateral securing any of the Guaranteed Debt, it is acknowledged that,
on the date hereof, neither

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the Borrower nor any of its Subsidiaries has granted, or has any obligation to
grant, any security interest in or other lien on any of its property as security
for the Guaranteed Debt.

14.7. In the event the Agent and/or the Lenders in their sole
discretion elects to give notice of any action with respect to any collateral
securing the Guaranteed Debt or any part thereof, ten (10) days' written notice
mailed to the Borrower by ordinary mail at the address shown hereon shall be
deemed reasonable notice of any matters contained in such notice. The Borrower
consents and agrees that neither the Agent nor any Lender shall be under any
obligation to marshall any assets in favor of the Borrower or against or in
payment of any or all of the Guaranteed Debt.

14.8. In the event that acceleration of the time for payment of
any of the Guaranteed Debt is stayed upon the insolvency, bankruptcy or
reorganization of the Subsidiary Borrower, or otherwise, all such amounts shall
nonetheless be payable by the Borrower forthwith upon demand by Agent. The
Borrower further agrees that, to the extent that the Subsidiary Borrower makes a
payment or payments to the Agent or any Lender on the Guaranteed Debt, or the
Agent or a Lender receive any proceeds of collateral securing the Guaranteed
Debt, which payment or receipt of proceeds or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be returned or repaid to the Subsidiary Borrower, its estate, trustee, receiver,
debtor in possession or any other party, including, without limitation, the
Borrower, under any insolvency or bankruptcy law, state or federal law, common
law or equitable cause, then to the extent of such payment, return or repayment,
the obligation or part thereof which has been paid, reduced or satisfied by such
amount shall be reinstated and continued in full force and effect as of the date
when such initial payment, reduction or satisfaction occurred.

14.9. No delay on the part of the Agent or any Lender in the
exercise of any right, power or remedy shall operate as a waiver thereof, and no
single or partial exercise by the Agent or any Lender of any right, power or
remedy shall preclude any further exercise thereof; nor shall any amendment,
supplement, modification or waiver of any of the terms or provisions of this
Guaranty be binding upon the Agent or any Lender, except as expressly set forth
in a writing duly signed and delivered by the Agent and the Lenders. The
failure by the Agent and/or the Lenders at any time or times hereafter to
require strict performance by the Subsidiary Borrower or the Borrower of any of
the provisions, warranties, terms and conditions contained in any promissory
note, security agreement, agreement, guaranty, instrument or document now or at
any time or times hereafter executed pursuant to the terms of, or in connection
with, this Agreement by the Subsidiary Borrower or the Borrower and delivered to
the Agent or any Lender shall not waive, affect or diminish any right of the
Agent or any Lender at any time or times hereafter to demand strict performance
thereof, and such right shall not be deemed to have been waived by any act or
knowledge of the Agent or any Lender, its agents, officers or employees, unless
such waiver is contained in an instrument in writing duly signed and delivered
by the Agent or such Lender. No waiver by the Agent or any Lender of any
default shall operate as a waiver of any other default or the same default on a
future occasion, and no action by the Agent or any Lender permitted hereunder
shall in any way affect or impair the

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Agent's or such Lender's rights or powers, or the obligations of the Borrower
under this Guaranty. Any determination by a court of competent jurisdiction of
the amount of any Guaranteed Debt owing by the Subsidiary Borrower to the Agent
and the Lenders shall be conclusive and binding on the Borrower irrespective of
whether the Borrower was a party to the suit or action in which such
determination was made.

14.10. Subject to the provisions of Section 14.8, this guaranty
shall continue in effect until this Agreement has terminated, the Guaranteed
Debt has been paid in full and the other conditions of this guaranty have been
satisfied.

ARTICLE XV

SUBSIDIARY GUARANTY

15.1. The Subsidiary Guarantor hereby absolutely, irrevocably and
unconditionally guarantees prompt, full and complete payment when due, whether
at stated maturity, upon acceleration or otherwise, and at all times thereafter,
of (a) the principal of and interest on the Advances made by the Lenders to, and
the Notes held by the Lenders of, the Borrower and (b) all other amounts from
time to time owing to the Lenders by the Borrower under this Agreement, the
Notes and the other Loan Documents, including without limitation all Obligations
of the Borrower (solely for purposes of this Article XV, collectively referred
to as the "Guaranteed Debt"). This is a guaranty of payment, not a guaranty of
collection.

15.2. The Subsidiary Guarantor waives notice of the acceptance of
this Article XV (solely for purposes of this Article XV, referred to as the
"Guaranty") and of the extension or incurrence of the Guaranteed Debt or any
part thereof. The Subsidiary Guarantor further waives all setoffs and
counterclaims and presentment, protest, notice, filing of claims with a court in
the event of receivership, bankruptcy or reorganization of the Borrower, demand
or action on delinquency in respect of the Guaranteed Debt or any part thereof,
including any right to require the Agent or any Lender to sue the Borrower,
other person obligated with respect to the Guaranteed Debt or any part thereof,
or otherwise to enforce payment thereof against any collateral securing the
Guaranteed Debt or any part thereof.

15.3. The Subsidiary Guarantor hereby agrees that, to the fullest
extent permitted by law, its obligations hereunder shall be continuing, absolute
and unconditional under any and all circumstances and not subject to any
reduction, limitation, impairment, termination, defense (other than indefeasible
payment in full), setoff, counterclaim or recoupment whatsoever (all of which
are hereby expressly waived by it to the fullest extent permitted by law),
whether by reason of any claim of any character whatsoever, including, without
limitation, any claim of waiver, release, surrender,

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alteration or compromise. The validity and enforceability of this Guaranty
shall not be impaired or affected by any of the following: (a) any extension,
modification or renewal of, or indulgence with respect to, or substitution for,
the Guaranteed Debt or any part thereof or any agreement relating thereto at any
time; (b) any failure or omission to perfect or maintain any lien on, or
preserve rights to, any security or collateral or to enforce any right, power or
remedy with respect to the Guaranteed Debt or any part thereof or any agreement
relating thereto, or any collateral securing the Guaranteed Debt or any part
thereof; (c) any waiver of any right, power or remedy or of any default with
respect to the Guaranteed Debt or any part thereof or any agreement relating
thereto or with respect to any collateral securing the Guaranteed Debt or any
part thereof; (d) any release, surrender, compromise, settlement, waiver,
subordination or modification, with or without consideration, of any collateral
securing the Guaranteed Debt or any part thereof, any other guaranties with
respect to the Guaranteed Debt or any part thereof, or any other obligations of
any person or entity with respect to the Guaranteed Debt or any part thereof;
(e) the enforceability or validity of the Guaranteed Debt or any part thereof or
the genuineness, enforceability or validity of any agreement relating thereto or
with respect to any collateral securing the Guaranteed Debt or any part thereof;
(f) the application of payments received from any source to the payment of
indebtedness other than the Guaranteed Debt, any part thereof or amounts which
are not covered by this Guaranty even though the Agent or any Lender might
lawfully have elected to apply such payments to any part or all of the
Guaranteed Debt or to amounts which are not covered by this Guaranty; (g) any
change of ownership of the Borrower or the insolvency, bankruptcy or any other
change in the legal status of the Borrower; (h) any change in, or the imposition
of, any law, decree, regulation or other governmental act which does or might
impair, delay or in any way affect the validity, enforceability or the payment
when due of the Guaranteed Debt; (i) the failure of the Borrower to maintain in
full force, validity or effect or to obtain or renew when required all
governmental and other approvals, licenses or consents required in connection
with the Guaranteed Debt or this Guaranty, or to take any other action required
in connection with the performance of all obligations pursuant to the Guaranteed
Debt or this Guaranty; (j) the existence of any claim, setoff or other rights
which the Subsidiary Borrower may have at any time against the Borrower in
connection herewith or with any unrelated transaction; (k) the Agent's or a
Lender's election, in any case or proceeding instituted under chapter 11 of the
Bankruptcy Code, of the application of section 1111(b)(2) of the Bankruptcy
Code; (l) any borrowing, use of cash collateral, or grant of a security interest
by the Borrower, as debtor in possession, under section 363 or 364 of the
Bankruptcy Code; (m) the disallowance of all or any portion of the Agent's or a
Lender's claims for repayment of the Guaranteed Debt under section 502 or 506 of
the Bankruptcy Code; or (n) any other fact or circumstance which might otherwise
constitute grounds at law or equity for the discharge or release of the
Subsidiary Guarantor from its obligations hereunder, all whether or not the
Subsidiary Guarantor shall have had notice or knowledge of any act or omission
referred to in the foregoing clauses (a) through (n) of this paragraph. It is
agreed that the Subsidiary Guarantor's liability hereunder is independent of any
other guaranties or other obligations at any time in effect with respect to the
Guaranteed Debt or any part thereof and that the Subsidiary Guarantor's
liability hereunder may be enforced regardless of the existence, validity,
enforcement or non-enforcement of any such other guaranties or other obligations

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or any provision of any applicable law or regulation purporting to prohibit
payment by the Borrower of the Guaranteed Debt in the manner agreed upon between
the Agent, the Lenders and the Borrower.

15.4. Credit may be granted or continued from time to time by the
Agent and/or any Lender to the Borrower without notice to or authorization from
the Subsidiary Guarantor regardless of the Borrower's financial or other
condition at the time of any such grant or continuation. Neither the Agent nor
any Lender shall have any obligation to disclose or discuss with the Subsidiary
Guarantor its assessment of the financial condition of the Borrower.

15.5. Until the irrevocable payment in full of the Obligations and
termination of all commitments which could give rise to any Obligation, the
Subsidiary Guarantor shall not have any right of subrogation with respect to the
Guaranteed Debt and hereby waives any right to enforce any remedy which the
Agent and/or any Lender now has or may hereafter have against the Borrower, any
endorser or any other guarantor of all or any part of the Guaranteed Debt, and
the Borrower hereby waives any benefit of, and any right to participate in, any
security or collateral given to the Agent and/or the Lenders to secure payment
of the Guaranteed Debt or any part thereof or any other liability of the
Borrower to the Agent and/or the Lenders.

15.6. The Subsidiary Guarantor authorizes the Agent and the
Lenders to take any action or exercise any remedy with respect to any collateral
from time to time securing the Guaranteed Debt, which the Agent and Lenders in
their sole discretion (but subject, as applicable, to the terms of this
Agreement and of any documentation pursuant to which a Lien in such collateral
is granted) shall determine, without notice to the Subsidiary Borrower.
Notwithstanding any reference herein to any collateral securing any of the
Guaranteed Debt, it is acknowledged that, on the date hereof, neither the
Borrower nor any of its Subsidiaries has granted, or has any obligation to
grant, any security interest in or other lien on any of its property as security
for the Guaranteed Debt.

15.7. In the event the Agent and/or the Lenders in their sole
discretion elects to give notice of any action with respect to any collateral
securing the Guaranteed Debt or any part thereof, ten (10) days' written notice
mailed to the Subsidiary Guarantor by ordinary mail at the address shown hereon
shall be deemed reasonable notice of any matters contained in such notice. The
Subsidiary Borrower consents and agrees that neither the Agent nor any Lender
shall be under any obligation to marshall any assets in favor of the Subsidiary
Borrower or against or in payment of any or all of the Guaranteed Debt.

15.8. In the event that acceleration of the time for payment of
any of the Guaranteed Debt is stayed upon the insolvency, bankruptcy or
reorganization of the Borrower, or otherwise, all such amounts shall nonetheless
be payable by the Subsidiary Guarantor forthwith upon demand by the Agent. The
Subsidiary Guarantor further agrees that, to the extent that the Borrower makes
a

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payment or payments to the Agent or any Lender on the Guaranteed Debt, or the
Agent or a Lender receive any proceeds of collateral securing the Guaranteed
Debt, which payment or receipt of proceeds or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be returned or repaid to the Borrower, its estate, trustee, receiver, debtor in
possession or any other party, including, without limitation, the Subsidiary
Borrower, under any insolvency or bankruptcy law, state or federal law, common
law or equitable cause, then to the extent of such payment, return or repayment,
the obligation or part thereof which has been paid, reduced or satisfied by such
amount shall be reinstated and continued in full force and effect as of the date
when such initial payment, reduction or satisfaction occurred.

15.9. No delay on the part of the Agent or any Lender in the
exercise of any right, power or remedy shall operate as a waiver thereof, and no
single or partial exercise by the Agent or any Lender of any right, power or
remedy shall preclude any further exercise thereof; nor shall any amendment,
supplement, modification or waiver of any of the terms or provisions of this
Guaranty be binding upon the Agent or any Lender, except as expressly set forth
in a writing duly signed and delivered by the Agent and the Lenders. The
failure by the Agent or any Lender at any time or times hereafter to require
strict performance by the Subsidiary Borrower or the Borrower of any of the
provisions, warranties, terms and conditions contained in any promissory note,
security agreement, agreement, guaranty, instrument or document now or at any
time or times hereafter executed pursuant to the terms of, or in connection
with, this Agreement by the Subsidiary Borrower or the Borrower and delivered to
the Agent or any Lender shall not waive, affect or diminish any right of the
Agent or any Lender at any time or times hereafter to demand strict performance
thereof, and such right shall not be deemed to have been waived by any act or
knowledge of the Agent or any Lender, its agents, officers or employees, unless
such waiver is contained in an instrument in writing duly signed and delivered
by the Agent or such Lender. No waiver by the Agent or any Lender of any
default shall operate as a waiver of any other default or the same default on a
future occasion, and no action by the Agent or any Lender permitted hereunder
shall in any way affect or impair the Agent or such Lender's rights or powers,
or the obligations of the Subsidiary Guarantor under this Guaranty. Any
determination by a court of competent jurisdiction of the amount of any
Guaranteed Debt owing by the Borrower or the Subsidiary Borrower to the Agent
and the Lenders shall be conclusive and binding on the Subsidiary Guarantor
irrespective of whether the Subsidiary Borrower was a party to the suit or
action in which such determination was made.

15.10. Subject to the provisions of Section 15.8, this guaranty
shall continue in effect until this Agreement has terminated, the Guaranteed
Debt has been paid in full and the other conditions of this guaranty have been
satisfied.

ARTICLE XVI

SALE OF SUBSIDIARY BORROWER

61
<PAGE>

16.1. In addition to the transactions permitted by Section
6.12(d), the Borrower may at any time permit White Mountains to sell, transfer
or otherwise dispose of 100% of the capital stock of the Subsidiary Borrower in
a single transaction so long as (a) no Loans attributable to the Subsidiary
Borrower are outstanding on the date of the consummation of such transaction,
(b) no Default or Unmatured Default exists, (c) the Borrower shall have
delivered written notice to the Lenders at least 15 days prior to the date of
the consummation of such transaction and (d) the Subsidiary Borrower shall have
delivered a certificate (in form and substance acceptable to the Agent and
executed by an Authorized Officer) to the Agent on, and dated, the date of the
consummation of such transaction (i) stating that it relinquishes its rights to
request Loans under this Agreement and (ii) confirming that the Subsidiary
Borrower has paid in full all amounts then due and owing to any Lender under
Sections 3.5 or 9.7 and under Section 15 to the extent the Borrower incurred
Obligations of the type described in Sections 3.5 or 9.7 on or prior the date of
the consummation of such transaction. Upon the delivery of such certificate,
the Subsidiary Borrower shall cease to be one of the Borrowers hereunder and
shall have no rights, duties or obligations under this Agreement and references
to the Subsidiary Borrower as such in this Agreement shall be deemed to be
deleted.

[signature pages to follow]

62
<PAGE>

IN WITNESS` WHEREOF, the Borrower, the Subsidiary Borrower, the Lenders and
the Agent have executed this Agreement as of the date first above written.

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

By:

Print Name:

Title:

Address: 80 South Main Street
Hanover, New Hampshire
Attn:

Fax No.:
Tel. No.:

FUND AMERICAN ENTERPRISES, INC.

By:

Print Name:

Title:

Address: 80 South Main Street
Hanover, New Hampshire
Attn:

Fax No.:
Tel. No.:

63
<PAGE>

Commitments

THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $ Individually and as Agent

By:

Print Name:

Title:

Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President

Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142

$ [OTHER LENDERS]

Aggregate Initial
Commitment $

<PAGE>

Exhibit 10(e)

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

$50,000,000

AMENDED AND RESTATED

CREDIT AGREEMENT

AMONG

WHITE MOUNTAINS HOLDINGS, INC.,

as Borrower,

THE LENDERS NAMED HEREIN

and

THE FIRST NATIONAL BANK OF CHICAGO,

as Agent

DATED AS OF

July 30, 1997

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

<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE I DEFINITIONS ...................................................... 1

ARTICLE II THE CREDITS ..................................................... 16
2.1. Advances ....................................................... 16
2.2. Ratable Loans .................................................. 16
2.3. Types of Advances .............................................. 17
2.4. Facility Fee; Reductions in Aggregate Commitment ............... 17
2.5. Minimum Amount of Each Advance ................................. 17
2.6. Optional Principal Payments .................................... 17
2.7. Mandatory Commitment Reductions ................................ 17
2.8. Method of Selecting Types and
Interest Periods for New Advances .............................. 18
2.9. Conversion and Continuation of Outstanding Advances ............ 19
2.10. Changes in Interest Rate, etc. ................................. 19
2.11. Rates Applicable After Default ................................. 20
2.12. Method of Payment .............................................. 20
2.13. Notes .......................................................... 20
2.14. Interest Payment Dates; Interest and Fee Basis. ................ 20
2.15. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions .......................................... 21
2.16. Lending Installations .......................................... 21
2.17. Non-Receipt of Funds by the Agent .............................. 21
2.18. Taxes .......................................................... 21
2.19. Agent's Fees ................................................... 22

ARTICLE III CHANGE IN CIRCUMSTANCES ........................................ 23
3.1. Yield Protection ............................................... 23
3.2. Changes in Capital Adequacy Regulations ........................ 23
3.3. Availability of Types of Advances .............................. 24
3.4. Funding Indemnification ........................................ 24
3.5. Lender Statements; Survival of Indemnity ....................... 24

ARTICLE IV CONDITIONS PRECEDENT ............................................ 25
4.1. Initial Loans .................................................. 25
4.2. Each Future Advance ............................................ 26

ARTICLE V REPRESENTATIONS AND WARRANTIES ................................... 27
5.1. Corporate Existence and Standing ............................... 27
</TABLE>

<PAGE>

<TABLE>
<S> <C>
5.2. Authorization and Validity ..................................... 27
5.3. Compliance with Laws and Contracts ............................. 27
5.4. Governmental Consents .......................................... 28
5.5. Financial Statements ........................................... 28
5.6. Material Adverse Change ........................................ 28
5.7. Taxes .......................................................... 29
5.8. Litigation and Contingent Obligations .......................... 29
5.9. Capitalization ................................................. 29
5.10. ERISA .......................................................... 30
5.11. Defaults ....................................................... 30
5.12. Federal Reserve Regulations .................................... 30
5.13. Investment Company ............................................. 30
5.14. Certain Fees ................................................... 30
5.15. Solvency ....................................................... 31
5.16. Indebtedness ................................................... 31
5.17. Insurance Licenses ............................................. 31
5.18. Material Agreements ............................................ 31
5.19. Environmental Laws ............................................. 31
5.20. Insurance ...................................................... 32
5.21. Disclosure ..................................................... 32

ARTICLE VI COVENANTS ....................................................... 32
6.1. Financial Reporting ............................................. 32
6.2. Use of Proceeds ................................................. 34
6.3. Notice of Default ............................................... 35
6.4. Conduct of Business ............................................. 35
6.5. Taxes ........................................................... 35
6.6. Insurance ....................................................... 36
6.7. Compliance with Laws ............................................ 36
6.8. Maintenance of Properties ....................................... 36
6.9. Inspection ...................................................... 36
6.11. Indebtedness .................................................... 37
6.12. Merger .......................................................... 37
6.13. Investments and Purchases ....................................... 38
6.14. Contingent Obligations .......................................... 39
6.15. Liens ........................................................... 39
6.16. Affiliates ...................................................... 40
6.17. Environmental Matters ........................................... 40
6.18. Change in Corporate Structure; Fiscal Year ...................... 40
6.19. Inconsistent Agreements ......................................... 40
6.20. Financial Covenants ............................................. 41
</TABLE>

<PAGE>

<TABLE>
<S> <C>
6.20.2. Leverage Ratio ............................................... 41
6.20.3. Fixed Charges Coverage Ratio ................................. 41
6.20.4. Finance Assets Ratio ......................................... 41
6.20.5. Statutory Surplus ............................................ 41
6.21. Tax Consolidation ............................................ 41
6.22. ERISA Compliance ............................................. 42

ARTICLE VII DEFAULTS ....................................................... 42

ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ................ 44
8.1. Acceleration ..................................................... 44
8.2. Amendments ....................................................... 45
8.3. Preservation of Rights ........................................... 45

ARTICLE IX GENERAL PROVISIONS ............................................. 46
9.1. Survival of Representations .................................... 46
9.2. Governmental Regulation ........................................ 46
9.3. Taxes .......................................................... 46
9.4. Headings ....................................................... 46
9.5. Entire Agreement ............................................... 46
9.6. Several Obligations; Benefits of this Agreement ................ 46
9.7. Expenses; Indemnification ...................................... 46
9.8. Numbers of Documents ........................................... 47
9.9. Accounting ..................................................... 47
9.10. Severability of Provisions ..................................... 47
9.11. Nonliability of Lenders ........................................ 47
9.12. CHOICE OF LAW .................................................. 48
9.13. CONSENT TO JURISDICTION ........................................ 48
9.14. WAIVER OF JURY TRIAL ........................................... 48
9.15. Disclosure ..................................................... 48
9.16. Counterparts ................................................... 48
9.17. Treatment of Certain Information: Confidentiality .............. 49

ARTICLE X THE AGENT ....................................................... 49
10.1. Appointment .................................................... 49
10.2. Powers ......................................................... 49
10.3. General Immunity ............................................... 50
10.4. No Responsibility for Loans, Recitals, etc. .................... 50
10.5. Action on Instructions of Lenders .............................. 50
10.6. Employment of Agents and Counsel ............................... 50
10.7. Reliance on Documents; Counsel ................................. 50
</TABLE>

iii

<PAGE>

<TABLE>
<S> <C>
10.8. Agent's Reimbursement and Indemnification ..................... 51
10.9. Notice of Default ............................................. 51
10.10. Rights as a Lender ............................................ 51
10.11. Lender Credit Decision ........................................ 51
10.12. Successor Agent ............................................... 51

ARTICLE XI SETOFF; RATABLE PAYMENTS ....................................... 52
11.1. Setoff ........................................................ 52
11.2. Ratable Payments .............................................. 52

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS ............. 53
12.1. Successors and Assigns ....................................... 53
12.2. Participations. .............................................. 53
12.2.1. Permitted Participants; Effect. .............................. 53
12.2.2. Voting Rights ................................................ 53
12.2.3. Benefit of Setoff ............................................ 54
12.3. Assignments .................................................. 54
12.3.1. Permitted Assignments ........................................ 54
12.3.2. Effect; Effective Date ....................................... 54
12.4. Dissemination of Information ................................. 55
12.5. Tax Treatment ................................................ 55

ARTICLE XIII NOTICES ...................................................... 55
13.1. Giving Notice ................................................ 55
13.2. Change of Address ............................................ 55

ARTICLE XIV AMENDMENT AND RESTATEMENT ..................................... 55

</TABLE>

<PAGE>

vii

<PAGE>

EXHIBITS

<TABLE>
<S> <C>
Exhibit A (Article 1) Note
Exhibit B (Section 6.1(g)) Compliance Certificate
Exhibit C (Section 6.12(d)) Assumption Agreement
Exhibit D (Section 12.3.1) Assignment Agreement
</TABLE>

SCHEDULES

<TABLE>
<S> <C>
Schedule 1 - Margins
Schedule 5.3 - Approvals and Consents
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.16 - Indebtedness
Schedule 5.17 - Insurance Licenses
Schedule 5.18 - Material Restrictions
Schedule 6.15 - Liens
</TABLE>

viii

<PAGE>

AMENDED AND RESTATED CREDIT AGREEMENT

This Amended and Restated Credit Agreement, dated as of July 30, 1997, is
among WHITE MOUNTAINS HOLDINGS, INC., a New Hampshire corporation, the Lenders
and THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent.

R E C I T A L S:

A. The Borrower has requested the Lenders to make financial
accommodations to it in the aggregate principal amount of $50,000,000, the
proceeds of which the Borrower will use for the working capital and general
corporate needs of the Borrower and its Subsidiaries and

B. The Lenders are willing to extend such financial accommodations on the
terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the
Agent hereby agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement:

"ABR Advance" means an Advance which bears interest at the Alternate Base
Rate.

"Adjusted Net Worth" means, with respect to the Borrower, Net Worth of the
Borrower (on a consolidated basis) on the date of determination (without
duplication for amounts already excluded) minus the amount by which the
aggregate book value of the Borrower's equity interest in FAE and SOMSC at such
time exceeds $75,000,000.

"Advance" means a borrowing pursuant to Section 2.1 consisting of the
aggregate amount of the several Loans made on the same Borrowing Date by the
Lenders to the Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.

<PAGE>

to direct or cause the direction of the management or policies of the controlled
Person, whether through ownership of stock, by contract or otherwise.

"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to Article X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to Article X.

"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders hereunder. The initial Aggregate Commitment is $50,000,000.

"Agreement" means this Credit Agreement, as it may be amended, modified or
restated and in effect from time to time.

"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; provided, however, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
Financial Statements furnished to the Lenders pursuant to Section 5.5 hereof.

"Annual Statement" means the annual statutory financial statement of any
Insurance Subsidiary required to be filed with the insurance commissioner (or
similar authority) of its jurisdiction of incorporation, which statement shall
be in the form required by such Insurance Subsidiary's jurisdiction of
incorporation or, if no specific form is so required, in the form of financial
statements permitted by such insurance commissioner (or such similar authority)
to be used for filing annual statutory financial statements and shall contain
the type of information permitted by such insurance commissioner (or such
similar authority) to be disclosed therein, together with all exhibits or
schedules filed therewith.

"Applicable Eurodollar Margin" has the meaning ascribed to it by, and shall
be determined in accordance with, Schedule 1.

<PAGE>

"Applicable Facility Fee Margin" has the meaning ascribed to it by, and
shall be determined in accordance with, Schedule 1.

"Article" means an article of this Agreement unless another document is
specifically referenced.

"Asset Disposition" means any sale, transfer or other disposition (outside
the ordinary course of business) of any material asset of the Borrower in a
single transaction or in a series of related transactions (other than the sale
of (a) Margin Stock or (b) the sale of a Money Market Investment or of the
Borrower's equity interests in FAE and SOMSC the proceeds of which, in the case
of each of (a) and (b) are utilized to pay dividends permitted by Section 6.10),
including any such sale, transfer or disposition by means of a transaction
permitted by Section 6.12.

"Authorized Officer" means any of the chief executive officer, president,
chief financial officer, treasurer or controller of the Borrower, acting singly.

"Benefit Plan" means any deferred benefit plan for the benefit of present,
future or former employees, whether or not such benefit plan is a Plan.

"Borrower" means White Mountains Holdings, Inc., a New Hampshire
corporation, and its successors and assigns.

"Borrowing Date" means a date on which an Advance is made hereunder.

"Borrowing Notice" is defined in Section 2.8.

"Business Day" means (a) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago for the conduct of substantially all
of their commercial lending activities and on which dealings in United States
dollars are carried on in the London interbank market, and (b) for all other
purposes, a day (other than a Saturday or Sunday) on which banks generally are
open in Chicago for the conduct of substantially all of their commercial lending
activities.

3
<PAGE>

"Change" is defined in Section 3.2.

"Change in Control" means (a) the acquisition by any "person" or "group"
(as such terms are used in Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended) (other than Parent, any Wholly-Owned Subsidiary of
Parent, John J. Byrne or any Plan or any Benefit Plan of Parent, the Borrower or
any of their Subsidiaries), including without limitation any acquisition
effected by means of any transaction contemplated by Section 6.12, of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended) of 25% or more
of the outstanding shares of voting stock of the Borrower; or (b) during any
period of 12 consecutive calendar months, commencing on the date of the
Agreement, the ceasing of those individuals (the "Continuing Directors") who (i)
were directors of the Borrower on the first day of each such period or (ii)
subsequently became directors of the Borrower and whose initial election or
initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Borrower to constitute a majority of the board of directors of the Borrower; or
(c) during any period of 12 consecutive calendar months, commencing on the date
of this Agreement, the ceasing of individuals who hold an office possessing the
title Senior Vice President or such title that ranks senior to a Senior Vice
President (collectively, "Senior Management") of the Borrower on the first day
of each such period to constitute a majority of the Senior Management of the
Borrower. Notwithstanding the foregoing, the FAE Merger shall not be deemed in
and of itself to constitute a Change in Control.

"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.

4
<PAGE>

the Borrower is a member for state income tax purposes.

"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest publicly announced by First Chicago from time to time, changing
when and as said corporate base rate changes. The Corporate Base Rate is a
reference rate and does not necessarily represent the lowest or best rate of
interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.

"Default" means an event described in Article VII.

"Environmental Laws" is defined in Section 5.19.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.

"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest

5
<PAGE>

Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable
to such Interest Period, divided by (ii) one minus the Reserve Requirement
(expressed as a decimal) applicable to such Interest Period, plus the Applicable
Eurodollar Margin. The Eurodollar Rate shall be rounded to the next higher
multiple of 1/100 of 1% if the rate is not such a multiple.

"Facility Fee" is defined in Section 2.4(a).

"Facility Termination Date" means July 30, 2002.

"FAE" means, at any time prior to the FAE Merger, Fund American
Enterprises, Inc., a Delaware corporation and direct Wholly-Owned Subsidiary of
Parent, and on and after the consummation of the FAE Merger, Fund American
Enterprises, Inc. (f/k/a Fund American Enterprises II, Inc.), a Delaware
corporation and direct Wholly-Owned Subsidiary of the Borrower.

"FAE Merger" means the merger of the corporation known as of the date of
this Agreement as Fund American Enterprises, Inc. into the Borrower with Fund
American Enterprises, Inc. surviving the merger and changing its name to White
Mountain Holdings, Inc.

"Finance Assets" means each of the following: (a) investments in
securities issued or fully guaranteed by the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States of America is pledged in support thereof), (b) investments in
equity securities traded on the New York Stock Exchange, the American Stock
Exchange or NASDAQ and securities convertible in to such equity securities, (c)
investments in Investment Grade Obligations, (d) investments in money market
funds substantially all the assets of which are comprised of securities of the
types described in clauses (a) through (c) above, (e) investments in
Wholly-Owned Subsidiaries of the Borrower, (f) investments in Main Street
America Holdings, Inc., Folksamerica Holding Company Inc. and Financial Security
Assurance Holdings Ltd. and (g) so long as put rights with respect thereto are
available to the Borrower, investments in US West Preferred Stock; provided,
that Finance Assets shall not include any securities pledged to secure any
obligations (contingent or otherwise) or any Investments in FAE or SOMSC.

6
<PAGE>

"Finance Assets Ratio" means, at any time, the ratio of (a) Finance Assets
of the Borrower at such time to (b) the excess of (i) Funded Indebtedness of the
Borrower at such time over (ii) cash and Money Market Investments of the
Borrower at such time. For purposes of this definition, Finance Assets shall be
valued, without duplication, at fair market value to the extent there exists a
readily ascertainable fair market value for such Finance Asset or, in the event
there exists no such readily ascertainable fair market value for such Finance
Assets, at book value, as calculated in accordance with Agreement Accounting
Principles.

"Financial Statements" is defined in Section 5.5.

"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.

"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.

"Fiscal Year" means the twelve-month accounting period ending December 31
of each year.

"Fixed Charges Coverage Ratio" means, as of the end of any Fiscal Quarter,
the ratio of:

(a) the sum, without duplication, of,

(i) investments of the Borrower and Valley in cash, Money Market
Investments and clauses (a) through (d) of the definition "Finance
Assets" as of the end of such Fiscal Quarter, plus
(ii) cash dividends received by the Borrower and Valley during the
four Fiscal Quarters then ended from Financial Security Assurance
Holdings Ltd., Folksamerica Holding Company Inc. and Main Street
America Holdings, Inc., as long as such Person was not a Wholly-Owned
Subsidiary of the Borrower or Valley at the time such payment was made
and to the extent that such Person would not be restricted from paying
such dividend during the succeeding four Fiscal Quarters, plus

(iii) an amount equal to the maximum amount of dividends and
intercompany fees available to be paid to the Borrower and Valley
without approval of any Governmental Authority by each Wholly-Owned
Subsidiary of the Borrower and Valley (other than FAE, SOMSC and each
Wholly-Owned Insurance Subsidiary) as of the end of such Fiscal
Quarter, plus

(iv) an amount equal to the maximum amount of dividends and
intercompany

7
<PAGE>

fees available to be paid to the Borrower and Valley without approval
of any Governmental Authority by each present and future Wholly-Owned
Subsidiary of the Borrower that is a first-tier Insurance Subsidiary
of either the Borrower or any of its Subsidiaries that is not an
Insurance Subsidiary pursuant to applicable insurance statutes, rules
and regulations of the applicable Governmental Authority during the
succeeding four Fiscal Quarters,

to (b) Fixed Charges.

"Fixed Charges" means, with respect to the Borrower and Valley, as of the
end of any Fiscal Quarter, the sum, without duplication, of (a) interest
expenses payable on outstanding Indebtedness (determined by adjusting the
principal amount of such Indebtedness for scheduled amortization payments as
reflected in clauses (c), (d) and (e) below and assuming that the applicable
interest rate in effect as of the date of determination would remain constant
during the succeeding four Fiscal Quarter period), (b) dividends payable on
preferred stock, (c) Indebtedness payable pursuant to the scheduled amortization
of such Indebtedness, (d) Loans payable pursuant to Section 2.1(b) (determined
by assuming that the principal amount of Loans as of the date of determination
would remain constant during the succeeding four Fiscal Quarter period) as a
result of reductions in the Aggregate Commitment occurring in any such period
pursuant to Section 2.7(a) (other than on July 30, 2002), and (e) Loans (as
defined in the Valley Credit Agreement) payable pursuant to Section 2.1(b) of
the Valley Credit Agreement (determined by assuming that the outstanding
principal amount of such Loans as of the date of determination would remain
constant during the succeeding four Fiscal Quarter period) as a result of
reductions in the Aggregate Commitment (as defined in the Valley Credit
Agreement) occurring in any such period pursuant to Section 2.7(a) of the Valley
Credit Agreement (other than on July 30, 2002), in each case for the period of
four Fiscal Quarters immediately following the date of determination.

"Funded Indebtedness" means Indebtedness of the type described in clauses
(a), (d), (e) and (h) of the definition "Indebtedness".

"Governmental Authority" means any government (foreign or domestic) or any
state or other political subdivision thereof or any governmental body, agency,
authority, department or commission (including without limitation any board of
insurance, insurance department or insurance commissioner and any taxing
authority or political subdivision) or any instrumentality or officer thereof
(including without limitation any court or tribunal) exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any corporation, partnership or other entity directly or
indirectly owned or controlled by or subject to the control of any of the
foregoing.

"Hazardous Materials" is defined in Section 5.19.

8
<PAGE>

"Insurance Subsidiary" means any Subsidiary which is engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.

"Investment" of a Person means any loan, advance (other than commission,
travel and similar advances to officers and employees made in the ordinary
course of business), extension of credit (other than accounts receivable arising
in the ordinary course of business on terms customary in the trade), deposit
account or contribution of capital by such Person to any other Person or any
investment in, or purchase or other acquisition of, the stock, partnership
interests, notes, debentures or other securities of any other Person made by
such Person.

"Investment Grade Obligations" means, as of any date, investments having an
NAIC investment rating of 1 or 2, or a Standard & Poor=s rating within the range
of ratings from AAA to BBB-, or a Moody=s rating within the range of ratings
from Aaa to Baa3.

"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.

"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch, subsidiary or affiliate of such Lender or the Agent.

9
<PAGE>

"Leverage Ratio" means, at any time, the ratio of (a) the consolidated
Funded Indebtedness of the Borrower and its Subsidiaries, other than FAE and
SOMSC, at such time to (b) the sum of the consolidated Funded Indebtedness of
the Borrower and its Subsidiaries, other than FAE and SOMSC, at such time plus
Net Worth (without giving effect to the Borrower's equity interests in FAE and
SOMSC) at such time, in all cases determined in accordance with Agreement
Accounting Principles.

"License" means any license, certificate of authority, permit or other
authorization which is required to be obtained from any Governmental Authority
in connection with the operation, ownership or transaction of insurance
business.

"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.

"Loan Documents" means this Agreement, the Notes and the other documents
and agreements contemplated hereby and executed by the Borrower in favor of the
Agent or any Lender.

"Margin Stock" has the meaning assigned to that term under Regulation U.

"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of the Borrower and its Subsidiaries taken as a whole,
(b) the ability of the Borrower or any Subsidiary to perform its obligations
under the Loan Documents, or (c) the validity or enforceability of any of the
Loan Documents or the rights or remedies of the Agent or the Lenders thereunder.

10
<PAGE>

company organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than 90 days from the date of acquisition
thereof; (c) commercial paper rated A-1 or better P-1 or better by Standard &
Poor's Ratings Group or Moody's Investors Services, Inc., respectively, maturing
not more than 90 days from the date of acquisition thereof; and (d) shares in an
open-end management investment company with U.S. dollar denominated investments
in fixed income obligations, including repurchase agreements, fixed time
deposits and other obligations, with a dollar weighted average maturity of not
more than one year, and for the calculation of this dollar weighted average
maturity, certain instruments which have a variable rate of interest readjusted
no less frequently than annually are deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.

"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissioners and similar Governmental
Authorities of the various states of the United States toward the promotion of
uniformity in the practices of such Governmental Authorities.

"Net Available Proceeds" means (a) with respect to any Asset Disposition,
the sum of cash or readily marketable cash equivalents received (including by
way of a cash generating sale or discounting of a note or account receivable)
therefrom, whether at the time of such disposition or subsequent thereto, in
excess in the case of any Asset Disposition of any amounts derived from such
sale used (and permitted by this Agreement to be used) within five Business Days
after such sale to make a Permitted Reinvestment, or (b) with respect to any
sale or issuance of equity securities of the Borrower, cash or readily
marketable cash equivalents received therefrom, whether at the time of such sale
or issuance or subsequent thereto, net, in either case, of all legal, title and
recording tax expenses, commissions and other fees and all costs and expenses
incurred, including, without limitation, incremental income taxes resulting from
such transaction.

"Non-Excluded Taxes" is defined in Section 2.18(a).

11
<PAGE>

"Note" means a promissory note in substantially the form of Exhibit A
hereto, with appropriate insertions, duly executed and delivered to the Agent by
the Borrower and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.

"Notice of Assignment" is defined in Section 12.3.2.

"Obligations" means all unpaid principal of and accrued and unpaid interest
on the Notes, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of the Borrower to the Lenders or to any
Lender, the Agent or any indemnified party hereunder arising under any of the
Loan Documents.

"Parent" means Fund American Enterprises Holdings, Inc., a Delaware
corporation.

"Parent Credit Agreement" means the Credit Agreement to be entered into
among Parent, FAE (as defined after giving effect to the FAE Merger), the
financial institutions from time to time party thereto and First Chicago, as
agent, as the same may be amended, supplemented or otherwise modified from time
to time.

"Participants" is defined in Section 12.2.1.

"Payment Date" means the last day of each March, June, September and
December.

"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.

"Permitted Reinvestment" means an Investment in a Finance Asset or any
other Investment approved by the Required Lenders.

"Plan" means an employee pension benefit plan, as defined in Section 3(2)
of ERISA, as to which the Borrower or any member of the Controlled Group may
have any liability.

"Proceeding" is defined in Section 5.19.

"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.

"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage

12
<PAGE>

of the Aggregate Commitment or if the Aggregate Commitment has been terminated,
its percentage of the aggregate principal amount of outstanding Advances.

"Purchase" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which the Borrower or any
of its Subsidiaries (a) acquires any going business or all or substantially all
of the assets of any firm, corporation or division or line of business thereof,
whether through purchase of assets, merger or otherwise, or (b) directly or
indirectly acquires (in one transaction or as the most recent transaction in a
series of transactions) at least a majority (in number of votes) of the
securities of a corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage or voting power) of the
outstanding partnership interests of a partnership.

"Purchasers" is defined in Section 12.3.1.

"Quarterly Statement" means the quarterly statutory financial statement of
any Insurance Subsidiary required to be filed with the insurance commissioner
(or similar authority) of its jurisdiction of incorporation or, if no specific
form is so required, in the form of financial statements permitted by such
insurance commissioner (or such similar authority) to be used for filing
quarterly statutory financial statements and shall contain the type of financial
information permitted by such insurance commissioner (or such similar authority)
to be disclosed therein, together with all exhibits or schedules filed
therewith.

"Regulation G" means Regulation G of the Board of Governors of the Federal
Reserve System as from time to time in effect and shall include any successor or
other regulation or

13
<PAGE>

official interpretation of said Board of Governors relating to the extension of
credit by Persons other than banks, brokers and dealers for the purpose of
purchasing or carrying margin stocks applicable to such Persons.

"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq.

14
<PAGE>

"Restatement Effective Date" means the date on which all conditions
precedent set forth in Section 4.1 are satisfied or waived by all of the
Lenders.

"Risk-Based Capital Guidelines" is defined in Section 3.2.

"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) in the jurisdiction of such Person for the preparation
of annual statements and other financial reports by insurance companies of the
same type as such Person in effect from time to time; provided, however, that if
any changes in statutory accounting practices from those in effect on the date
of this Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of statutory accounting practices in
effect on the date of this Agreement applied, to the extent applicable, on a
basis consistent with that used in the preparation of the Financial Statements
furnished to the Lenders pursuant to Section 5.5 (g) and (h) hereof.

"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.

"Significant Subsidiary" shall mean and include, at any time, each
Subsidiary of the Borrower to the extent that the Net Worth of such Subsidiary
is equal to or greater than $5,000,000.

15
<PAGE>

"SOMSC" means Source One Mortgage Services Corporation, a Delaware
corporation.

"SOMSC Credit Agreement" means the credit agreement or credit agreements
from time to time in effect among SOMSC, the financial institutions from time to
time party thereto and First Chicago, as agent, as the same may be amended,
supplemented, restated, replaced or otherwise modified from time to time (and,
subsequent to the termination thereof, as in effect on the date of such
termination).

"Statutory Surplus" means, with respect to any Insurance Subsidiary at any
time, the statutory capital and surplus of such Insurance Subsidiary at such
time, as determined in accordance with SAP ("Liabilities, Surplus and Other
Funds" statement, page 3, line 25 of the Annual Statement for the 1995 Fiscal
Year entitled "Surplus as Regards Policyholders").

"Transferee" is defined in Section 12.4.

"Type" means, with respect to any Advance, its nature as an ABR Advance or
Eurodollar Advance.

16
<PAGE>

"Unmatured Default" means an event which but for the lapse of time or the
giving of notice, or both, would constitute a Default.

"Unrestricted Subsidiary" means SOMSC and its Subsidiaries and, following
the FAE Merger, FAE and its Subsidiaries.

"US West Preferred Stock" means the US West Series B cumulative redeemable
preferred stock $1.00 par value per share purchased by Parent pursuant to and
subject to the terms of the Securities Purchase Agreement dated April 10, 1994
among Parent, US West, Inc., US West Capital Corporation and Financial Security
Assurance Holdings, Ltd. (as such agreement may be amended from time to time).

"Valley Credit Agreement" means the Credit Agreement, dated as of July 30,
1997, among Valley, the financial institutions from time to time party thereto
and First Chicago, as agent, as the same may be amended, supplemented or
otherwise modified from time to time.

"Valley" means Valley Group, Inc., an Oregon corporation.

"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the
outstanding voting securities of which (other than directors' qualifying or
similar shares) shall at the time be owned or controlled, directly or
indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such
Person, or by such Person and one or more Wholly-Owned Subsidiaries of such
Person, or (b) any partnership, association, joint venture, limited liability
company or similar business organization 100% of the ownership interests having
ordinary voting power of which (other than directors' qualifying or similar
shares) shall at the time be so owned or controlled.

The foregoing definitions shall be equally applicable to both the singular
and plural forms of the defined terms. References herein to particular columns,
lines or sections of any Person's Annual Statement shall be deemed, where
appropriate, to be references to the corresponding column, line or section of
such Person's Quarterly Statement, or if no such corresponding column, line or
section exists or if any report form changes, then to the corresponding item
referenced thereby. In the event that the columns, lines or sections of the
Annual Statement referenced herein are changed or renumbered, all such
references shall be deemed references to such column, line or section as so
renumbered or changed. Each accounting term used herein which is not otherwise
defined herein shall be defined in accordance with Agreement Accounting
Principles or SAP, as applicable, unless otherwise specified.

17
<PAGE>

ARTICLE II

THE CREDITS

2.1. Advances. (a) From and including the date hereof to but excluding
the Facility Termination Date, each Lender severally (and not jointly) agrees,
on the terms and conditions set forth in this Agreement, to make Advances to the
Borrower from time to time in amounts not to exceed in the aggregate at any one
time outstanding the amount of its pro-rata share of the Aggregate Commitment
existing at such time. Subject to the terms of this Agreement, the Borrower may
borrow, repay and reborrow Advances at any time prior to the Facility
Termination Date.

(b) The Borrower hereby agrees that if at any time, as a result of
reductions in the Aggregate Commitment pursuant to Section 2.7 or otherwise, the
aggregate balance of the Loans exceeds the Aggregate Commitment, the Borrower
shall repay immediately its then outstanding Loans in such amount as may be
necessary to eliminate such excess.

(c) The Borrower's obligation to pay the principal of, and interest
on, the Loans shall be evidenced by the Notes. Although the Notes shall be
dated the date of this Agreement, interest in respect thereof shall be payable
only for the periods during which the Loans evidenced thereby are outstanding
and, although the stated amount of each Note shall be equal to the applicable
Lender's Commitment, each Note shall be enforceable, with respect to the
Borrower's obligation to pay the principal amount thereof, only to the extent of
the unpaid principal amount of the Loans at the time evidenced thereby.

(d) All Advances and all Loans shall mature, and the principal amount
thereof and the unpaid accrued interest thereon shall be due and payable, on the
Facility Termination Date.

2.2. Ratable Loans. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.

2.3. Types of Advances. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance with
Sections 2.8 and 2.9.

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<PAGE>

each Payment Date hereafter and on the Facility Termination Date. All accrued
Facility Fees shall be payable on the effective date of any termination of the
obligations of the Lenders to make Loans hereunder.

(b) The Borrower may permanently reduce the Aggregate Commitment in
whole, or in part ratably among the Lenders in a minimum aggregate amount of
$2,000,000 upon at least three (3) Business Days' written notice to the Agent,
which notice shall specify the amount of any such reduction; provided, however,
that the amount of the Aggregate Commitment may not be reduced below the
aggregate principal amount of the outstanding Advances. Such reductions shall
be in addition to reductions occurring pursuant to Section 2.7(b). Voluntary
commitment reductions pursuant to this Section 2.4(b) shall be applied to the
mandatory commitment reductions required to be made pursuant to Section 2.7(a)
in direct order of maturity.

2.5. Minimum Amount of Each Advance. Each Advance shall be in the minimum
amount of $2,000,000 (and in integral multiples of $500,000 if in excess
thereof); provided, however, that (a) any ABR Advance may be in the amount of
the unused Aggregate Commitment and (b) in no event shall more than six (6)
Eurodollar Advances be permitted to be outstanding at any time.

2.6. Optional Principal Payments. The Borrower may from time to time pay,
without penalty or premium, all outstanding ABR Advances, or, in a minimum
aggregate amount of $2,000,000 any portion of the outstanding ABR Advances upon
two Business Days' prior notice to the Agent. Subject to Section 3.4 and upon
like notice, a Eurodollar Advance may be paid prior to the last day of the
applicable Interest Period in a minimum amount of $2,000,000 or an integral
multiple of $500,000 in excess thereof.

2.7. Mandatory Commitment Reductions. (a) The Aggregate Commitment shall
be automatically and permanently reduced by the following amounts (or such
lesser amount as a result of reductions pursuant to Section 2.7(c)) on the
following dates:

<TABLE>
<CAPTION>
Date Reduction Amount
------------- ----------------
<S> <C>
June 30, 1999 $3,000,000
June 30, 2000 $3,000,000
June 30, 2001 $4,000,000
July 30, 2002 $40,000,000

</TABLE>

(b) The Aggregate Commitment shall also be automatically and
permanently reduced in the amounts and at the times set forth below:

19
<PAGE>

(i) within 5 Business Days after the receipt in the form of cash or
cash equivalents thereof by the Borrower, 100% of the aggregate Net
Available Proceeds in excess of $1,000,000 realized upon all Asset
Dispositions in any Fiscal Year of the Borrower; and

(ii) within 5 Business Days after the receipt in the form of cash or
cash equivalents thereof by the Borrower, 85% of the Net Available Proceeds
realized upon the sale by the Borrower of any equity securities issued by
it after the date of this Agreement in excess of an aggregate amount of
$1,000,000 (other than a sale of common stock of the Borrower to Parent).

(c) Mandatory commitment reductions under Section 2.7(b) shall be
cumulative and in addition to reductions occurring pursuant to Section 2.4(b).
Any mandatory commitment reductions under Section 2.7(b) shall be applied to the
mandatory commitment reductions required to be made pursuant to Section 2.7(a)
in the inverse order of maturity.

(d) Any reduction in the Aggregate Commitment pursuant to this
Section 2.7 or otherwise shall ratably reduce the Commitment of each Lender.

2.8. Method of Selecting Types and Interest Periods for New Advances. The
Borrower shall select the Type of Advance and, in the case of each Eurodollar
Advance, the Interest Period applicable to each Advance from time to time;
provided, however, that in the event Loans are incurred on the date of this
Agreement, all Loans incurred on such date shall be ABR Advances. The Borrower
shall give the Agent irrevocable notice (a "Borrowing Notice") not later than
10:00 a.m. (Chicago time) on the Borrowing Date of each ABR Advance and at least
three (3) Business Days before the Borrowing Date for each Eurodollar Advance,
specifying:

(a) the Borrowing Date of such Advance, which shall be a Business
Day;

(b) the aggregate amount of such Advance;

(d) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, which shall end on or prior to
the Facility Termination Date; and

(e) any changes to money transfer instructions previously delivered
to the Agent.

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<PAGE>

2.9. Conversion and Continuation of Outstanding Advances. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances. Each Eurodollar Advance shall continue as a
Eurodollar Advance until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Advance shall be automatically converted
into an ABR Advance unless the Borrower shall have given the Agent a
Conversion/Continuation Notice requesting that, at the end of such Interest
Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or
another Interest Period. Subject to the terms of Section 2.5, the Borrower may
elect from time to time to convert all or any part of an Advance of any Type
into any other Type or Types of Advances; provided, however, that any conversion
of any Eurodollar Advance shall be made on, and only on, the last day of the
Interest Period applicable thereto. The Borrower shall give the Agent
irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an
ABR Advance or continuation of a Eurodollar Advance not later than 10:00 a.m.
(Chicago time) on the conversion date, in the case of a conversion into an ABR
Advance, or at least three (3) Business Days, in the case of a conversion into
or continuation of a Eurodollar Advance, prior to the date of the requested
conversion or continuation, specifying:

(a) the requested date of such conversion or continuation, which
shall be a Business Day;

(b) the aggregate amount and Type of the Advance which is to be
converted or continued; and

(c) the amount and Type(s) of Advance(s) into which such Advance is
to be converted or continued and, in the case of a
conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto, which shall
end on or prior to the Facility Termination Date.

2.10. Changes in Interest Rate, etc. Each ABR Advance shall bear
interest at the Alternate Base Rate from and including the date of such Advance
or the date on which such Advance was converted into an ABR Advance to (but not
including) the date on which such ABR Advance is paid or converted to a
Eurodollar Advance. Changes in the rate of interest on that portion of any
Advance maintained as an ABR Advance will take effect simultaneously with

21
<PAGE>

each change in the Alternate Base Rate. Each Eurodollar Advance shall bear
interest from and including the first day of the Interest Period applicable
thereto to, but not including, the last day of such Interest Period at the
Eurodollar Rate determined as applicable to such Eurodollar Advance plus the
Applicable Eurodollar Margin. No Interest Period may end after the Facility
Termination Date. The Borrower shall select Interest Periods so that it is not
necessary to repay any portion of a Eurodollar Advance prior to the last day of
the applicable Interest Period in order to make a mandatory repayment required
pursuant to Section 2.7(a).

2.11. Rates Applicable After Default. Notwithstanding anything to the
contrary contained in Section 2.8 or 2.9, no Advance may be made as, converted
into or continued as a Eurodollar Advance (except with the consent of the Agent
and the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of Section 8.2
requiring unanimous consent of the Lenders to changes in interest rates),
declare that each Eurodollar Advance and ABR Advance shall bear interest (for
the remainder of the applicable Interest Period in the case of Eurodollar
Advances) at a rate per annum equal to the rate otherwise applicable plus two
percent (2%) per annum; provided, however, that such increased rate shall
automatically and without action of any kind by the Lenders become and remain
applicable until revoked by the Required Lenders in the event of a Default
described in Section 7.6 or 7.7.

2.12. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower (at least two Business Days in advance) by
noon (Chicago time) on the date when due and shall be applied ratably by the
Agent among the Lenders. Each payment delivered to the Agent for the account of
any Lender shall be delivered promptly by the Agent to such Lender in the same
type of funds that the Agent received at its address specified pursuant to
Article XIII or at any Lending Installation specified in a notice received by
the Agent from such Lender. The Agent is hereby authorized to charge the
account of the Borrower maintained with the Agent for each payment of principal,
interest and fees as it becomes due hereunder.

2.13. Notes. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to its
Note; provided, however, that neither the failure to so record nor any error in
such recordation shall affect the Borrower's obligations under such Note.

2.14. Interest Payment Dates; Interest and Fee Basis. Interest accrued
on each ABR Advance shall be payable on each Payment Date, commencing with the
first such date to occur

22
<PAGE>

after the date hereof, on any date on which an ABR Advance is prepaid, whether
due to acceleration or otherwise, and at maturity. Interest accrued on that
portion of the outstanding principal amount of any ABR Advance converted into a
Eurodollar Advance on a day other than a Payment Date shall be payable on the
date of conversion. Interest accrued on each Eurodollar Advance shall be
payable on the last day of its applicable Interest Period, on any date on which
the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at
maturity. Interest accrued on each Eurodollar Advance having an Interest Period
longer than three months shall also be payable on the last day of each
three-month interval during such Interest Period. Interest and commitment fees
shall be calculated for actual days elapsed on the basis of a 360-day year.
Interest shall be payable for the day an Advance is made but not for the day of
any payment on the amount paid if payment is received prior to noon (Chicago
time) at the place of payment. If any payment of principal of or interest on an
Advance shall become due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and, in the case of a
principal payment, such extension of time shall be included in computing
interest in connection with such payment.

2.15. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice received
by it hereunder. The Agent will notify each Lender of the interest rate
applicable to each Eurodollar Advance promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Alternate Base Rate.

2.16. Lending Installations. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.

2.17. Non-Receipt of Funds by the Agent. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrower, a payment of principal,
interest or fees to the Agent for the account of the Lenders, that it does not
intend to make such payment, the Agent may assume that such payment has been
made. The Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption.
If the Borrower has not in fact made such payment to the Agent, the Lenders
shall, on demand by the Agent, repay to the Agent the amount so made available
together with interest thereon in respect of each day during the period
commencing on the date such amount was so made available by the Agent until the
date the Agent recovers such amount at a rate per annum equal to the Federal
Funds Effective Rate for

23
<PAGE>

such day. If any Lender has not in fact made such payment to the Agent, such
Lender or the Borrower shall, on demand by the Agent, repay to the Agent the
amount so made available together with interest thereon in respect of each day
during the period commencing on the date such amount was so made available by
the Agent until the date the Agent recovers such amount at a rate per annum
equal to (a) in the case of payment by a Lender, the Federal Funds Effective
Rate for such day, or (b) in the case of payment by the Borrower, the interest
rate applicable to the relevant Loan.

2.18. Taxes. (a) Any payments made by the Borrower under this
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes or any other tax based
upon any income imposed on the Agent or any Lender by the jurisdiction in which
the Agent or such Lender is incorporated or has its principal place of business
or maintains its Lending Installation. If any such non-excluded taxes, levies,
imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the Agent or any
Lender hereunder, the amounts so payable to the Agent or such Lender shall be
increased to the extent necessary to yield to the Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in or pursuant to this
Agreement; provided, however, that the Borrower shall not be required to
increase any such amounts payable to any Lender that is not organized under the
laws of the U.S. or a state thereof if such Lender fails to comply with the
requirements of paragraph (b) of this Section 2.18. Whenever any Non-Excluded
Taxes are payable by the Borrower, as promptly as practicable thereafter the
Borrower shall send to the Agent for its own account or for the account of such
Lender, as the case may be, a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrower fails to pay
any Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Agent the required receipts or other required documentary evidence,
the Borrower shall indemnify the Agent and the Lenders for any incremental
taxes, interest or penalties that may become payable by any Agent or any Lender
as a result of any such failure. The agreements in this Section 2.18 shall
survive the termination of this Agreement and the payment of all other amounts
payable hereunder.

24
<PAGE>

delivers a Form 1001 or 4224 (or a successor form) further undertakes to deliver
to each of the Borrower and the Agent two additional duly completed and properly
executed copies of such form (or a successor form) on or before the date that
such form expires (currently, three successive calendar years for Form 1001 and
each tax year for Form 4224) or becomes obsolete or after the occurrence of any
event requiring a change in the most recent forms so delivered by it, and such
amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Lender
is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes, unless an
event (including, without limitation, any change in treaty, law or regulation)
has occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender advises the Borrower and the Agent that it is not capable of
receiving payments without any deduction or withholding of United States federal
income tax.

2.19. Agent's Fees. The Borrower shall pay to the Agent those fees, in
addition to the Facility Fees referenced in Section 2.4(a), in the amounts and
at the times separately agreed to between the Agent and the Borrower.

ARTICLE III

CHANGE IN CIRCUMSTANCES

(a) subjects any Lender or any applicable Lending Installation to any
tax, duty, charge or withholding on or from payments due from the
Borrower (excluding taxation of the overall net income of any Lender or
applicable Lending Installation imposed by the jurisdiction in which such
Lender or Lending Installation is incorporated or has its principal place
of business), or changes the basis of taxation of principal, interest or
any other payments to any Lender or Lending Installation in respect of its
Loans or other amounts due it hereunder, or

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Installation (other than reserves and assessments taken into account in
determining the interest rate applicable to Eurodollar Advances), or

(ci imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of
making, funding or maintaining Loans or reduces any amount receivable by
any Lender or any applicable Lending Installation in connection with any
Loans, or requires any Lender or any applicable Lending Installation to
make any payment calculated by reference to the amount of Loans held, or
interest received by it, by an amount deemed material by such Lender,

3.2. Changes in Capital Adequacy Regulations. If a Lender determines the
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a Change, then, within 15 days of demand by such
Lender, the Borrower shall pay such Lender the amount necessary to compensate
for any shortfall in the rate of return on the portion of such increased capital
which such Lender determines is attributable to this Agreement, its Loans or its
obligation to make Loans hereunder (after taking into account such Lender's
policies as to capital adequacy). "Change" means (a) any change after the date
of this Agreement in the Risk-Based Capital Guidelines, or (b) any adoption of
or change in any other law, governmental or quasi-governmental rule, regulation,
policy, guideline, interpretation, or directive (whether or not having the force
of law) after the date of this Agreement which affects the amount of capital
required or expected to be maintained by any Lender or any Lending Installation
or any corporation controlling any Lender. "Risk-Based Capital Guidelines"
means (a) the risk-based capital guidelines in effect in the United States on
the date of this Agreement and (b) the corresponding capital regulations
promulgated by regulatory authorities outside the United States implementing the
July 1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices entitled "International Convergence of Capital Measurements and
Capital Standards" and any amendments to such regulations adopted prior to the
date of this Agreement.

3.3. Availability of Types of Advances. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available, or (b) the interest rate applicable to a Eurodollar Advance does not
accurately or fairly reflect the cost of making or maintaining such Advance,
then the Agent shall suspend the availability of the Eurodollar Advances until
such circumstance no longer exists and require any Eurodollar Advances to be
repaid.

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<PAGE>

3.4. Funding Indemnification. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower will indemnify the Agent and each
Lender for any loss or cost incurred by it resulting therefrom, including,
without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Eurodollar Advance.

3.5. Lender Statements; Survival of Indemnity. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Advances to reduce any liability of the Borrower to
such Lender under Sections 2.18, 3.1 and 3.2 or to avoid the unavailability of a
Type of Advance under Section 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written statement
of such Lender to the Borrower (with a copy to the Agent) as to the amount due,
if any, under Section 3.1, 3.2 or 3.4. Such written statement shall set forth
in reasonable detail the calculations upon which such Lender determined such
amount and shall be final, conclusive and binding on the Borrower in the absence
of manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Advance shall be calculated as though each Lender
funded its Eurodollar Advances through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of any Lender shall be payable on demand after receipt by the Borrower
of the written statement. The obligations of the Borrower under Sections 3.1,
3.2 and 3.4 shall survive payment of the Obligations and termination of this
Agreement.

ARTICLE IV

CONDITIONS PRECEDENT

(ai Charter Documents; Good Standing Certificates. Copies of the
certificate of incorporation of the Borrower, together with all amendments
thereto, both certified by the appropriate governmental officer in its
jurisdiction of incorporation, together with a good standing certificate
issued by the Secretary of State of the jurisdiction of its incorporation
and such other jurisdictions as shall be reasonably requested by the Agent.

(bi By-Laws and Resolutions. Copies, certified by the Secretary or
Assistant

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<PAGE>

Secretary of the Borrower, of its by-laws and of its Board of Directors'
resolutions authorizing the execution, delivery and performance of the Loan
Documents to which the Borrower is a party.

(ci Secretary's Certificate. An incumbency certificate, executed by
the Secretary or Assistant Secretary of the Borrower, which shall identify
by name and title and bear the signature of the officers of the Borrower
authorized to sign the Loan Documents and to make borrowings hereunder,
upon which certificate the Agent and the Lenders shall be entitled to rely
until informed of any change in writing by the Borrower.

(di Officer's Certificate. A certificate signed by an Authorized
Officer of the Borrower, in form and substance satisfactory to the Agent,
to the effect that on the Restatement Effective Date (both before and after
giving effect to the consummation of the transactions contemplated hereby
and the making of the Loans hereunder, if any, being made on such date):
(i) no Default or Unmatured Default has occurred and is continuing; (ii) no
injunction or temporary restraining order which would prohibit the making
of any Loans or other litigation which could reasonably be expected to have
a Material Adverse Effect is pending or, to the best of such Person's
knowledge, threatened; (iii) all orders, consents, approvals, licenses,
authorizations, or validations of, or filings, recordings or registrations
with, or exemptions by, any Governmental Authority required in connection
with the execution, delivery and performance of this Agreement have been
or, prior to the time required, will have been, obtained, given, filed or
taken and are or will be in full force and effect (or the Borrower has
obtained effective judicial relief with respect to the application thereof)
and all applicable waiting periods have expired; (iv) each of the
representations and warranties set forth in Article V of this Agreement is
true and correct on and as of the Restatement Effective Date; and (v) since
December 31, 1996, no event or change has occurred that has caused or
evidences a Material Adverse Effect.

(ei Legal Opinion. A written opinion of Brobeck, Phleger & Harrison
LLP, counsel to the Borrower, addressed to the Agent and the Lenders in
form and substance acceptable to the Agent and its counsel.

(fi Notes. Notes payable to the order of each of the Lenders duly
executed by the Borrower.

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<PAGE>

(ii Solvency Certificate. A written solvency certificate from the
chief financial officer of the Borrower in form and content satisfactory to
the Agent with respect to the value, Solvency and other factual
information, or relating to, as the case may be of the Borrower on a
consolidated basis.

(ji Regulatory Matters. Receipt of any required regulatory
approvals from any Governmental Authority.

(ki Investment Policy Guidelines. Certified copy of the investment
policy guidelines adopted by the finance committee of the board of
directors of the Borrower.

(li Other. Such other documents as the Agent, any Lender or their
counsel may have reasonably requested.

4.2. Each Future Advance. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:

(ai There exists no Default or Unmatured Default and none would
result from such Advance;

(ci A Borrowing Notice shall have been properly submitted; and

(di All legal matters incident to the making of such Advance shall be
satisfactory to the Lenders and their counsel.

Each Borrowing Notice with respect to each such Advance shall constitute a
representation and warranty by the Borrower that the conditions contained in
Section 4.2(a), (b) and (c) have been satisfied. Any Lender may require a duly
completed compliance certificate in substantially the form of Exhibit B hereto
as a condition to making an Advance.

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<PAGE>

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lenders that:

5.2. Authorization and Validity. The Borrower has all requisite power and
authority (corporate and otherwise) and legal right to execute and deliver each
of the Loan Documents and to perform its obligations thereunder. The execution
and delivery by the Borrower of the Loan Documents and the performance of its
obligations thereunder have been duly authorized by proper corporate proceedings
and the Loan Documents constitute legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with their terms, except
as enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.

5.3. Compliance with Laws and Contracts. The Borrower and its Subsidiaries
have complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof, having jurisdiction over the conduct of
their respective businesses or the ownership of their respective properties,
except where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect. Neither the execution and delivery by the Borrower of
the Loan Documents, the application of the proceeds of the Loans or the
consummation of the transactions contemplated in the Loan Documents, nor
compliance with the provisions of the Loan Documents will, or at the relevant
time did, (a) violate any law, rule, regulation (including Regulations G, T, U
and X), order, writ, judgment, injunction, decree or award binding on the
Borrower or any Subsidiary or the Borrower's or any Subsidiary's charter,
articles or certificate of incorporation or by-laws, (b) violate the provisions
of or require the approval or consent of any party to any indenture, instrument
or agreement to which the Borrower or any Subsidiary is a party or is subject,
or by which it, or its property, is bound, or conflict with or constitute a
default thereunder, or result in the creation or imposition of any Lien (other
than Liens permitted by, the Loan Documents) in, of or on the property of the
Borrower or any Subsidiary pursuant to the terms of any such indenture,
instrument or agreement, or (c) require any consent of the stockholders of any
Person, except for approvals or consents which will be obtained on or before

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<PAGE>

the initial Advance and are disclosed on Schedule 5.3, except for any violation
of, or failure to obtain an approval or consent required under, any such
indenture, instrument or agreement that could not reasonably be expected to have
a Material Adverse Effect.

5.4. Governmental Consents. No order, consent, approval, qualification,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, or other action in respect of, any court, governmental or
public body or authority, or any subdivision thereof, any securities exchange or
other Person is or at the relevant time was required to authorize, or is or at
the relevant time was required in connection with the execution, delivery,
consummation or performance of, or the legality, validity, binding effect or
enforceability of, any of the Loan Documents or the application of the proceeds
of the Loans or any other transaction contemplated in the Loan Documents.
Neither the Borrower nor any Subsidiary is in default under or in violation of
any foreign, federal, state or local law, rule, regulation, order, writ,
judgment, injunction, decree or award binding upon or applicable to the Borrower
or such Subsidiary, in each case the consequences of which default or violation
could reasonably be expected to have a Material Adverse Effect.

5.5. Financial Statements. The Borrower has heretofore furnished to each
of the Lenders (a) the December 31, 1996 unaudited consolidated financial
statements of the Borrower and its Subsidiaries, (b) the unaudited consolidated
financial statements of the Borrower and its Subsidiaries as of March 31, 1997,
(c) the December 31, 1996 audited financial statements of Charter Group, Inc.
and its Subsidiaries, (d) the December 31, 1996 audited financial statements of
Valley Insurance Co. and its Subsidiaries, (e) the December 31, 1996 audited
financial statements of Valley and its Subsidiaries, (f) the December 31, 1996
audited financial statements of SOMSC and its Subsidiaries, (g) the December 31,
1996 audited financial statements of Parent and its Subsidiaries, (h) the March
31, 1997 unaudited balance sheets and income statements of Parent, the Borrower,
Valley (excluding White Mountains Insurance Company related transactions), While
Mountains Insurance Company (as if no business was reinsured through Valley
Insurance Company), SOMSC, Financial Security Assurance Holdings Ltd.,
Folksamerica Holding Company, Inc. and Main Street America Holdings, Inc.; (i)
the December 31, 1996 Annual Statement of each Insurance Subsidiary and (j) the
March 31, 1997 Quarterly Statement of each Insurance Subsidiary (collectively,
the "Financial Statements"). Each of the Financial Statements (other than as
described in clause (h)) was prepared in accordance with Agreement Accounting
Principles or SAP, as applicable, and fairly presents the consolidated financial
condition and operations of the Person which is the subject of such Financial
Statements at such dates and the consolidated results of their operations for
the respective periods then ended (except, in the case of such unaudited
statements, for normal year-end audit adjustments).

5.6. Material Adverse Change. No material adverse change in the business,
Property, condition (financial or otherwise), performance, prospects or results
of operations of

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the Borrower and its Subsidiaries has occurred since December 31, 1996, except
as specifically disclosed in the Financial Statements.

5.7. Taxes. Neither the Borrower nor any of its Subsidiaries is required
to file United States federal, foreign, state or local tax returns. As of the
date hereof, the United States income tax returns of Parent on a consolidated
basis have been audited by the Internal Revenue Service through its fiscal
period ending December 31, 1985, and all tax years beginning on or after January
1, 1986 are currently being audited or are subject to audit. No tax liens have
been filed and no claims are being asserted with respect to any taxes of Parent
which could reasonably be expected to have a Material Adverse Effect. The
charges, accruals and reserves on the books of Parent in respect of any taxes or
other governmental charges of Parent are in accordance with Agreement Accounting
Principles.

5.8. Litigation and Contingent Obligations. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any Subsidiary or any of their respective properties which could
reasonably be expected to have a Material Adverse Effect or to prevent, enjoin
or unduly delay the making of the Loans under this Agreement. Neither the
Borrower nor any Subsidiary has any material contingent obligations incurred
outside of the ordinary course of its business except as set forth on Schedule
5.16 or disclosed in the Financial Statements or in financial statements
required to be delivered under Section 6.1(a) and (b) and as permitted under
this Agreement.

5.9. Capitalization. Schedule 5.9 hereto contains (a) an accurate
description of the Borrower's capitalization as of March 31, 1997 (after giving
effect to the application of the proceeds of Loans incurred by the Borrower on
the initial Borrowing Date and to the FAE Merger) and (b) an accurate list of
all of the existing Subsidiaries as of the date of this Agreement, setting forth
their respective jurisdictions of incorporation and the percentage of their
capital stock owned by the Borrower or other Subsidiaries. All of the issued
and outstanding shares of capital stock of the Borrower and of each Subsidiary
have been duly authorized and validly issued, are fully paid and non-assessable,
and are free and clear of all Liens. No authorized but unissued or treasury
shares of capital stock of the Borrower or any Subsidiary are subject to any
option, warrant, right to call or commitment of any kind or character. Except
as set forth on Schedule 5.9 or pursuant to management incentive plans
implemented after the date of this Agreement, neither the Borrower nor any
Subsidiary has any outstanding stock or securities convertible into or
exchangeable for any shares of its capital stock, or any right issued to any
Person (either preemptive or other) to subscribe for or to purchase, or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to any of its capital stock or any stock or securities
convertible into or exchangeable for any of its capital stock other than as
expressly set forth in the certificate or articles of incorporation of the
Borrower or such Subsidiary. Neither

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<PAGE>

the Borrower nor any Subsidiary is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any convertible securities, rights or options of the type
described in the preceding sentence except as otherwise set forth on Schedule
5.9 or pursuant to management incentive plans implemented after the date of this
Agreement.
5.10. ERISA. Except as disclosed on Schedule 5.10, neither the
Borrower nor any other member of the Controlled Group maintains any Single
Employer Plans, and no Single Employer Plan has any Unfunded Liability. Neither
the Borrower nor any other member of the Controlled Group maintains, or is
obligated to contribute to, any Multiemployer Plan or has incurred, or is
reasonably expected to incur, any withdrawal liability to any Multiemployer
Plan. Each Plan complies in all material respects with all applicable
requirements of law and regulations other than any such failure to comply which
could not reasonably be expected to have a Material Adverse Effect. Neither the
Borrower nor any member of the Controlled Group has, with respect to any Plan,
failed to make any contribution or pay any amount required under Section 412 of
the Code or Section 302 of ERISA or the terms of such Plan. There are no
pending or, to the knowledge of the Borrower, threatened claims, actions,
investigations or lawsuits against any Plan, any fiduciary thereof, or the
Borrower or any member of the Controlled Group with respect to a Plan. Neither
the Borrower nor any member of the Controlled Group has engaged in any
prohibited transaction (as defined in Section 4975 of the Code or Section 406 of
ERISA) in connection with any Plan which would subject such Person to any
material liability. Within the last five years neither the Borrower nor any
member of the Controlled Group has engaged in a transaction which resulted in a
Single Employer Plan with an Unfunded Liability being transferred out of the
Controlled Group which could reasonably be expected to have a Material Adverse
Effect. No Termination Event has occurred or is reasonably expected to occur
with respect to any Plan which is subject to Title IV of ERISA which could
reasonably be expected to have a Material Adverse Effect.

5.11. Defaults. No Default or Unmatured Default has occurred and is
continuing.

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<PAGE>

5.14. Certain Fees. No broker's or finder's fee or commission was, is
or will be payable by the Borrower or any Subsidiary with respect to any of the
transactions contemplated by this Agreement, except as described in Section 9.5.
The Borrower hereby agrees to indemnify the Agent and the Lenders against and
agrees that it will hold each of them harmless from any claim, demand or
liability for broker's or finder's fees or commissions alleged to have been
incurred by the Borrower in connection with any of the transactions contemplated
by this Agreement and any expenses (including, without limitation, attorneys'
fees and time charges of attorneys for the Agent or any Lender, which attorneys
may be employees of the Agent or any Lender) arising in connection with any such
claim, demand or liability. No other similar fee or commissions will be payable
by the Borrower or any Subsidiary for any other services rendered to the
Borrower or any Subsidiary ancillary to any of the transactions contemplated by
this Agreement.

5.15. Solvency. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by the Borrower or its
Subsidiaries with respect to the transactions contemplated by the Loan Documents
and the application of the proceeds of Loans incurred by the Borrower on the
initial Borrowing Date, each of the Borrower and each Subsidiary is Solvent.

5.16. Indebtedness. Attached hereto as Schedule 5.16 is a complete and
correct list of all Indebtedness of the Borrower and its Subsidiaries
outstanding on the date of this Agreement (other than Indebtedness in a
principal amount not exceeding $500,000 for a single item of Indebtedness and
$2,000,000 in the aggregate for all such Indebtedness listed, it being
understood and agreed that any such Indebtedness shall be permitted to exist
pursuant to Section 6.11(b) notwithstanding the absence thereof on Schedule
5.16), showing the aggregate principal amount which was outstanding on such date
after giving effect to the application of the proceeds of Loans incurred by the
Borrower on the initial Borrowing Date.

5.17. Insurance Licenses. Schedule 5.17 hereto lists all of the
jurisdictions in which any Insurance Subsidiary holds a License and is
authorized to and does transact insurance business as of the date of this
Agreement. No such License, the loss of which could reasonably be expected to
have a Material Adverse Effect, is the subject of a proceeding for suspension or
revocation. To the Borrower's knowledge, there is no sustainable basis for such
suspension or revocation, and no such suspension or revocation has been
threatened by any Governmental Authority.

5.18. Material Agreements. Except as set forth in Schedule 5.18 and
except for agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries, neither the Borrower nor any Subsidiary is a party to
any agreement or instrument or subject to any charter or other corporate
restriction which could reasonably be expected to have a Material

34
<PAGE>

Adverse Effect or which restricts or imposes conditions upon the ability of any
Subsidiary (other than an Unrestricted Subsidiary) to (a) pay dividends or make
other distributions on its capital stock (b) make loans or advances to the
Borrower, (c) repay loans or advances from Borrower or (d) grant Liens to the
Agent to secure the Obligations. Neither the Borrower nor any Subsidiary is in
default in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement to which it is a party, which
default could reasonably be expected to have a Material Adverse Effect.

5.19. Environmental Laws. There are no claims, investigations,
litigation, administrative proceedings, notices, requests for information (each
a "Proceeding"), whether pending or threatened, or judgments or orders asserting
violations of applicable federal, state and local environmental, health and
safety statutes, regulations, ordinances, codes, rules, orders, decrees,
directives and standards ("Environmental Laws") or relating to any toxic or
hazardous waste, substance or chemical or any pollutant, contaminant, chemical
or other substance defined or regulated pursuant to any Environmental Law,
including, without limitation, asbestos, petroleum, crude oil or any fraction
thereof ("Hazardous Materials") asserted against the Borrower or any of its
Subsidiaries, other than in connection with an insurance policy issued in the
ordinary course of business to any Person (other than Parent or any Subsidiary
of Parent), which, in any case, could reasonably be expected to have a Material
Adverse Effect. As of the date hereof, the Borrower and its Subsidiaries do not
have liabilities exceeding $100,000 in the aggregate for all of them with
respect to compliance with applicable Environmental Laws or related to the
generation, treatment, storage, disposal, release, investigation or cleanup of
Hazardous Materials, and no facts or circumstances exist which could give rise
to such liabilities with respect to compliance with applicable Environmental
Laws and the generation, treatment, storage, disposal, release, investigation or
cleanup of Hazardous Materials.

5.20. Insurance. The Borrower and its Subsidiaries maintain with
financially sound and reputable insurance companies insurance on their Property
in such amounts and covering such risks as is consistent with sound business
practice.

5.21. Disclosure. No information, exhibit or report furnished by the
Borrower or any of its Subsidiaries to the Agent or to any Lender in connection
with the negotiation of, or compliance with, the Loan Documents contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
There is no fact known to the Borrower (other than matters of a general economic
or political nature) that has had or could reasonably be expected to have a
Material Adverse Effect and that has not been disclosed herein or in such other
documents, certificates and statements furnished to the Lenders for use in
connection with the transactions contemplated by this Agreement.

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<PAGE>

ARTICLE VI

COVENANTS

During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:

(ai As soon as practicable and in any event within 100 days after the
close of each of its Fiscal Years, an unqualified audit report certified by
independent certified public accountants, acceptable to the Lenders,
prepared in accordance with Agreement Accounting Principles on a
consolidated and consolidating basis (consolidating statements need not be
certified by such accountants) for itself and its Subsidiaries, including
balance sheets as of the end of such period and related statements of
income, retained earnings and cash flows accompanied by a certificate of
said accountants that, in the course of the examination necessary for their
certification of the foregoing, they have obtained no knowledge of any
Default or Unmatured Default, or if, in the opinion of such accountants,
any Default or Unmatured Default shall exist, stating the nature and status
thereof.

(ci (i) Upon the earlier of (A) fifteen (15) days after the
regulatory filing date or (B) seventy-five (75) days after the close of
each fiscal year of each Insurance Subsidiary, copies of the unaudited
Annual Statement of such Insurance Subsidiary, certified by the chief
financial officer or the treasurer of such Insurance Subsidiary, all such
statements to be prepared in accordance with SAP and (ii) no later than
each June 15, copies of financial statements prepared in accordance with
SAP, or generally accepted accounting principles with a reconciliation to
SAP, and certified by independent certified public accountants of
recognized national standing.

(di Upon the earlier of (i) ten (10) days after the regulatory filing
date or (ii) sixty (60) days after the close of each of the first three (3)
fiscal quarters of each fiscal

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<PAGE>

year of each Insurance Subsidiary, copies of the unaudited Quarterly
Statement of each of the Insurance Subsidiaries, certified by the chief
financial officer or the treasurer of such Insurance Subsidiary, all such
statements to be prepared in accordance with SAP.

(ei Promptly and in any event within ten (10) days after (i) learning
thereof, notification of any changes after the date of this Agreement in
the rating given by A.M. Best & Co. in respect of any Insurance Subsidiary
and (ii) receipt thereof, copies of any ratings analysis by A.M. Best & Co.
relating to any Insurance Subsidiary.

(fi Copies of any outside actuarial reports prepared with respect to
any valuation or appraisal of any Insurance Subsidiary, promptly after the
receipt thereof.

(gi Together with the financial statements required by clauses (a)
and (b) above, a compliance certificate in substantially the form of
Exhibit B hereto signed by the Borrower's chief financial officer showing
the calculations necessary to determine compliance with this Agreement and
stating that no Default or Unmatured Default exists, or if any Default or
Unmatured Default exists, stating the nature and status thereof.

(hi Promptly after the same becomes available after the close of each
Fiscal Year, a statement of the Unfunded Liabilities of each Single
Employer Plan, certified as correct by an actuary enrolled under ERISA.

(ii As soon as possible and in any event within 10 days after the
Borrower knows that any Termination Event has occurred with respect to any
Plan, a statement, signed by the chief financial officer of the Borrower,
describing said Termination Event and the action which the Borrower
proposes to take with respect thereto.

(ji As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (i) any notice, claim, complaint or order to the
effect that the Borrower or any of its Subsidiaries is or may be liable to
any Person as a result of the release by the Borrower or any of its
Subsidiaries of any Hazardous Materials into the environment or requiring
that action be taken to respond to or clean up a Release of Hazardous
Materials into the environment, and (ii) any notice, complaint or citation
alleging any violation of any Environmental Law or Environmental Permit by
the Borrower or any of its Subsidiaries. Within ten days of the Borrower
or any Subsidiary having knowledge of the enactment or promulgation of any
Environmental Law which could reasonably be expected to have a Material
Adverse Effect, the Borrower shall provide the Agent with written notice
thereof.

(ki Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements
so furnished.

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<PAGE>

(li Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which
the Borrower or any of its Subsidiaries files with the Securities and
Exchange Commission, the National Association of Securities Dealers, any
securities exchange, the NAIC or any insurance commission or department or
analogous Governmental Authority (including any filing made by the Borrower
or any Subsidiary pursuant to any insurance holding company act or related
rules or regulations), but excluding routine or non-material filings with
the NAIC, any insurance commissioner or department or analogous
Governmental Authority.

(mi Promptly and in any event within ten (10) days after learning
thereof, notification of (i) any material tax assessment, demand, notice of
proposed deficiency or notice of deficiency received by Parent or any other
Consolidated Person or (ii) the filing of any tax Lien or commencement of
any judicial proceeding by or against any such Consolidated Person, if any
such assessment, demand, notice, Lien or judicial proceeding relates to tax
liabilities in excess of ten percent (10%) of the net worth (determined
according to generally accepted accounting standards and without reduction
for any reserve for such liabilities) of the Borrower and its Subsidiaries
taken as a whole.

(ni Promptly after available, any management letter prepared by the
accountants conducting the audit of the financial statements delivered
pursuant to Section 6.1(a).

(oi Promptly after reviewed by the board of directors of the
Borrower, a copy of the Borrower's investment policy compliance report.

(pi Such other information (including, without limitation, the annual
Best's Advance Report Service report prepared with respect to each
Insurance Subsidiary rated by A.M. Best & Co. and non-financial
information) as the Agent or any Lender may from time to time reasonably
request.

6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances to meet the working capital and general
corporate needs of the Borrower and its Subsidiaries, including but not limited
to the purchase of Finance Assets. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances in any manner which
would violate, or result in the violation of, Regulation G, Regulation T,
Regulation U or Regulation X or to finance the Purchase of any Person which has
not been approved and recommended by the board of directors (or functional
equivalent thereof) of such Person.

6.3. Notice of Default. The Borrower will give prompt notice in writing to
the Lenders of the occurrence of (a) any Default or Unmatured Default, (b) of
any other event or

38
<PAGE>

development, financial or other, relating specifically to the Borrower or any of
its Subsidiaries (and not of a general economic or political nature) which could
reasonably be expected to have a Material Adverse Effect, (c) receipt by the
Borrower or any Subsidiary of any notice from any Governmental Authority of the
expiration without renewal, revocation or suspension of, or the institution of
any proceedings to revoke or suspend, any License now or hereafter held by any
Insurance Subsidiary which is required to conduct insurance business in
compliance with all applicable laws and regulations and the expiration,
revocation or suspension of which could reasonably be expected to have a
Material Adverse Effect, (d) receipt by the Borrower or any Subsidiary of any
notice from any Governmental Authority of the institution of any disciplinary
proceedings against or in respect of any Insurance Subsidiary, or the issuance
of any order, the taking of any action or any request for an extraordinary audit
for cause by any Governmental Authority which, if adversely determined, could
reasonably be expected to have a Material Adverse Effect, (e) any material
judicial or administrative order of which the Borrower or any Subsidiary is
aware limiting or controlling the insurance business of any Insurance Subsidiary
(and not the insurance industry generally) which has been issued or adopted or
(f) the commencement of any litigation of which the Borrower or any Subsidiary
is aware which could reasonably be expected to create a Material Adverse Effect.

6.4. Conduct of Business. The Borrower will, and will cause each
Subsidiary to, (a) carry on and conduct its business in substantially the same
manner as it is presently conducted, (b) not conduct any significant business
except for financial services, (c) do all things necessary to remain duly
incorporated, validly existing and in good standing as a domestic corporation in
its jurisdiction of incorporation and maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted
except where the failure to maintain such authority could not reasonably be
expected to have a Material Adverse Effect and (d) do all things necessary to
renew, extend and continue in effect all Licenses which may at any time and from
time to time be necessary for any Insurance Subsidiary to operate its insurance
business in compliance with all applicable laws and regulations except for any
License the loss of which could not reasonably be expected to have a Material
Adverse Effect; provided, that any Insurance Subsidiary may withdraw from one or
more states (other than its state of domicile) as an admitted insurer if such
withdrawal is determined by the Borrower's Board of Directors to be in the best
interest of the Borrower and could not reasonably be expected to have a Material
Adverse Effect.

6.5. Taxes. At any time on and after the date the Borrower or any of its
Subsidiaries is required to do so, the Borrower will, and will cause each
Subsidiary to, timely file complete and correct United States federal and
applicable foreign, state and local tax returns required by applicable law and
pay when due all taxes, assessments and governmental charges and levies upon it
or its income, profits or Property, except those which are being contested in
good faith by appropriate proceedings and with respect to which adequate
reserves have been set aside in accordance with generally accepted accounting
principles or SAP, as applicable.

39
<PAGE>

6.6. Insurance. The Borrower will, and will cause each Subsidiary
to, maintain with financially sound and reputable insurance companies
insurance on all their Property in such amounts and covering such risks as is
consistent with sound business practice, and the Borrower will furnish to the
Agent and any Lender upon request full information as to the insurance
carried.

6.8. Maintenance of Properties. The Borrower will, and will cause
each Subsidiary to, do all things necessary to maintain, preserve, protect
and keep its Property in good repair, working order and condition, and make
all necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times.

6.9. Inspection. The Borrower will, and will cause each Subsidiary
to, at reasonable times during normal business hours and upon reasonable
notice, permit the Agent and the Lenders, by their respective representatives
and agents, to inspect any of the Property, corporate books and financial
records of the Borrower and each Subsidiary, to examine and make copies of
the books of accounts and other financial records of the Borrower and each
Subsidiary, and to discuss the affairs, finances and accounts of the Borrower
and each Subsidiary with, and to be advised as to the same by, their
respective officers at such reasonable times and intervals as the Lenders may
designate. The Borrower will keep or cause to be kept, and cause each
Subsidiary to keep or cause to be kept, appropriate records and books of
account in which complete entries are to be made reflecting its and their
business and financial transactions, such entries to be made in accordance
with Agreement Accounting Principles or SAP, as applicable.

6.10. Dividends. The Borrower will not declare or pay any dividends
or make any distributions on its capital stock (other than dividends payable
in its own capital stock) or redeem, repurchase or otherwise acquire or
retire any of its capital stock or any options or other rights in respect
thereof at any time outstanding, except that so long as no Default or
Unmatured Default exists before or after giving effect to the declaration or
payment of such dividends or distributions or repurchase or redemption of
such stock or other transaction, (a) the Borrower may declare and pay
dividends, and make distributions, on its common stock and repurchase and
redeem and otherwise acquire or retire its common stock and any options or
other rights thereof in an aggregate amount not to exceed (i) during the
Borrower's 1997 Fiscal Year, 1% of Adjusted Net Worth as of December 31,
1996, (ii) during the Borrower's 1998 Fiscal Year, 2% of Adjusted Net Worth
as of December 31, 1997, and (iii) during any Fiscal Year thereafter, 3% of
Adjusted Net Worth as of the end of the Fiscal Year preceding the Fiscal Year
during which such

<PAGE>

transaction is consummated and (b) in addition to any dividends, distributions,
repurchases, redemptions, acquisitions or retirements which may be declared,
paid or made pursuant to the preceding clause (a), the Borrower may declare and
pay dividends, and make distributions, on its common stock and repurchase and
redeem and otherwise acquire or retire its common stock, and any options or
rights thereof, (x) in an amount equal to the proceeds received by the Borrower
from dividends, sales, transfers or other dispositions of its equity interests
in FAE (as defined after giving effect to the FAE Merger) and SOMSC and (y)
utilizing its equity interests in SOMSC.

6.11. Indebtedness. The Borrower will not, nor will it permit any
Subsidiary (other than an Unrestricted Subsidiary) to, create, incur or suffer
to exist any Indebtedness, except:

(ai the Loans;

(bi Indebtedness existing on the date hereof and described in
Schedule 5.16 hereto and any renewals, extensions, refundings or
refinancings of such Indebtedness; provided that the amount thereof is not
increased and the maturity of principal thereof is not shortened (unless to
a maturity occurring after the Facility Termination Date);

(ci Indebtedness owing by (x) the Borrower to any Wholly-Owned
Subsidiary and (y) any Wholly-Owned Subsidiary to a Wholly-Owned Subsidiary
or the Borrower;

(di Indebtedness permitted under the Valley Credit Agreement;

(ei Indebtedness secured by Liens permitted pursuant to Section
6.15(f); and

(fi other Indebtedness of the Borrower or any Subsidiary to the
extent not otherwise included in subparagraphs (a) through (e) of this
Section 6.11 or in Section 6.14, in an aggregate amount outstanding at any
one time not to exceed $5,000,000.

6.12. Merger. The Borrower will not, nor will it permit any
Significant Subsidiary to, merge or consolidate with or into any other Person,
except that;

(a) a Wholly-Owned Subsidiary may merge with (i) the Borrower, (ii)
any Wholly-Owned Subsidiary of the Borrower or (iii) any other Person so
long as no Default or Unmatured Default shall have occurred or be
continuing before and after giving effect to such merger and the surviving
entity of such merger is a Wholly-Owned Subsidiary of the Borrower;

(b) a Significant Subsidiary (other than Valley and FAE (as defined
after giving effect to the FAE Merger)) may merge or consolidate with any
Person so long as

<PAGE>

neither the Borrower nor any of its Subsidiaries shall hold any capital
stock of such Significant Subsidiary after giving effect to such merger or
consolidation;

(c) the Borrower or Valley may merge into any Person so long as (i)
the Borrower or Valley, as the case may be, is the surviving entity of such
merger, (ii) no Default or Unmatured Default shall have occurred or be
continuing before and after giving effect to such merger and (iii) the
covenants contained in Section 6.20 shall be complied with on a pro forma
basis on the date of, and after giving effect to, such merger;

(d) the FAE Merger shall be permitted so long as:

(i) no Default or Unmatured Default shall have occurred or be
continuing before and after giving effect to the FAE Merger;

(ii) the Agent shall have received on or prior to the date
thereof (x) a certificate from the chief financial officer of FAE (as
defined before giving effect to the FAE Merger) demonstrating that the
covenants contained in Section 6.20 shall be complied with on a pro
forma basis on the date of, and after giving effect to, the FAE
Merger, (y) a certificate from the Secretary or Assistant Secretary of
FAE (as defined before giving effect to the FAE Merger) certifying a
true and correct copy of the agreement and plan of merger in
connection with such merger, true and correct copies of all
resolutions passed by the Board of Directors of the Persons subject to
such merger, incumbency of officers and a true and correct copy of the
certificate of incorporation and by-laws of the surviving Person, and
(z) a legal opinion of Cravath, Swaine & Moore addressed to the Agent
and the Lenders, in form and substance acceptable to the Agent and its
counsel, with respect to such merger;

(iii) Parent shall have satisfied all of the conditions
precedent contained in Section 4.1 of the Parent Credit Agreement, and
a fully executed copy of the Parent Credit Agreement, in form and
substance as to FAE (as defined after giving effect to the FAE Merger)
acceptable to the Lenders, shall have been delivered to the Lenders;
and

(iv) FAE, as survivor of the merger with the Borrower, shall
enter into an agreement in the form of Exhibit C hereto, assuming the
obligations and liabilities of the "Borrower" under this Agreement;
and

(e) after the consummation of the FAE Merger, FAE and any Subsidiary
of FAE may merge or consolidate with any other Person.

6.13. Investments and Purchases. The Borrower will not, and will not
permit any

<PAGE>

Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer to exist
any Investments (including, without limitation, loans and advances to, and other
Investments in, Subsidiaries), or commitments therefor, or create any Subsidiary
or become or remain a partner in any partnership or joint venture, or make any
Purchases, except:

(a) Investments in existence on the date hereof;

(b) loans and advances to employees in the ordinary course of
business and consistent with past practices;

(c) Investments made in Subsidiaries and in Main Street America
Holdings, Inc., Folksamerica Holding Company Inc. and Financial Security
Assurance Holdings Ltd.;

(d) Purchases of businesses or entities engaged in the insurance
and/or insurance services business which do not constitute hostile
takeovers;

(e) other Investments, so long as any such Investment is
materially consistent with the Borrower's investment policy guidelines as
approved from time to time by the finance committee of the board of directors
of the Borrower (a copy of the current version of such guidelines having been
delivered to each Lender); provided that any change from the guidelines
previously submitted to the Lenders shall not materially adversely affect the
Lenders.

6.14. Contingent Obligations. The Borrower will not, nor will it
permit any Subsidiary (other than an Unrestricted Subsidiary) to, make or suffer
to exist any Contingent Obligation (including, without limitation, any
Contingent Obligation with respect to the obligations of a Subsidiary), except
(a) the issuance of financial guarantees in the ordinary course of business,
(b) by endorsement of instruments for deposit or collection in the ordinary
course of business, (c) for insurance policies issued in the ordinary course of
business and (d) the issuance of intercompany guarantees so long as the primary
obligation is permitted under this Agreement.

6.15. Liens. The Borrower will not, nor will it permit any Subsidiary
(other than an Unrestricted Subsidiary) to, create, incur, or suffer to exist
any Lien in, of or on the Property (other than Margin Stock) of the Borrower or
any of its Subsidiaries (other than an Unrestricted Subsidiary), except:

(a) Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or thereafter
can be paid without penalty, or are being contested in good faith and by
appropriate proceedings and for which adequate reserves in accordance with
generally accepted principles of accounting

<PAGE>

shall have been set aside on its books;

(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business which secure the payment of obligations not more than 60 days past
due or which are being contested in good faith by appropriate proceedings
and for which adequate reserves shall have been set aside on its books;

(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions,
or other social security or retirement benefits, or similar
legislation;

(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties of a similar character and which do not
in any material way affect the marketability of the same or interfere with
the use thereof in the business of the Borrower or its Subsidiaries;

(e) Liens existing on the date hereof and described in Schedule 6.15
hereto;

(f) Liens in, of or on Property acquired after the date of this
Agreement (by purchase, construction or otherwise), each of which Liens
either (1) existed on such Property before the time of its acquisition and
was not created in anticipation thereof, or (2) was created solely for the
purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including the cost of construction) of such
Property; provided that no such Lien shall extend to or cover any Property
of the Borrower or such Subsidiary other than the Property so acquired and
improvements thereon; and provided, further, that the principal amount of
Indebtedness secured by any such Lien shall at the time the Lien is
incurred not exceed 75% of the fair market value (as determined in good
faith by a financial officer of the Borrower and, in the case of such
Property having a fair market value in excess of $500,000, certified by
such officer to the Agent, with a copy for each Lender) of the Property at
the time it was so acquired; and

(g) Liens not otherwise permitted by the foregoing clauses (a)
through (f) securing any Indebtedness of the Borrower, provided that the
aggregate principal amount of Indebtedness secured by Liens permitted by
this clause (g) shall not exceed $3,000,000 at any time.

6.16. Affiliates. The Borrower will not, and will not permit any
Subsidiary to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliates (other than a Wholly-Owned

<PAGE>

Subsidiary), except in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
than the Borrower or such Subsidiary would obtain in a comparable arms-length
transactions, except that any Unrestricted Subsdidiary may make loans to Parent.

6.17. Environmental Matters. The Borrower shall and shall cause each
of its Subsidiaries to (a) at all times comply in all material respects with all
applicable Environmental Laws and (b) promptly take any and all necessary
remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by the Borrower or any of its Subsidiaries.

6.18. Change in Corporate Structure; Fiscal Year. The Borrower shall
not, nor shall it permit any Subsidiary to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders or (b)
change its Fiscal Year to end on any date other than December 31 of each year.

6.19. Inconsistent Agreements. The Borrower shall not, nor shall it
permit any Subsidiary (other than an Unrestricted Subsidiary) to, enter into any
indenture, agreement, instrument or other arrangement which by its terms, (a)
other than pursuant to the Valley Credit Agreement or pursuant to agreements or
arrangements with regulatory agencies with regard to Insurance Subsidiaries,
directly or indirectly contractually prohibits or restrains, or has the effect
of contractually prohibiting or restraining, or contractually imposes materially
adverse conditions upon, the incurrence of the Obligations, the granting of
Liens to secure the Obligations, the amending of the Loan Documents or the
ability of any Subsidiary to (i) pay dividends or make other distributions on
its capital stock, (ii) make loans or advances to the Borrower or (iii) repay
loans or advances from the Borrower or (b) contains any provision which would be
violated or breached by the making of Advances or by the performance by the
Borrower or any Subsidiary of any of its obligations under any Loan Document.

6.20. Financial Covenants. The Borrower shall (or, in the case of
Section 6.20.5, shall cause its Insurance Subsidiaries to):

6.20.1 Minimum Adjusted Net Worth. At all times after the date hereof,
maintain a minimum Adjusted Net Worth at least equal to the sum of (a) an amount
equal to 85% of Net Worth (without giving effect to the Borrower's equity
interests in FAE (as defined

<PAGE>

after giving effect to the FAE Merger) and SOMSC) as of July 31, 1997, plus (b)
an amount equal to 85% of the cash and non-cash proceeds of any equity
securities issued by the Borrower after July 30, 1997, plus (c) an amount equal
to (i) $75,000,000 minus (ii) the aggregate amount of mandatory commitment
reductions pursuant to Section 2.7(b)(i) which occur after July 30, 1997 from
the Net Available Proceeds of all sales by the Borrower of its equity interests
in FAE (as defined after giving effect to the FAE Merger) or SOMSC minus (iii)
the aggregate amount of Permitted Reinvestments made by the Borrower after July
30, 1997 utilizing proceeds of sales of its equity interests in FAE (as defined
after giving effect to the FAE Merger) or SOMSC ("Specified Permitted
Reinvestments"), plus (d) an amount equal to 85% of Specified Permitted
Reinvestments made after July 30, 1997.

6.20.2. Leverage Ratio. At all times after the date hereof, maintain a
Leverage Ratio of (a) not greater than 30% through and including December 31,
1999 and (b) not greater than 25% at all times thereafter.

6.20.3. Fixed Charges Coverage Ratio. As of the end of each Fiscal
Quarter maintain a Fixed Charges Coverage Ratio of not less than 1.5:1.0

6.20.4. Finance Assets Ratio. At any time Loans are outstanding and the
sum of cash and Money Market Investments of the Borrower is less than the
aggregate outstanding principal amount of Funded Indebtedness of the Borrower at
such time, maintain a Finance Assets Ratio of not less than 2.5:1.0.

6.20.5. Statutory Surplus. At all times, maintain Statutory Surplus for
each Insurance Subsidiary in an amount not less than an amount equal to (a) 85%
of the Statutory Surplus of each such Insurance Subsidiary on September 30,
1996, plus (b) 85% of all subsequent capital contributions to each such
Insurance Subsidiary, less (c) in the event such Insurance Subsidiary dividends
or otherwise distributes to its parent all the capital stock of a Wholly-Owned
Insurance Subsidiary, 100% of the book value (calculated in accordance with SAP)
of such Wholly-Owned Insurance Subsidiary at the time of such dividend or
distribution.

6.21. Tax Consolidation. The Borrower will not and will not permit
any of its Subsidiaries to (a) file or consent to the filing of any
consolidated, combined or unitary income tax return with any Person other than
Parent and its Subsidiaries or (b) amend, terminate or fail to enforce any
existing tax sharing agreement or similar arrangement if such action would cause
a Material Adverse Effect.

6.22. ERISA Compliance.

With respect to any Plan, neither the Borrower nor any Subsidiary
shall:

(a) engage in any "prohibited transaction" (as such term is defined
in Section 406 of ERISA or Section 4975 of the Code) for which a civil
penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section
4975 of the Code in excess of $100,000 could be imposed;

<PAGE>

(b) incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) in excess of $100,000, whether or not
waived, or permit any Unfunded Liability to exceed $100,000;

(c) permit the occurrence of any Termination Event which could result
in a liability to the Borrower or any other member of the Controlled Group
in excess of $100,000;

(d) be an "employer" (as such term is defined in Section 3(5) of
ERISA) required to contribute to any Multiemployer Plan or a "substantial
employer" (as such term in defined in Section 4001(a)(2) of ERISA) required
to contribute to any Multiple Employer Plan; or

(e) permit the establishment or amendment of any Plan or fail to
comply with the applicable provisions of ERISA and the Code with respect to
any Plan which could result in liability to the Borrower or any other
member of the Controlled Group which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.

ARTICLE VII

DEFAULTS

The occurrence of any one or more of the following events shall constitute
a Default:

7.3. The breach by the Borrower of any of the terms or provisions of
Section 6.2, Section 6.3(a) or Sections 6.10 through 6.16 or Sections 6.18
through 6.22.

7.4. The breach by the Borrower (other than a breach which constitutes a
Default

<PAGE>

under Section 7.1, 7.2 or 7.3) of any of the terms or provisions of this
Agreement which is not remedied within twenty (20) days after written notice
from the Agent or any Lender.

7.5. The default by the Borrower or any of its Subsidiaries (or, at
any time the Borrower is a Subsidiary of Parent, by Parent) in the
performance of any term, provision or condition contained in any agreement or
agreements under which any Funded Indebtedness aggregating in excess of
$2,000,000 ($10,000,000 in the case of Parent and FAE and $20,000,000, or
such lower cross-default threshold amount as is provided in the SOMSC Credit
Agreement, in the case of SOMSC) was created or is governed, or the
occurrence of any other event or existence of any other condition, the effect
of any of which is to cause, or to permit the holder or holders of such
Funded Indebtedness to cause, such Funded Indebtedness to become due prior to
its stated maturity; or any such Funded Indebtedness of the Borrower, any of
its Subsidiaries or Parent shall be declared to be due and payable or
required to be prepaid (other than by a regularly scheduled payment) prior to
the stated maturity thereof.

7.6. The Borrower or any of its Significant Subsidiaries shall (a)
have an order for relief entered with respect to it under the Federal
bankruptcy laws as now or hereafter in effect, (b) make an assignment for the
benefit of creditors, (c) apply for, seek, consent to, or acquiesce in, the
appointment of a receiver, custodian, trustee, examiner, liquidator or
similar official for it or any substantial portion of its Property, (d)
institute any proceeding seeking an order for relief under the Federal
bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief
of debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (e) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 7.6, (f) fail to contest in good faith any appointment or proceeding
described in Section 7.7 or (g) become unable to pay, not pay, or admit in
writing its inability to pay, its debts generally as they become due.

7.7. Without the application, approval or consent of the Borrower
or any of its Significant Subsidiaries, a receiver, trustee, examiner,
liquidator or similar official shall be appointed for the Borrower or any of
its Significant Subsidiaries or any substantial portion of its Property, or a
proceeding described in Section 7.6(d) shall be instituted against the
Borrower or any of its Significant Subsidiaries and such appointment
continues undischarged or such proceeding continues undismissed or unstayed
for a period of sixty consecutive days.

7.8. The Borrower or any of its Subsidiaries shall fail within
thirty days to pay, bond or otherwise discharge any judgment or order for the
payment of money in excess of $1,000,000 (or multiple judgments or orders for
the payment of an aggregate amount in excess of $5,000,000), which is not
stayed on appeal or otherwise being appropriately contested in good

<PAGE>

faith and as to which no enforcement actions have been commenced.

7.9. Any Change in Control shall occur.

7.10. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement or the Notes) or the breach of any of the terms or
provisions of any Loan Document (other than this Agreement or the Notes), which
default or breach continues beyond any period of grace therein provided.

7.11. Any License of any Insurance Subsidiary (a) shall be revoked by
the Governmental Authority which issued such License, or any action
(administrative or judicial) to revoke such License shall have been commenced
against such Insurance Subsidiary and shall not have been dismissed within
thirty (30) days after the commencement thereof, (b) shall be suspended by such
Governmental Authority for a period in excess of thirty (30) days or (c) shall
not be reissued or renewed by such Governmental Authority upon the expiration
thereof following application for such reissuance or renewal of such Insurance
Subsidiary, which, in any case, could reasonably be expected to have a Material
Adverse Effect.

7.12. Any Insurance Subsidiary shall be the subject of a final
non-appealable order imposing a fine by or at the request of any state insurance
regulatory agency as a result of the violation by such Insurance Subsidiary of
such state's applicable insurance laws or the regulations promulgated in
connection therewith which could reasonably be expected to have a Material
Adverse Effect.

7.13. Any Insurance Subsidiary shall become subject to any
conservation, rehabilitation or liquidation order, directive or mandate issued
by any Governmental Authority or any Insurance Subsidiary shall become subject
to any other directive or mandate issued by any Governmental Authority in either
case which could reasonably be expected to have a Material Adverse Effect and
which is not stayed within thirty (30) days.

ARTICLE VIII

ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

<PAGE>

8.1. Acceleration. If any Default described in Section 7.6 or 7.7
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part
of the Agent or any Lender. If any other Default occurs, the Required
Lenders (or the Agent with the consent of the Required Lenders) may terminate
or suspend the obligations of the Lenders to make Loans hereunder, or declare
the Obligations to be due and payable, or both, whereupon the Obligations
shall become immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which the Borrower hereby expressly
waives.

If, within ten Business Days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.

8.2. Amendments. Subject to the provisions of this Article VIII,
the Required Lenders (or the Agent with the consent in writing of the
Required Lenders) and the Borrower may enter into agreements supplemental
hereto for the purpose of adding or modifying any provisions to the Loan
Documents or changing in any manner the rights of the Lenders or the Borrower
hereunder or waiving any Default hereunder; provided, however, that no such
supplemental agreement shall, without the consent of each Lender:

(a) Extend the final maturity of any Loan or Note or reduce the
principal amount thereof, or, subject to Section 2.11, reduce the rate or
extend the time of payment of interest or fees thereon;

(b) Reduce the percentage specified in the definition of Required
Lenders;

(c) Reduce the amount of or extend the date for the mandatory
payments and commitment reductions required under Section 2.1(b) or 2.7, or
increase the amount of the Commitment of any Lender hereunder;

(d) Extend the Facility Termination Date or reduce the amount or
extend the time of any mandatory commitment reduction required by Section
2.7;

(e) Amend this Section 8.2;

(f) Permit any assignment by the Borrower of its Obligations or its
rights hereunder.

<PAGE>

8.3. Preservation of Rights. No delay or omission of the Lenders
or the Agent to exercise any right under the Loan Documents shall impair such
right or be construed to be a waiver of any Default or an acquiescence
therein, and the making of a Loan notwithstanding the existence of a Default
or the inability of the Borrower to satisfy the conditions precedent to such
Loan shall not constitute any waiver or acquiescence. Any single or partial
exercise of any such right shall not preclude other or further exercise
thereof or the exercise of any other right, and no waiver, amendment or other
variation of the terms, conditions or provisions of the Loan Documents
whatsoever shall be valid unless in writing signed by the Lenders required
pursuant to Section 8.2, and then only to the extent in such writing
specifically set forth. All remedies contained in the Loan Documents or by
law afforded shall be cumulative and all shall be available to the Agent and
the Lenders until the Obligations have been paid in full.

ARTICLE IX

GENERAL PROVISIONS

9.1. Survival of Representations. All representations and
warranties of the Borrower contained in this Agreement or of the Borrower or
any Subsidiary contained in any Loan Document shall survive delivery of the
Notes and the making of the Loans herein contemplated.

9.2. Governmental Regulation. Anything contained in this Agreement
to the contrary notwithstanding, no Lender shall be obligated to extend
credit to the Borrower in violation of any limitation or prohibition provided
by any applicable statute or regulation.

9.3. Taxes. Any stamp, documentary or similar taxes, assessments
or charges payable or ruled payable by any governmental authority in respect
of the Loan Documents shall be paid by the Borrower, together with interest
and penalties, if any.

9.4. Headings. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any
of the provisions of the Loan Documents.

9.5. Entire Agreement. The Loan Documents embody the entire
agreement and understanding among the Borrower, the Agent and the Lenders and
supersede all prior agreements and understandings among the Borrower, the
Agent and the Lenders relating to the

<PAGE>

subject matter thereof other than the fee letter, dated July 30, 1997, in favor
of First Chicago.

9.6. Several Obligations; Benefits of this Agreement. The
respective obligations of the Lenders hereunder are several and not joint and
no Lender shall be the partner or agent of any other (except to the extent to
which the Agent is authorized to act as such). The failure of any Lender to
perform any of its obligations hereunder shall not relieve any other Lender
from any of its obligations hereunder. This Agreement shall not be construed
so as to confer any right or benefit upon any Person other than the parties
to this Agreement and their respective successors and assigns.

9.7. Expenses; Indemnification. The Borrower shall reimburse the
Agent for any reasonable costs, internal charges and out-of-pocket expenses
(including attorneys' fees and time charges of attorneys for the Agent, which
attorneys may be employees of the Agent) paid or incurred by the Agent in
connection with the preparation, negotiation, execution, delivery, review,
amendment, modification, and administration of the Loan Documents. The
Borrower also agrees to reimburse the Agent and the Lenders for any
reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent and the Lenders,
which attorneys may be employees of the Agent or the Lenders) paid or
incurred by the Agent or any Lender in connection with the collection and
enforcement of the Loan Documents. The Borrower further agrees to indemnify
the Agent and each Lender, its directors, officers and employees against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefor whether or not the Agent or any Lender is a party thereto) which any
of them may pay or incur arising out of or relating to this Agreement, the
other Loan Documents, the transactions contemplated hereby or thereby or the
direct or indirect application or proposed application of the proceeds of any
Loan hereunder arising from claims or assertions by third parties except to
the extent that they arise out of the gross negligence or willful misconduct
of the party seeking indemnification. The obligations of the Borrower under
this Section shall survive the termination of this Agreement.

9.8. Numbers of Documents. All statements, notices, closing
documents, and requests hereunder shall be furnished to the Agent with
sufficient counterparts so that the Agent may furnish one to each of the
Lenders.

9.9. Accounting. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement
Accounting Principles.

<PAGE>

jurisdiction or the operation, enforceability, or validity of that provision in
any other jurisdiction, and to this end the provisions of all Loan Documents are
declared to be severable.

9.11. Nonliability of Lenders. The relationship between the Borrower
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
the Borrower. Neither the Agent nor any Lender undertakes any responsibility to
the Borrower to review or inform the Borrower of any matter in connection with
any phase of the Borrower's business or operations. The Borrower shall rely
entirely upon its own judgment with respect to its business, and any review,
inspection or supervision of, or information supplied to the Borrower by the
Agent or the Lenders is for the protection of the Agent and the Lenders and
neither the Borrower nor any other Person is entitled to rely thereon. Whether
or not such damages are related to a claim that is subject to the waiver
effected above and whether or not such waiver is effective, neither the Agent
nor any Lender shall have any liability with respect to, and the Borrower hereby
waives, releases and agrees not to sue for, any special, indirect or
consequential damages suffered by the Borrower in connection with, arising out
of, or in any way related to the Loan Documents or the transactions contemplated
thereby or the relationship established by the Loan Documents, or any act,
omission or event occurring in connection therewith.

9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE
COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS;

<PAGE>

PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER COURTS IF JURISDICTION
MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS.

9.14. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.

9.15. Disclosure. The Borrower and each Lender hereby (a) acknowledge
and agree that First Chicago and/or its Affiliates from time to time may hold
other investments in, make other loans to or have other relationships with the
Borrower, including, without limitation, in connection with any interest rate
hedging instruments or agreements or swap transactions, and (b) waive any
liability of First Chicago or such Affiliate to the Borrower or any Lender,
respectively, arising out of or resulting from such investments, loans or
relationships other than liabilities arising out of the gross negligence or
willful misconduct of First Chicago or its Affiliates to the extent that such
liability would not have arisen but for First Chicago's status as Agent
hereunder.

9.17. Treatment of Certain Information: Confidentiality.

(a) The Borrower acknowledges that (i) services may be offered or
provided to it (in connection with this Agreement or otherwise) by each Lender
or by one or more subsidiaries or affiliates of such Lender and (ii) information
delivered to each Lender by the Borrower and its Subsidiaries may be provided to
each such Subsidiary and Affiliate, it being understood that any such Subsidiary
or Affiliate receiving such information shall be bound by the provisions of
clause (b) below as if it were a Lender hereunder.

<PAGE>

statue, rule, regulation or judicial process, (ii) to counsel for any of the
Lenders or the Agent, (iii) to bank examiners, auditors or accountants, (iv) to
the Agent or any other Lender (or to First Chicago Capital Markets, Inc.), (v)
in connection with any litigation to which any one or more of the Lenders or the
Agent is a party, (vi) to a subsidiary or affiliate of such Lender as provided
in clause (a) above, (vii) to any assignee or participant (or prospective
assignee or participant) so long as such assignee or participant (or prospective
assignee or participant) agrees with the respective Lender to keep such
information confidential on substantially the terms set forth in this Section
9.17(b), (viii) to any other Person as may be reasonably required in the course
of the enforcement of any Lender's rights or remedies hereunder or under any of
such Lender's Note, or (ix) to any other creditor of the Borrower or any of its
Subsidiaries at any time during the continuance of a Default; provided that in
no event shall any Lender or the Agent be obligated or required to return any
materials furnished by the Borrower.

ARTICLE X

THE AGENT

10.3. General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.

<PAGE>

any agreement by an obligor to furnish information directly to each Lender; (c)
the satisfaction of any condition specified in Article IV, except receipt of
items required to be delivered to the Agent and not waived at closing, or (d)
the validity, effectiveness, sufficiency, enforceability or genuineness of any
Loan Document or any other instrument or writing furnished in connection
therewith. The Agent shall have no duty to disclose to the Lenders information
that is not required to be furnished by the Borrower to the Agent at such time,
but is voluntarily furnished by the Borrower to the Agent (either in its
capacity as Agent or in its individual capacity).

<PAGE>

asserted against the Agent in any way relating to or arising out of the Loan
Documents or any other document delivered in connection therewith or the
transactions contemplated thereby, or the enforcement of any of the terms
thereof or of any such other documents; provided, that no Lender shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent. The obligations of the Lenders under this
Section 10.8 shall survive payment of the Obligations and termination of this
Agreement.

10.9. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.

10.10. Rights as a Lender. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender, including, without limitation, pursuant to Article XII
hereof, and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of trust, debt, equity or other transaction, in addition to those contemplated
by this Agreement or any other Loan Document, with the Borrower or any of its
Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby
from engaging with any other Person.

10.11. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.

<PAGE>

Lenders, a successor Agent, which successor Agent, so long as no Default is
continuing, shall be reasonably acceptable to the Borrower. If no successor
Agent shall have been so appointed by the Required Lenders and shall have
accepted such appointment within thirty days after the resigning Agent's giving
notice of its intention to resign, then the resigning Agent may appoint, on
behalf of the Borrower and the Lenders, a successor Agent, which successor
Agent, so long as no Default is continuing, shall be reasonably acceptable to
the Borrower. If the Agent has resigned and no successor Agent has been
appointed, the Lenders may perform all the duties of the Agent hereunder and the
Borrower shall make all payments in respect of the Obligations to the applicable
Lender and for all other purposes shall deal directly with the Lenders. No
successor Agent shall be deemed to be appointed hereunder until such successor
Agent has accepted the appointment. Any such successor Agent shall be a
commercial bank having capital and retained earnings of at least $50,000,000 and
with a Lending Installation in the United States of America. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation of the Agent, the resigning Agent shall be
discharged from its duties and obligations hereunder and under the Loan
Documents. After the effectiveness of the resignation of an Agent, the
provisions of this Article X shall continue in effect for its benefit in respect
of any actions taken or omitted to be taken by it while it was acting as the
Agent hereunder and under the other Loan Documents.

ARTICLE XI

SETOFF; RATABLE PAYMENTS

11.1. Setoff. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or Unmatured Default occurs, any and all deposits
(including all account balances, whether provisional or final and whether or not
collected or available) and any other Indebtedness at any time held or owing by
any Lender to or for the credit or account of the Borrower may be offset and
applied toward the payment of the Obligations owing to such Lender, whether or
not the Obligations, or any part hereof, shall then be due.

11.2. Ratable Payments. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
Section 2.18, 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share
of such Loans, such Lender agrees, promptly upon demand, to purchase a portion
of the Loans held by the other Lenders so that after such purchase each Lender
will hold its ratable proportion of Loans. If any Lender, whether in connection
with setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their Loans. In case any such payment is disturbed by legal
process, or otherwise, appropriate further adjustments shall be made. If an
amount to be setoff is to be applied to Indebtedness of the Borrower to a
Lender, other than

<PAGE>

Indebtedness evidenced by any of the Notes held by such Lender, such amount
shall be applied ratably to such other Indebtedness and to the Indebtedness
evidenced by such Notes.

ARTICLE XII

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

12.1. Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (a) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents, and (b) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (b) of the preceding sentence, any
Lender may at any time, without the consent of the Borrower or the Agent, assign
all or any portion of its rights under this Agreement and its Notes to a Federal
Reserve Bank; provided, however, that no such assignment to a Federal Reserve
Bank shall release the transferor Lender from its obligations hereunder. The
Agent may treat the payee of any Note as the owner thereof for all purposes
hereof unless and until such payee complies with Section 12.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Loan Documents. Any request, authority or consent of any Person, who at the
time of making such request or giving such authority or consent is the holder of
any Note, shall be conclusive and binding on any subsequent holder, transferee
or assignee of such Note or of any Note or Notes issued in exchange therefor.

12.2. Participations.

12.2.1. Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and the Borrower and the
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.

<PAGE>

12.2.3. Benefit of Setoff. The Borrower agrees that each Participant
shall be deemed to have the right of setoff provided in Section 11.1 in respect
of its participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing directly
to it as a Lender under the Loan Documents; provided, that each Lender shall
retain the right of setoff provided in Section 11.1 with respect to the amount
of participating interests sold to each Participant. The Lenders agree to share
with each Participant, and each Participant, by exercising the right of setoff
provided in Section 11.1, agrees to share with each Lender, any amount received
pursuant to the exercise of its right of setoff, such amounts to be shared in
accordance with Section 11.2 as if each Participant were a Lender.

12.3. Assignments.

12.3.1. Permitted Assignments. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any time assign
to one or more banks or other entities ("Purchasers") all or any part of its
rights and obligations under the Loan Documents; provided, however, that in the
case of an assignment to an entity which is not a Lender or an Affiliate of a
Lender, such assignment shall be in a minimum amount (when added to the amount
of the assignment of such Lender's obligations under the Valley Credit
Agreement) of $5,000,000 (or, if less, the entire amount of such Lender's
Commitment). Such assignment shall be substantially in the form of Exhibit D
hereto or in such other form as may be agreed to by the parties thereto. The
consent of the Agent and, so long as no Default under Section 7.2, 7.6 or 7.7 is
continuing, the Borrower, shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an Affiliate
thereof. Such consent shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained herein, any assignment by a Lender of its
rights and obligations under the Loan Documents shall be accompanied by an
assignment to the same assignee of the same ratable share of the rights and
obligations of such Lender under the Valley Credit Agreement in respect of its
obligations thereunder.

12.3.2. Effect; Effective Date. Upon (a) delivery to the Agent of a
notice of assignment, substantially in the form attached as Exhibit I to Exhibit
D hereto (a "Notice of Assignment"), together with any consents required by
Section 12.3.1, and (b) payment of a $3,000 fee to the Agent for processing such
assignment, such assignment shall become effective on the effective date
specified in such Notice of Assignment. On and after the effective date of such
assignment, (a) such Purchaser shall for all purposes be a Lender party to this
Agreement and any other Loan Document executed by the Lenders and shall have all
the rights and

<PAGE>

obligations of a Lender under the Loan Documents, to the same extent as if it
were an original party hereto, and (b) the transferor Lender shall be released
with respect to the percentage of the Aggregate Commitment and Loans assigned to
such Purchaser without any further consent or action by the Borrower, the
Lenders or the Agent. Upon the consummation of any assignment to a Purchaser
pursuant to this Section 12.3.2, the transferor Lender, the Agent and the
Borrower shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their Commitment, as adjusted pursuant to such assignment.

12.4. Dissemination of Information. Subject to Section 9.17(b), the
Borrower authorizes each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in the Loan Documents by operation of law
(each a "Transferee") and any prospective Transferee any and all information in
such Lender's possession concerning the creditworthiness of the Borrower and its
Subsidiaries.

ARTICLE XIII

NOTICES

13.2. Change of Address. The Borrower, the Agent and any Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.

<PAGE>

ARTICLE XIV

AMENDMENT AND RESTATEMENT

14.1. (a) This Agreement amends and restates in its entirety the Credit
Agreement, dated as of November 26, 1996, among the Borrower, the financial
institutions from time to time party thereto and First Chicago, as agent (as
amended, supplemented or otherwise modified through the date hereof, the "Prior
Credit Agreement") and, upon the Restatement Effective Date, the terms and
provisions of Prior Credit Agreement shall, subject to this Article XIV, be
superseded hereby and thereby. Prior to the Restatement Effective Date, the
Prior Credit Agreement shall continue to govern the making of any Loans and any
outstanding Loans and Obligations.

(b) Notwithstanding the amendment and restatement of the Prior Credit
Agreement by this agreement, the Loans under, and as defined in, the Prior
Credit Agreement ("Continuing Loans") and all accrued interest, fees and
expenses owing to First Chicago and Fleet National Bank by the Borrower shall
remain outstanding as of the Restatement Effective Date and constitute
continuing Obligations under this Agreement. The Continuing Loans shall in all
respects be continuing, and this Agreement shall not be deemed to evidence or
result in a novation or repayment and re-borrowing of the Continuing Loans. In
furtherance of and without limiting the foregoing (i) all interest, fees and
expenses which have arisen under the Prior Agreement shall be paid on the
applicable due date therefor specified in this Agreement and (ii) from and after
the Restatement Effective Date, the terms, conditions and covenants governing
the Continuing Loans shall be solely as set forth in this Agreement, which shall
supersede the Prior Credit Agreement to the extent provided in this Article XIV.

[signature pages to follow]

<PAGE>

IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed
this Agreement as of the date first above written.

WHITE MOUNTAINS HOLDINGS, INC.

By:

Print Name:

Title:

Address: 80 South Main Street
Hanover, New Hampshire 03755
Attn:

Fax No.:
Tel. No.:

Commitments

THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $ Individually and as Agent

By:

Print Name:

Title:

Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President

Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142

$ [OTHER LENDERS]

<PAGE>

Aggregate Initial
Commitment $

<PAGE>

SCHEDULE 1
TO CREDIT AGREEMENT

MARGINS

"Applicable Eurodollar Margin" and "Applicable Facility Fee Margin"
means, for any period, the applicable of the following percentages in effect
with such period based on the Leverage Ratio and the Fixed Charges Coverage
Ratio as follows:

<TABLE>
- ------------------------------------------------------------------------------------------
I II III IV
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio is: GREATER THAN 15% $15% LESS THAN 15% $15%
- ------------------------------------------------------------------------------------------
If Fixed Charges GREATER THAN 2:1 GREATER THAN 2:1 #2:1 #2:1
Coverage Ratio is:
- ------------------------------------------------------------------------------------------
The applicable
margin will be:
- ------------------------------------------------------------------------------------------
Applicable Facility .150% .175% .175% .200%
Fee Margin
- ------------------------------------------------------------------------------------------
Applicable
Eurodollar Margin .350% .450% .450% .550%
- ------------------------------------------------------------------------------------------
</TABLE>

The Leverage Ratio and Fixed Charges Coverage Ratio shall be
calculated by the Borrower as of the end of each of its Fiscal Quarters
commencing September 30, 1997 and shall be reported to the Agent pursuant to a
certificate executed by an authorized officer of the Borrower and delivered in
accordance with Section 6.1(g) of the Agreement. The foregoing margins shall be
adjusted, if necessary, quarterly as of the fifth day after the delivery of the
certificate provided for above; provided that if such certificate, together with
the financial statements to which such certificate relates, are not delivered by
the fifth day after the due date therefor specified in Section 6.1(g), then
until the fifth day after such delivery, each of the margins specified above
shall be as set forth in Column IV above. Until adjusted as described above
after September 30, 1997, the Applicable Eurodollar Margin and Applicable
Facility Fee Margin, as the case may be, shall be as specified in Column II
above.

<PAGE>

Exhibit 10(f)

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

$15,000,000

AMENDED AND RESTATED

CREDIT AGREEMENT

AMONG

VALLEY GROUP, INC.,

as Borrower,

WHITE MOUNTAINS HOLDINGS, INC.,

as Guarantor,

THE LENDERS NAMED HEREIN

and

THE FIRST NATIONAL BANK OF CHICAGO,

as Agent

DATED AS OF

July 30, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II THE CREDITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.1. Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.2. Ratable Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.3. Types of Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
2.4. Facility Fee; Reductions in Aggregate Commitment . . . . . . . . . . . .16
2.5. Minimum Amount of Each Advance . . . . . . . . . . . . . . . . . . . . .16
2.6. Optional Principal Payments. . . . . . . . . . . . . . . . . . . . . . .16
2.7. Mandatory Commitment Reductions. . . . . . . . . . . . . . . . . . . . .16
2.8. Method of Selecting Types and Interest Periods for New Advances. . . . .17
2.9. Conversion and Continuation of Outstanding Advances. . . . . . . . . . .18
2.10. Changes in Interest Rate, etc. . . . . . . . . . . . . . . . . . . . . .18
2.11. Rates Applicable After Default . . . . . . . . . . . . . . . . . . . . .19
2.12. Method of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.13. Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.14. Interest Payment Dates; Interest and Fee Basis . . . . . . . . . . . . .19
2.15. Notification of Advances, Interest Rates, Prepayments and Commitment
Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2.16. Lending Installations. . . . . . . . . . . . . . . . . . . . . . . . . .20
2.17. Non-Receipt of Funds by the Agent. . . . . . . . . . . . . . . . . . . .20
2.18. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2.19. Agent's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

ARTICLE III CHANGE IN CIRCUMSTANCES. . . . . . . . . . . . . . . . . . . . . . . . .22
3.1. Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
3.2. Changes in Capital Adequacy Regulations. . . . . . . . . . . . . . . . .22
3.3. Availability of Types of Advances. . . . . . . . . . . . . . . . . . . .23
3.4. Funding Indemnification. . . . . . . . . . . . . . . . . . . . . . . . .23
3.5. Lender Statements; Survival of Indemnity . . . . . . . . . . . . . . . .23

ARTICLE IV CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . .24
4.1. Initial Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
4.2. Each Future Advance. . . . . . . . . . . . . . . . . . . . . . . . . . .25

ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . .26
5.1. Corporate Existence and Standing . . . . . . . . . . . . . . . . . . . .26
</TABLE>

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5.2. Authorization and Validity. . . . . . . . . . . . . . . . . . . . . . . 26
5.3. Compliance with Laws and Contracts. . . . . . . . . . . . . . . . . . . 26
5.4. Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.5. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.6. Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . 27
5.7. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.8. Litigation and Contingent Obligations . . . . . . . . . . . . . . . . . 28
5.9 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.10. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.11. Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.12. Federal Reserve Regulations . . . . . . . . . . . . . . . . . . . . . . 29
5.13 Investment Company. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.14. Certain Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.15. Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.16. Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.17. Insurance Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.18. Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.19. Environmental Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.20. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.21. Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

ARTICLE VI COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1. Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.2. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.3. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.4. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.5. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.7. Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.8. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . 35
6.9. Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.10. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.11. Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.12. Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.13. Investments and Purchases . . . . . . . . . . . . . . . . . . . . . . . 36
6.14. Contingent Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 37
6.15. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.16. Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.17. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.18. Change in Corporate Structure; Fiscal Year. . . . . . . . . . . . . . . 38
6.19. Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

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6.20. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.20.1. Minimum Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.20.2. Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.20.3. Fixed Charges Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . 39
6.20.4. Finance Assets Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.20.5. Statutory Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.21. Tax Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.22. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

ARTICLE VII DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES. . . . . . . . . . . . . 42
8.1. Acceleration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.2. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.3. Preservation of Rights. . . . . . . . . . . . . . . . . . . . . . . . . 43

ARTICLE IX GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.1. Survival of Representations . . . . . . . . . . . . . . . . . . . . . . 44
9.2. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . 44
9.3. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.4. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.5. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.6. Several Obligations; Benefits of this Agreement . . . . . . . . . . . . 44
9.7. Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . 44
9.8. Numbers of Documents. . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.9. Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.10. Severability of Provisions. . . . . . . . . . . . . . . . . . . . . . . 45
9.11. Nonliability of Lenders . . . . . . . . . . . . . . . . . . . . . . . . 45
9.12. CHOICE OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.13. CONSENT TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . 45
9.14. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.15. Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.16. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.17. Treatment of Certain Information: Confidentiality . . . . . . . . . . . 46

ARTICLE X THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.1. Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.2. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.3. General Immunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.4. No Responsibility for Loans, Recitals, etc. . . . . . . . . . . . . . . 47
10.5. Action on Instructions of Lenders . . . . . . . . . . . . . . . . . . . 48
</TABLE>

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10.6. Employment of Agents and Counsel. . . . . . . . . . . . . . . . . . . . 48
10.7. Reliance on Documents; Counsel. . . . . . . . . . . . . . . . . . . . . 48
10.8. Agent's Reimbursement and Indemnification . . . . . . . . . . . . . . . 48
10.9. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.10. Rights as a Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.11. Lender Credit Decision. . . . . . . . . . . . . . . . . . . . . . . . . 49
10.12. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

ARTICLE XI SETOFF; RATABLE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . 50
11.1. Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.2. Ratable Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . . . . . . 50
12.1. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . 50
12.2. Participations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.2.1. Permitted Participants; Effect. . . . . . . . . . . . . . . . . . . . . 51
12.2.2. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.2.3. Benefit of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.3. Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.3.1. Permitted Assignments . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.3.2. Effect; Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . 52
12.4. Dissemination of Information. . . . . . . . . . . . . . . . . . . . . . 52
12.5. Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

ARTICLE XIII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13.1. Giving Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13.2. Change of Address . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

ARTICLE XIV GUARANTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>

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v
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EXHIBITS

Exhibit A (Article 1) Note
Exhibit B (Section 6.1(g)) Compliance Certificate
Exhibit C (Section 12.3.1) Assignment Agreement

SCHEDULES

Schedule 1 - Margins
Schedule 5.3 - Approvals and Consents
Schedule 5.9 - Capitalization and Subsidiaries
Schedule 5.10 - ERISA
Schedule 5.16 - Indebtedness
Schedule 5.17 - Insurance Licenses
Schedule 5.18 - Material Restrictions
Schedule 6.15 - Liens

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AMENDED AND RESTATED CREDIT AGREEMENT

This Amended and Restated Credit Agreement, dated as of July 30, 1997, is
among VALLEY GROUP, INC., an Oregon corporation, WHITE MOUNTAINS HOLDINGS, INC.,
a New Hampshire corporation, the Lenders and THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Agent.

R E C I T A L S:

A. The Borrower has requested the Lenders to make financial
accommodations to it in the aggregate principal amount of $15,000,000, the
proceeds of which the Borrower will use for the working capital and general
corporate needs of the Borrower and its Subsidiaries; and

B. The Lenders are willing to extend such financial accommodations on the
terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each Loan Party, the Lenders and
the Agent hereby agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement:

"ABR Advance" means an Advance which bears interest at the Alternate Base
Rate.

"Adjusted Net Worth" means, with respect to Parent, Net Worth of Parent (on
a consolidated basis) on the date of determination (without duplication for
amounts already excluded) minus the amount by which the aggregate book value of
Parent's equity interest in FAE and SOMSC at such time exceeds $75,000,000.

<PAGE>

to direct or cause the direction of the management or policies of the controlled
Person, whether through ownership of stock, by contract or otherwise.

"Agent" means First Chicago in its capacity as agent for the Lenders
pursuant to Article X, and not in its individual capacity as a Lender, and any
successor Agent appointed pursuant to Article X.

"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders hereunder. The initial Aggregate Commitment is $15,000,000.

"Agreement" means this Credit Agreement, as it may be amended, modified or
restated and in effect from time to time.

"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time; provided, however, that if any
changes in accounting principles from those in effect on the date of this
Agreement are adopted which result in a material change in the method of
calculation of any of the financial covenants, standards or terms in this
Agreement, the parties agree to enter into negotiations to determine whether
such provisions require amendment and, if so, the terms of such amendment so as
to equitably reflect such changes. Until a resolution thereof is reached, all
calculations made for the purposes of determining compliance with the terms of
this Agreement shall be made by application of generally accepted accounting
principles in effect on the date of this Agreement applied, to the extent
applicable, on a basis consistent with that used in the preparation of the
Financial Statements furnished to the Lenders pursuant to Section 5.5 hereof.

"Applicable Eurodollar Margin" has the meaning ascribed to it by, and shall
be determined in accordance with, Schedule 1.

"Applicable Facility Fee Margin" has the meaning ascribed to it by, and
shall be

<PAGE>

determined in accordance with, Schedule 1.

"Article" means an article of this Agreement unless another document is
specifically referenced.

"Authorized Officer" means, with respect to either Loan Party, any of the
chief executive officer, president, chief financial officer, treasurer or
controller of such Loan Party, acting singly.

"Benefit Plan" means any deferred benefit plan for the benefit of present,
future or former employees, whether or not such benefit plan is a Plan.

"Borrower" means Valley Group, Inc., an Oregon corporation, and its
successors and assigns.

"Borrowing Date" means a date on which an Advance is made hereunder.

"Borrowing Notice" is defined in Section 2.8.

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<PAGE>

"Change" is defined in Section 3.2.

"Change in Control" means (a) the acquisition by any "person" or "group"
(as such terms are used in Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended) (other than Holdings, any Wholly-Owned Subsidiary of
Holdings, John J. Byrne or any Plan or any Benefit Plan of Holdings, Parent, the
Borrower or any of their Subsidiaries), including without limitation any
acquisition effected by means of any transaction contemplated by Section 6.12,
of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended) of
25% or more of the outstanding shares of voting stock of the Borrower; or (b)
during any period of 12 consecutive calendar months, commencing on the date of
the Agreement, the ceasing of those individuals (the "Continuing Directors") who
(i) were directors of the Borrower on the first day of each such period or (ii)
subsequently became directors of the Borrower and whose initial election or
initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Borrower to constitute a majority of the board of directors of the Borrower; or
(c) during any period of 12 consecutive calendar months, commencing on the date
of this Agreement, the ceasing of individuals who hold an office possessing the
title Senior Vice President or such title that ranks senior to a Senior Vice
President (collectively, "Senior Management") of the Borrower on the first day
of each such period to constitute a majority of the Senior Management of the
Borrower. Notwithstanding the foregoing, the FAE Merger shall not be deemed in
and of itself to constitute a Change in Control.

"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.

"Consolidated Person" means, for the taxable year of reference, each Person
which is a member of the affiliated group of Parent if Consolidated returns are
or shall be filed for such affiliated group for federal income tax purposes or
any combined or unitary group of which Parent is a member for state income tax
purposes.

"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide

4
<PAGE>

funds for the payment of, or otherwise becomes or is contingently liable upon,
the obligation or liability of any other Person, or agrees to maintain the net
worth or working capital or other financial condition of any other Person, or
otherwise assures any creditor of such other Person against loss, including,
without limitation, any comfort letter, operating agreement or take-or-pay
contract or application for a Letter of Credit, excluding however (a) insurance
policies and insurance contracts issued in the ordinary course of business and
(b) any financial guarantees issued by Financial Security Assurance Holdings
Ltd.

"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with either Loan Party or any of its Subsidiaries, are treated
as a single employer under Section 414 of the Code.

"Conversion/Continuation Notice" is defined in Section 2.9.
"Corporate Base Rate" means a rate per annum equal to the corporate base
rate of interest publicly announced by First Chicago from time to time, changing
when and as said corporate base rate changes. The Corporate Base Rate is a
reference rate and does not necessarily represent the lowest or best rate of
interest actually charged to any customer. First Chicago may make commercial
loans or other loans at rates of interest at, above or below the Corporate Base
Rate.

"Default" means an event described in Article VII.

"Environmental Laws" is defined in Section 5.19.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

"Eurodollar Advance" means an Advance which bears interest at the
Eurodollar Rate.

"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
the Applicable Eurodollar Margin. The Eurodollar Rate shall be rounded to the
next higher multiple of 1/100 of 1% if the rate is not such a multiple.

5
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"Facility Fee" is defined in Section 2.4(a).

"Facility Termination Date" means July 30, 2002.

"FAE" means, at any time prior to the FAE Merger, Fund America Enterprises,
Inc., a Delaware corporation and direct Wholly-Owned Subsidiary of Holdings, and
on and after the consummation of the FAE Merger, Fund American Enterprises, Inc.
(f/k/a Fund American Enterprises II, Inc.), a Delaware corporation and direct
Wholly-Owned Subsidiary of Parent.

"FAE Merger" means the merger of the corporation known as of the date of
this Agreement as Fund American Enterprises, Inc. into Parent with Fund American
Enterprises, Inc. surviving the merger and changing its name to White Mountain
Holdings, Inc.

"Finance Assets" means each of the following: (a) investments in
securities issued or fully guaranteed by the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States of America is pledged in support thereof), (b) investments
in equity securities traded on the New York Stock Exchange, the American
Stock Exchange or NASDAQ and securities convertible in to such equity
securities, (c) investments in Investment Grade Obligations, (d) investments
in money market funds substantially all the assets of which are comprised of
securities of the types described in clauses (a) through (c) above, (e)
investments in Wholly-Owned Subsidiaries of either Loan Party, (f)
investments in Main Street America Holdings, Inc., Folksamerica Holding
Company Inc. and Financial Security Assurance Holdings Ltd. and (g) so long
as put rights with respect thereto are available to either Loan Party,
investments in US West Preferred Stock; provided, that Finance Assets shall
not include any securities pledged to secure any obligations (contingent or
otherwise) or any Investments in FAE or SOMSC.

"Finance Assets Ratio" means, at any time, the ratio of (a) Finance Assets
of Parent at such time to (b) the excess of (i) Funded Indebtedness of Parent at
such time over (ii) cash and Money Market Investments of Parent at such time.
For purposes of this definition, Finance Assets shall be valued, without
duplication, at fair market value to the extent there exists a readily
ascertainable fair market value for such Finance Asset or, in the event there
exists no such

6
<PAGE>

readily ascertainable fair market value for such Finance Assets, at book value,
as calculated in accordance with Agreement Accounting Principles.

"Financial Statements" is defined in Section 5.5.

"First Chicago" means The First National Bank of Chicago in its individual
capacity, and its successors.

"Fiscal Quarter" means one of the four three-month accounting periods
comprising a Fiscal Year.

"Fiscal Year" means the twelve-month accounting period ending December 31
of each year.

"Fixed Charges Coverage Ratio" means, as of the end of any Fiscal Quarter,
the ratio of:

(a) the sum, without duplication, of,

(i) investments of Parent and the Borrower in cash, Money Market
Investments and clauses (a) through (d) of the definition "Finance
Assets" as of the end of such Fiscal Quarter, plus

(ii) cash dividends received by Parent and the Borrower during the
four Fiscal Quarters then ended from Financial Security Assurance
Holdings, Ltd., Folksamerica Holding Company Inc. and Main Street
America Holdings, Inc., as long as such Person was not a Wholly-Owned
Subsidiary of Parent or the Borrower at the time such payment was made
and to the extent that such Person would not be restricted from paying
such dividend during the succeeding four Fiscal Quarters, plus

(iii) an amount equal to the maximum amount of dividends and
intercompany fees available to be paid to Parent and the Borrower
without approval of any Governmental Authority by each Wholly-Owned
Subsidiary of Parent and the Borrower (other than FAE, SOMSC and each
Wholly-Owned Insurance Subsidiary) as of the end of such Fiscal
Quarter, plus

(iv) an amount equal to the maximum amount of dividends and
intercompany fees available to be paid to Parent and the Borrower
without approval of any Governmental Authority by each present and
future Wholly-Owned Subsidiary of Parent that is a first-tier
Insurance Subsidiary of either Parent or any of its Subsidiaries that
is not an Insurance Subsidiary pursuant to applicable insurance

7
<PAGE>

statutes, rules and regulations of the applicable Governmental
Authority during the succeeding four Fiscal Quarters,

to (b) Fixed Charges.

"Fixed Charges" means, with respect to Parent and the Borrower, as of the
end of any Fiscal Quarter, the sum, without duplication, of (a) interest
expenses payable on outstanding Indebtedness (determined by adjusting the
principal amount of such Indebtedness for scheduled amortization payments as
reflected in clauses (c), (d) and (e) below and assuming that the applicable
interest rate in effect as of the date of determination would remain constant
during the succeeding four Fiscal Quarter period), (b) dividends payable on
preferred stock, (c) Indebtedness payable pursuant to the scheduled amortization
of such Indebtedness, (d) Loans payable pursuant to Section 2.1(b) (determined
by assuming that the principal amount of Loans as of the date of determination
would remain constant during the succeeding four Fiscal Quarter period) as a
result of reductions in the Aggregate Commitment occurring in any such period
pursuant to Section 2.7(a) (other than on July 30, 2002), and (e) Loans (as
defined in the White Mountains Credit Agreement) payable pursuant to Section
2.1(b) of the White Mountains Credit Agreement (determined by assuming that the
outstanding principal amount of such Loans as of the date of determination would
remain constant during the succeeding four Fiscal Quarter period) as a result of
reductions in the Aggregate Commitment (as defined in the White Mountains Credit
Agreement) occurring in any such period pursuant to Section 2.7(a) of the White
Mountains Credit Agreement (other than on July 30, 2002), in each case for the
period of four Fiscal Quarters immediately following the date of determination.

"Funded Indebtedness" means Indebtedness of the type described in clauses
(a), (d), (e) and (h) of the definition "Indebtedness".

"Governmental Authority" means any government (foreign or domestic) or any
state or other political subdivision thereof or any governmental body, agency,
authority, department or commission (including without limitation any board of
insurance, insurance department or insurance commissioner and any taxing
authority or political subdivision) or any instrumentality or officer thereof
(including without limitation any court or tribunal) exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any corporation, partnership or other entity directly or
indirectly owned or controlled by or subject to the control of any of the
foregoing.

"Guaranty" means the Guaranty of Parent pursuant to Article XIV.

"Hazardous Materials" is defined in Section 5.19.

"Holdings" means Fund American Enterprises Holdings, Inc., a Delaware
corporation.

8
<PAGE>

"Insurance Subsidiary" means any Subsidiary which is engaged in the
insurance business as an issuer or underwriter of insurance policies and/or
insurance contracts.

"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.

"Lending Installation" means, with respect to a Lender or the Agent, any
office, branch,

9
<PAGE>

subsidiary or affiliate of such Lender or the Agent.

"Leverage Ratio" means, at any time, the ratio of (a) the consolidated
Funded Indebtedness of Parent and its Subsidiaries, other than FAE and SOMSC, at
such time to (b) the sum of the consolidated Funded Indebtedness of Parent and
its Subsidiaries, other than FAE and SOMSC, at such time plus Net Worth (without
giving effect to Parent's equity interests in FAE and SOMSC) at such time, in
all cases determined in accordance with Agreement Accounting Principles.

"Loan" means, with respect to a Lender, such Lender's portion of any
Advance and "Loans" means, with respect to the Lenders, the aggregate of all
Advances.

"Loan Documents" means this Agreement, the Notes and the other documents
and agreements contemplated hereby and executed by either Loan Party in favor of
the Agent or any Lender.

"Loan Party" means each and either of the Borrower or Parent.

"Margin Stock" has the meaning assigned to that term under Regulation U.

"Material Adverse Effect" means a material adverse effect on (a) the
business, Property, condition (financial or other), performance, results of
operations, or prospects of Parent and its Subsidiaries taken as a whole, (b)
the ability of Parent, the Borrower or any Subsidiary of Parent or the Borrower
to perform its obligations under the Loan Documents, or (c) the validity or
enforceability of any of the Loan Documents or the rights or remedies of the
Agent or the Lenders thereunder.

10
<PAGE>

"Money Market Investments" means (a) direct obligations of the United
States of America, or of any agency thereof, or obligations guaranteed as to
principal and interest by the United States of America, or of any agency
thereof, in either case maturing not more than one year from the date of
acquisition thereof; (b) certificates of deposit issued by any bank or trust
company organized under the laws of the United States of America or any state
thereof and having capital, surplus and undivided profits of at least
$500,000,000, maturing not more than 90 days from the date of acquisition
thereof; (c) commercial paper rated A-1 or better P-1 or better by Standard &
Poor's Ratings Group or Moody's Investors Services, Inc., respectively,
maturing not more than 90 days from the date of acquisition thereof; and (d)
shares in an open-end management investment company with U.S. dollar
denominated investments in fixed income obligations, including repurchase
agreements, fixed time deposits and other obligations, with a dollar weighted
average maturity of not more than one year, and for the calculation of this
dollar weighted average maturity, certain instruments which have a variable
rate of interest readjusted no less frequently than annually are deemed to
have a maturity equal to the period remaining until the next readjustment of
the interest rate.

"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which either Loan Party or
any member of the Controlled Group is a party to which more than one employer
is obligated to make contributions.

"NAIC" means the National Association of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissioners and similar Governmental
Authorities of the various states of the United States toward the promotion
of uniformity in the practices of such Governmental Authorities.

"Net Available Proceeds" means (a) with respect to any Asset
Disposition, the sum of cash or readily marketable cash equivalents received
(including by way of a cash generating sale or discounting of a note or
account receivable) therefrom, whether at the time of such disposition or
subsequent thereto, in excess in the case of any Asset Disposition of any
amounts derived from such sale used (and permitted by this Agreement to be
used) within five Business Days after such sale to make a Permitted
Reinvestment, or (b) with respect to any sale or issuance of equity
securities of the Borrower, cash or readily marketable cash equivalents
received therefrom, whether at the time of such sale or issuance or
subsequent thereto, net, in either case, of all legal, title and recording
tax expenses, commissions and other fees and all costs and expenses incurred,
including, without limitation, incremental income taxes resulting from such
transaction.

"Net Worth" means, with respect to any Person, at any date the
consolidated shareholders' equity of such Person and its Consolidated
Subsidiaries determined in accordance with Agreement Accounting Principles
(but excluding the effect of Statement of Financial Accounting

11
<PAGE>

Standards No. 115).

"Non-Excluded Taxes" is defined in Section 2.18(a).

"Note" means a promissory note in substantially the form of Exhibit A
hereto, with appropriate insertions, duly executed and delivered to the Agent
by the Borrower and payable to the order of a Lender in the amount of its
Commitment, including any amendment, modification, renewal or replacement of
such promissory note.

"Notice of Assignment" is defined in Section 12.3.2.

"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of each Loan Party to the
Lenders or to any Lender, the Agent or any indemnified party hereunder
arising under any of the Loan Documents.

"Parent" means, at any time prior to FAE Merger, White Mountains
Holdings, Inc., a New Hampshire corporation, and on and after the
consummation of the FAE Merger, Fund American Enterprises, Inc., a Delaware
corporation, surviving the merger and changing its name to White Mountains
Holdings, Inc.

"Participants" is defined in Section 12.2.1.

"Payment Date" means the last day of each March, June, September and
December.

"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.

"Permitted Reinvestment" means an Investment in a Finance Asset or any
other Investment approved by the Required Lenders.

"Person" means any natural person, corporation, firm, joint venture,
partnership, association, enterprise, trust or other entity or organization,
or any government or political subdivision or any agency, department or
instrumentality thereof.

"Plan" means an employee pension benefit plan, as defined in Section
3(2) of ERISA, as to which either Loan Party or any member of the Controlled
Group may have any liability.

"Proceeding" is defined in Section 5.19.

"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets
owned, leased or operated by such Person.

12
<PAGE>

"pro-rata" means, when used with respect to a Lender, and any described
aggregate or total amount, an amount equal to such Lender's pro-rata share or
portion based on its percentage of the Aggregate Commitment or if the
Aggregate Commitment has been terminated, its percentage of the aggregate
principal amount of outstanding Advances.

"Purchase" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which either Loan
Party or any of its Subsidiaries (a) acquires any going business or all or
substantially all of the assets of any firm, corporation or division or line
of business thereof, whether through purchase of assets, merger or otherwise,
or (b) directly or indirectly acquires (in one transaction or as the most
recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary
voting power for the election of directors (other than securities having such
power only by reason of the happening of a contingency) or a majority (by
percentage or voting power) of the outstanding partnership interests of a
partnership.

"Purchasers" is defined in Section 12.3.1.

"Quarterly Statement" means the quarterly statutory financial statement
of any Insurance Subsidiary required to be filed with the insurance
commissioner (or similar authority) of its jurisdiction of incorporation or,
if no specific form is so required, in the form of financial statements
permitted by such insurance commissioner (or such similar authority) to be
used for filing quarterly statutory financial statements and shall contain
the type of financial information permitted by such insurance commissioner
(or such similar authority) to be disclosed therein, together with all
exhibits or schedules filed therewith.

"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions
and modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such party's assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any of
the foregoing.

"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor
thereto or other regulation or official interpretation of said Board of
Governors relating to reserve requirements applicable to depositary
institutions.

13
<PAGE>

"Regulation G" means Regulation G of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by Persons other than banks,
brokers and dealers for the purpose of purchasing or carrying margin stocks
applicable to such Persons.

"Regulation T" means Regulation T of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of such Board of
Governors relating to the extension of credit by securities brokers and
dealers for the purpose of purchasing or carrying margin stocks applicable to
such Persons.

"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or
other regulation or official interpretation of said Board of Governors
relating to the extension of credit by banks for the purpose of purchasing or
carrying margin stocks applicable to such Persons.

"Regulation X" means Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect and shall include any
successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by the specified lenders for
the purpose of purchasing or carrying margin stocks applicable to such
Persons.

"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq.

"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a
Plan, excluding, however, such events as to which the PBGC has by regulation
waived the requirement of Section 4043(a) of ERISA that it be notified within
30 days of the occurrence of such event; provided, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of
ERISA shall be a Reportable Event regardless of the issuance of any such
waiver of the notice requirement in accordance with either Section 4043(a) of
ERISA or Section 412(d) of the Code.

"Required Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 66-2/3% of the
aggregate unpaid principal amount of the outstanding Loans.

"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves)

14
<PAGE>

which is imposed under Regulation D on Eurocurrency liabilities.

"Restatement Effective Date" means the date on which all conditions
precedent set forth in Section 4.1 are satisfied or waived by all of the
Lenders.

"Risk-Based Capital Guidelines" is defined in Section 3.2.

"SAP" means, with respect to any Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner
(or other similar authority) in the jurisdiction of such Person for the
preparation of annual statements and other financial reports by insurance
companies of the same type as such Person in effect from time to time;
provided, however, that if any changes in statutory accounting practices from
those in effect on the date of this Agreement are adopted which result in a
material change in the method of calculation of any of the financial
covenants, standards or terms in this Agreement, the parties agree to enter
into negotiations to determine whether such provisions require amendment and,
if so, the terms of such amendment so as to equitably reflect such changes.
Until a resolution thereof is reached, all calculations made for the purposes
of determining compliance with the terms of this Agreement shall be made by
application of statutory accounting practices in effect on the date of this
Agreement applied, to the extent applicable, on a basis consistent with that
used in the preparation of the Financial Statements furnished to the Lenders
pursuant to Section 5.5(h) and (i) hereof.

"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.

"Significant Subsidiary" shall mean and include, at any time, each
Subsidiary of the Borrower to the extent that the Net Worth of such
Subsidiary is equal to or greater than $5,000,000.

"Single Employer Plan" means a Plan subject to Title IV of ERISA
maintained by either Loan Party or any member of the Controlled Group for
employees of either Loan Party or any member of the Controlled Group, other
than a Multiemployer Plan.

"Solvent" means, when used with respect to a Person, that (a) the fair
saleable value of the assets of such Person is in excess of the total amount
of the present value of its liabilities (including for purposes of this
definition all liabilities (including loss reserves as determined by such
Person), whether or not reflected on a balance sheet prepared in accordance
with Agreement Accounting Principles and whether direct or indirect, fixed or
contingent, secured or unsecured, disputed or undisputed), (b) such Person is
able to pay its debts or obligations in the ordinary course as they mature
and (c) such Person does not have unreasonably small capital to carry out its
business as conducted and as proposed to be conducted. "Solvency" shall have
a correlative

15
<PAGE>

meaning.

"SOMSC" means Source One Mortgage Service Corporation, a Delaware
corporation.

"SOMSC Credit Agreement" means the credit agreement or credit agreements
from time to time in effect among SOMSC, the financial institutions from time
to time party thereto and First Chicago, as agent, as the same may be
amended, supplemented, restated, replaced or otherwise modified from time to
time (and, subsequent to the termination thereof, as in effect on the date of
such termination).

"Statutory Surplus" means, with respect to any Insurance Subsidiary at
any time, the statutory capital and surplus of such Insurance Subsidiary at
such time, as determined in accordance with SAP ("Liabilities, Surplus and
Other Funds" statement, page 3, line 25 of the Annual Statement for the 1995
Fiscal Year entitled "Surplus as Regards Policyholders").

"Subsidiary" of a Person means (a) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the
time be owned or controlled, directly or indirectly, by such Person or by one
or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (b) any partnership, association, joint venture, limited
liability company or similar business organization more than 50% of the
ownership interests having ordinary voting power of which shall at the time
be so owned or controlled. Unless otherwise expressly provided, all
references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.

"Termination Event" means, with respect to a Plan which is subject to
Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of either Loan
Party or any other member of the Controlled Group from such Plan during a
plan year in which either Loan Party or any other member of the Controlled
Group was a "substantial employer" as defined in Section 4001(a)(2) of ERISA
or was deemed such under Section 4068(f) of ERISA, (c) the termination of
such Plan, the filing of a notice of intent to terminate such Plan or the
treatment of an amendment of such Plan as a termination under Section 4041 of
ERISA, (d) the institution by the PBGC of proceedings to terminate such Plan
or (e) any event or condition which might constitute grounds under Section
4042 of ERISA for the termination of, or appointment of a trustee to
administer, such Plan.

"Transferee" is defined in Section 12.4.

"Type" means, with respect to any Advance, its nature as an ABR Advance
or Eurodollar Advance.

"Unfunded Liability" means the amount (if any) by which the present
value of all vested

16
<PAGE>

and unvested accrued benefits under a Single Employer Plan exceeds the fair
market value of assets allocable to such benefits, all determined as of the
then most recent valuation date for such Plans using PBGC actuarial
assumptions for single employer plan terminations.

"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.

"Unrestricted Subsidiary" means SOMSC and its Subsidiaries and,
following the FAE Merger, FAE and its Subsidiaries.

"US West Preferred Stock" means the US West Series B cumulative
redeemable preferred stock $1.00 par value per share purchased by Holdings
pursuant to and subject to the terms of the Securities Purchase Agreement
dated April 10, 1994 among Holdings, US West, Inc., US West Capital
Corporation and Financial Security Assurance Holdings Ltd (as such agreement
may be amended from time to time).

"White Mountains Credit Agreement" means the Amended and Restated Credit
Agreement, dated as of July 30, 1997, among Parent, the financial
institutions from time to time party thereto and First Chicago, as agent, as
the same may be amended, supplemented or otherwise modified from time to time
(and, subsequent to the termination thereof, as in effect on the date of such
termination).

"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of
the outstanding voting securities of which (other than directors' qualifying
or similar shares) shall at the time be owned or controlled, directly or
indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such
Person, or by such Person and one or more Wholly-Owned Subsidiaries of such
Person, or (b) any partnership, association, joint venture, limited liability
company or similar business organization 100% of the ownership interests
having ordinary voting power of which (other than directors' qualifying or
similar shares) shall at the time be so owned or controlled.

The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms. References herein to
particular columns, lines or sections of any Person's Annual Statement shall
be deemed, where appropriate, to be references to the corresponding column,
line or section of such Person's Quarterly Statement, or if no such
corresponding column, line or section exists or if any report form changes,
then to the corresponding item referenced thereby. In the event that the
columns, lines or sections of the Annual Statement referenced herein are
changed or renumbered, all such references shall be deemed references to such
column, line or section as so renumbered or changed. Each accounting term
used herein which is not otherwise defined herein shall be defined in
accordance with Agreement Accounting Principles or SAP, as applicable, unless
otherwise specified.

17
<PAGE>

ARTICLE II

THE CREDITS

2.1. Advances. (a) From and including the date hereof to but excluding
the Facility Termination Date, each Lender severally (and not jointly)
agrees, on the terms and conditions set forth in this Agreement, to make
Advances to the Borrower from time to time in amounts not to exceed in the
aggregate at any one time outstanding the amount of its pro-rata share of the
Aggregate Commitment existing at such time. Subject to the terms of this
Agreement, the Borrower may borrow, repay and reborrow Advances at any time
prior to the Facility Termination Date.

(b) The Borrower hereby agrees that if at any time, as a result of
reductions in the Aggregate Commitment pursuant to Section 2.7 or otherwise,
the aggregate balance of the Loans exceeds the Aggregate Commitment, the
Borrower shall repay immediately its then outstanding Loans in such amount as
may be necessary to eliminate such excess.

(c) The Borrower's obligation to pay the principal of, and
interest on, the Loans shall be evidenced by the Notes. Although the Notes
shall be dated the date of this Agreement, interest in respect thereof shall
be payable only for the periods during which the Loans evidenced thereby are
outstanding and, although the stated amount of each Note shall be equal to
the applicable Lender's Commitment, each Note shall be enforceable, with
respect to the Borrower's obligation to pay the principal amount thereof,
only to the extent of the unpaid principal amount of the Loans at the time
evidenced thereby.

(d) All Advances and all Loans shall mature, and the principal
amount thereof and the unpaid accrued interest thereon shall be due and
payable, on the Facility Termination Date.

2.2. Ratable Loans. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.

2.3. Types of Advances. The Advances may be ABR Advances or Eurodollar
Advances, or a combination thereof, selected by the Borrower in accordance
with Sections 2.8 and 2.9.

2.4. Facility Fee; Reductions in Aggregate Commitment. (a) The
Borrower agrees to pay to the Agent for the account of each Lender a facility
fee ("Facility Fee") in an amount equal to the Applicable Facility Fee Margin
per annum times the daily average Commitment of

18
<PAGE>

such Lender from the date hereof to and including the Facility Termination
Date, payable on each Payment Date hereafter and on the Facility Termination
Date. All accrued Facility Fees shall be payable on the effective date of any
termination of the obligations of the Lenders to make Loans hereunder.

(b) The Borrower may permanently reduce the Aggregate Commitment
in whole, or in part ratably among the Lenders in a minimum aggregate amount
of $1,000,000 upon at least three (3) Business Days' written notice to the
Agent, which notice shall specify the amount of any such reduction; provided,
however, that the amount of the Aggregate Commitment may not be reduced below
the aggregate principal amount of the outstanding Advances. Such reductions
shall be in addition to reductions occurring pursuant to Section 2.7(b).
Voluntary commitment reductions pursuant to this Section 2.4(b) shall be
applied to the mandatory commitment reductions required to be made pursuant
to Section 2.7(a) in direct order of maturity.

2.5. Minimum Amount of Each Advance. Each Advance shall be in the
minimum amount of $1,000,000 (and in integral multiples of $500,000 if in
excess thereof); provided, however, that (a) any ABR Advance may be in the
amount of the unused Aggregate Commitment and (b) in no event shall more than
six (6) Eurodollar Advances be permitted to be outstanding at any time.

2.6. Optional Principal Payments. The Borrower may from time to time
pay, without penalty or premium, all outstanding ABR Advances, or, in a
minimum aggregate amount of $1,000,000 any portion of the outstanding ABR
Advances upon two Business Days' prior notice to the Agent. Subject to
Section 3.4 and upon like notice, a Eurodollar Advance may be paid prior to
the last day of the applicable Interest Period in a minimum amount of
$1,000,000 or an integral multiple of $500,000 in excess thereof.

2.7. Mandatory Commitment Reductions. (a) The Aggregate Commitment
shall be automatically and permanently reduced by the following amounts (or
such lesser amount as a result of reductions pursuant to Section 2.7(c)) on
the following dates:

Date Reduction Amount
------ --------------------
<S> <C>

June 30, 1999 $ 1,000,000
June 30, 2000 $ 2,000,000
June 30, 2001 $ 2,000,000
July 30, 2002 $10,000,000

</TABLE>

(b) The Aggregate Commitment shall also be automatically and
permanently reduced in the amounts and at the times set forth below:

19
<PAGE>

(i) within 5 Business Days after the receipt in the form of cash
or cash equivalents thereof by the Borrower, 100% of the aggregate Net
Available Proceeds in excess of $1,000,000 realized upon all Asset
Dispositions in any Fiscal Year of the Borrower; and

(ii) within 5 Business Days after the receipt in the form of cash
or cash equivalents thereof by the Borrower, 85% of the Net Available
Proceeds realized upon the sale by the Borrower of any equity securities
issued by it after the date of this Agreement in excess of an aggregate
amount of $1,000,000 (other than a sale of common stock of the Borrower
to Parent).

(c) Mandatory commitment reductions under Section 2.7(b) shall be
cumulative and in addition to reductions occurring pursuant to Section
2.4(b). Any mandatory commitment reductions under Section 2.7(b) shall be
applied to the mandatory commitment reductions required to be made pursuant
to Section 2.7(a) in the inverse order of maturity.

(d) Any reduction in the Aggregate Commitment pursuant to this
Section 2.7 or otherwise shall ratably reduce the Commitment of each Lender.

2.8. Method of Selecting Types and Interest Periods for New Advances.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable to each Advance from time
to time; provided, however, that in the event Loans are incurred on the date
of this Agreement, all Loans incurred on such date shall be ABR Advances.
The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice")
not later than 10:00 a.m. (Chicago time) on the Borrowing Date of each ABR
Advance and at least three (3) Business Days before the Borrowing Date for
each Eurodollar Advance, specifying:

(a) the Borrowing Date of such Advance, which shall be a Business
Day;

(b) the aggregate amount of such Advance;

(d) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, which shall end on or prior to the Facility
Termination Date; and

(e) any changes to money transfer instructions previously delivered
to the Agent.

Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available

20
<PAGE>

its Loan or Loans, in funds immediately available in Chicago, to the Agent at
its address specified pursuant to Article XIII. The Agent will make the
funds so received from the Lenders available to the Borrower at the Agent's
aforesaid address or at such account at such other institution in the United
States of America as the Borrower may indicate in the Borrowing Notice.

2.9. Conversion and Continuation of Outstanding Advances. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are
converted into Eurodollar Advances. Each Eurodollar Advance shall continue
as a Eurodollar Advance until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Advance shall be automatically
converted into an ABR Advance unless the Borrower shall have given the Agent
a Conversion/Continuation Notice requesting that, at the end of such Interest
Period, such Eurodollar Advance continue as a Eurodollar Advance for the same
or another Interest Period. Subject to the terms of Section 2.5, the
Borrower may elect from time to time to convert all or any part of an Advance
of any Type into any other Type or Types of Advances; provided, however, that
any conversion of any Eurodollar Advance shall be made on, and only on, the
last day of the Interest Period applicable thereto. The Borrower shall give
the Agent irrevocable notice (a "Conversion/Continuation Notice") of each
conversion of an ABR Advance or continuation of a Eurodollar Advance not
later than 10:00 a.m. (Chicago time) on the conversion date, in the case of
a conversion into an ABR Advance, or at least three (3) Business Days, in the
case of a conversion into or continuation of a Eurodollar Advance, prior to
the date of the requested conversion or continuation, specifying:

(a) the requested date of such conversion or continuation, which
shall be a Business Day;

(b) the aggregate amount and Type of the Advance which is to be
converted or continued; and

(c) the amount and Type(s) of Advance(s) into which such Advance
is to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Advance, the duration of the Interest Period
applicable thereto, which shall end on or prior to the Facility Termination
Date.

2.10. Changes in Interest Rate, etc. Each ABR Advance shall bear
interest at the Alternate Base Rate from and including the date of such
Advance or the date on which such Advance was converted into an ABR Advance
to (but not including) the date on which such ABR Advance is paid or
converted to a Eurodollar Advance. Changes in the rate of interest on that
portion of any Advance maintained as an ABR Advance will take effect
simultaneously with each change in the Alternate Base Rate. Each Eurodollar
Advance shall bear interest from and

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<PAGE>

including the first day of the Interest Period applicable thereto to, but not
including, the last day of such Interest Period at the Eurodollar Rate
determined as applicable to such Eurodollar Advance plus the Applicable
Eurodollar Margin. No Interest Period may end after the Facility Termination
Date. The Borrower shall select Interest Periods so that it is not necessary
to repay any portion of a Eurodollar Advance prior to the last day of the
applicable Interest Period in order to make a mandatory repayment required
pursuant to Section 2.7(a).

2.11. Rates Applicable After Default. Notwithstanding anything to the
contrary contained in Section 2.8 or 2.9, no Advance may be made as,
converted into or continued as a Eurodollar Advance (except with the consent
of the Agent and the Required Lenders) when any Default or Unmatured Default
has occurred and is continuing. During the continuance of a Default the
Required Lenders may, at their option, by notice to the Borrower (which
notice may be revoked at the option of the Required Lenders notwithstanding
any provision of Section 8.2 requiring unanimous consent of the Lenders to
changes in interest rates), declare that each Eurodollar Advance and ABR
Advance shall bear interest (for the remainder of the applicable Interest
Period in the case of Eurodollar Advances) at a rate per annum equal to the
rate otherwise applicable plus two percent (2%) per annum; provided, however,
that such increased rate shall automatically and without action of any kind
by the Lenders become and remain applicable until revoked by the Required
Lenders in the event of a Default described in Section 7.6 or 7.7.

2.12. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower (at least two Business Days in advance)
by noon (Chicago time) on the date when due and shall be applied ratably by
the Agent among the Lenders. Each payment delivered to the Agent for the
account of any Lender shall be delivered promptly by the Agent to such Lender
in the same type of funds that the Agent received at its address specified
pursuant to Article XIII or at any Lending Installation specified in a notice
received by the Agent from such Lender. The Agent is hereby authorized to
charge the account of the Borrower maintained with the Agent for each payment
of principal, interest and fees as it becomes due hereunder.

2.13. Notes. Each Lender is hereby authorized to record the principal
amount of each of its Loans and each repayment on the schedule attached to
its Note; provided, however, that neither the failure to so record nor any
error in such recordation shall affect the Borrower's obligations under such
Note.

2.14. Interest Payment Dates; Interest and Fee Basis. Interest accrued
on each ABR Advance shall be payable on each Payment Date, commencing with
the first such date to occur after the date hereof, on any date on which an
ABR Advance is prepaid, whether due to

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<PAGE>

acceleration or otherwise, and at maturity. Interest accrued on that portion
of the outstanding principal amount of any ABR Advance converted into a
Eurodollar Advance on a day other than a Payment Date shall be payable on the
date of conversion. Interest accrued on each Eurodollar Advance shall be
payable on the last day of its applicable Interest Period, on any date on
which the Eurodollar Advance is prepaid, whether by acceleration or
otherwise, and at maturity. Interest accrued on each Eurodollar Advance
having an Interest Period longer than three months shall also be payable on
the last day of each three-month interval during such Interest Period.
Interest and commitment fees shall be calculated for actual days elapsed on
the basis of a 360-day year. Interest shall be payable for the day an
Advance is made but not for the day of any payment on the amount paid if
payment is received prior to noon (Chicago time) at the place of payment. If
any payment of principal of or interest on an Advance shall become due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such
extension of time shall be included in computing interest in connection with
such payment.

2.15. Notification of Advances, Interest Rates, Prepayments and
Commitment Reductions. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Commitment reduction notice,
Borrowing Notice, Conversion/Continuation Notice, and repayment notice
received by it hereunder. The Agent will notify each Lender of the interest
rate applicable to each Eurodollar Advance promptly upon determination of
such interest rate and will give each Lender prompt notice of each change in
the Alternate Base Rate.

2.16. Lending Installations. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to
any such Lending Installation and the Notes shall be deemed held by each
Lender for the benefit of such Lending Installation. Each Lender may, by
written or telex notice to the Agent and the Borrower, designate a Lending
Installation through which Loans will be made by it and for whose account
Loan payments are to be made.

2.17. Non-Receipt of Funds by the Agent. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it
is scheduled to make payment to the Agent of (a) in the case of a Lender, the
proceeds of a Loan, or (b) in the case of the Borrower, a payment of
principal, interest or fees to the Agent for the account of the Lenders, that
it does not intend to make such payment, the Agent may assume that such
payment has been made. The Agent may, but shall not be obligated to, make
the amount of such payment available to the intended recipient in reliance
upon such assumption. If the Borrower has not in fact made such payment to
the Agent, the Lenders shall, on demand by the Agent, repay to the Agent the
amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made
available by the Agent until the date the Agent recovers such amount at a
rate per annum equal to the Federal Funds Effective Rate for such day. If
any Lender has not in fact made such payment to the Agent, such Lender or the

23
<PAGE>

Borrower shall, on demand by the Agent, repay to the Agent the amount so made
available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the Agent
until the date the Agent recovers such amount at a rate per annum equal to
(a) in the case of payment by a Lender, the Federal Funds Effective Rate for
such day, or (b) in the case of payment by the Borrower, the interest rate
applicable to the relevant Loan.

2.18. Taxes. (a) Any payments made by either Loan Party under this
Agreement or any other Loan Document shall be made free and clear of, and
without deduction or withholding for or on account of, any present or future
income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority, excluding net income
taxes and franchise taxes or any other tax based upon any income imposed on
the Agent or any Lender by the jurisdiction in which the Agent or such Lender
is incorporated or has its principal place of business or maintains its
Lending Installation. If any such non-excluded taxes, levies, imposts,
duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are
required to be withheld from any amounts payable to the Agent or any Lender
hereunder, the amounts so payable to the Agent or such Lender shall be
increased to the extent necessary to yield to the Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in or pursuant to this
Agreement; provided, however, that no Loan Party shall be required to
increase any such amounts payable to any Lender that is not organized under
the laws of the U.S. or a state thereof if such Lender fails to comply with
the requirements of paragraph (b) of this Section 2.18. Whenever any
Non-Excluded Taxes are payable by either Loan Party, as promptly as
practicable thereafter such Loan Party shall send to the Agent for its own
account or for the account of such Lender, as the case may be, a certified
copy of an original official receipt received by such Loan Party showing
payment thereof. If either Loan Party fails to pay any Non-Excluded Taxes
when due to the appropriate taxing authority or fails to remit to the Agent
the required receipts or other required documentary evidence, each Loan Party
shall indemnify the Agent and the Lenders for any incremental taxes, interest
or penalties that may become payable by any Agent or any Lender as a result
of any such failure. The agreements in this Section 2.18 shall survive the
termination of this Agreement and the payment of all other amounts payable
hereunder.

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<PAGE>

Borrower and the Agent two additional duly completed and properly executed
copies of such form (or a successor form) on or before the date that such
form expires (currently, three successive calendar years for Form 1001 and
each tax year for Form 4224) or becomes obsolete or after the occurrence of
any event requiring a change in the most recent forms so delivered by it, and
such amendments thereto or extensions or renewals thereof as may be
reasonably requested by the Borrower or the Agent, in each case certifying
that such Lender is entitled to receive payments under this Agreement and the
Notes without deduction or withholding of any United States federal income
taxes, unless an event (including, without limitation, any change in treaty,
law or regulation) has occurred prior to the date on which any such delivery
would otherwise be required which renders all such forms inapplicable or
which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender advises the Borrower and the Agent
that it is not capable of receiving payments without any deduction or
withholding of United States federal income tax.

2.19. Agent's Fees. The Borrower shall pay to the Agent those fees, in
addition to the Facility Fees referenced in Section 2.4(a), in the amounts
and at the times separately agreed to between the Agent and the Borrower.

ARTICLE III

CHANGE IN CIRCUMSTANCES

3.1. Yield Protection. If, after the date hereof, the adoption of or
any change in any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force
of law), or any new interpretation thereof, or the compliance of any Lender
with such adoption, change or interpretation,

(ai subjects any Lender or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due from the
Borrower (excluding taxation of the overall net income of any Lender or
applicable Lending Installation imposed by the jurisdiction in which
such Lender or Lending Installation is incorporated or has its principal
place of business), or changes the basis of taxation of principal,
interest or any other payments to any Lender or Lending Installation in
respect of its Loans or other amounts due it hereunder, or

(bi imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, any Lender or any applicable Lending Installation (other
than reserves and assessments taken into account in determining the
interest rate applicable to Eurodollar Advances), or

25
<PAGE>

(ci imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making,
funding or maintaining Loans or reduces any amount receivable by any
Lender or any applicable Lending Installation in connection with any
Loans, or requires any Lender or any applicable Lending Installation to
make any payment calculated by reference to the amount of Loans held, or
interest received by it, by an amount deemed material by such Lender,

then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or resulting in an
amount received which such Lender determines is attributable to making,
funding and maintaining its Loans and its Commitment.

3.2. Changes in Capital Adequacy Regulations. If a Lender determines
the amount of capital required or expected to be maintained by such Lender,
any Lending Installation of such Lender or any corporation controlling such
Lender is increased as a result of a Change, then, within 15 days of demand
by such Lender, the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "Change" means
(a) any change after the date of this Agreement in the Risk-Based Capital
Guidelines, or (b) any adoption of or change in any other law, governmental
or quasi-governmental rule, regulation, policy, guideline, interpretation, or
directive (whether or not having the force of law) after the date of this
Agreement which affects the amount of capital required or expected to be
maintained by any Lender or any Lending Installation or any corporation
controlling any Lender. "Risk-Based Capital Guidelines" means (a) the
risk-based capital guidelines in effect in the United States on the date of
this Agreement and (b) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory Practices
entitled "International Convergence of Capital Measurements and Capital
Standards" and any amendments to such regulations adopted prior to the date
of this Agreement.

3.3. Availability of Types of Advances. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (a)
deposits of a type and maturity appropriate to match fund Eurodollar Advances
are not available, or (b) the interest rate applicable to a Eurodollar
Advance does not accurately or fairly reflect the cost of making or
maintaining such Advance, then the Agent shall suspend the availability of
the Eurodollar Advances until such circumstance no longer exists and require
any Eurodollar Advances to be repaid.

3.4. Funding Indemnification. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration,

26
<PAGE>

prepayment or otherwise, or a Eurodollar Advance is not made on the date
specified by the Borrower for any reason other than default by the Lenders,
the Borrower will indemnify the Agent and each Lender for any loss or cost
incurred by it resulting therefrom, including, without limitation, any loss
or cost in liquidating or employing deposits acquired to fund or maintain the
Eurodollar Advance.

3.5. Lender Statements; Survival of Indemnity. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Advances to reduce any liability of the Borrower to
such Lender under Sections 2.18, 3.1 and 3.2 or to avoid the unavailability
of a Type of Advance under Section 3.3, so long as such designation is not
disadvantageous to such Lender. Each Lender shall deliver a written
statement of such Lender to the Borrower (with a copy to the Agent) as to the
amount due, if any, under Section 3.1, 3.2 or 3.4. Such written statement
shall set forth in reasonable detail the calculations upon which such Lender
determined such amount and shall be final, conclusive and binding on the
Borrower in the absence of manifest error. Determination of amounts payable
under such Sections in connection with a Eurodollar Advance shall be
calculated as though each Lender funded its Eurodollar Advances through the
purchase of a deposit of the type and maturity corresponding to the deposit
used as a reference in determining the Eurodollar Rate applicable to such
Loan, whether in fact that is the case or not. Unless otherwise provided
herein, the amount specified in the written statement of any Lender shall be
payable on demand after receipt by the Borrower of the written statement.
The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive
payment of the Obligations and termination of this Agreement.

ARTICLE IV

CONDITIONS PRECEDENT

4.1. Initial Loans. The Lenders shall not be required to make the
initial Advance hereunder unless each Loan Party has furnished the following
to the Agent with sufficient copies for the Lenders and the other conditions
set forth below have been satisfied:

(ai Charter Documents; Good Standing Certificates. Copies of the
certificate of incorporation of each Loan Party, together with all
amendments thereto, both certified by the appropriate governmental
officer in its jurisdiction of incorporation, together with a good
standing certificate issued by the Secretary of State of the
jurisdiction of its incorporation and such other jurisdictions as shall
be reasonably requested by the Agent.

(bi By-Laws and Resolutions. Copies, certified by the Secretary
or Assistant Secretary of the relevant Loan Party, of its by-laws and of
its Board of Directors' resolutions authorizing the execution, delivery
and performance of the Loan Documents

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<PAGE>

to which it is a party.

(ci Secretary's Certificate. An incumbency certificate, executed
by the Secretary or Assistant Secretary of the relevant Loan Party,
which shall identify by name and title and bear the signature of the
officers of such Loan Party authorized to sign the Loan Documents and,
in the case of the Borrower, to make borrowings hereunder, upon which
certificate the Agent and the Lenders shall be entitled to rely until
informed of any change in writing by the Borrower.

(di Officer's Certificate. A certificate signed by an Authorized
Officer of the Borrower, in form and substance satisfactory to the
Agent, to the effect that on the Restatement Effective Date (both before
and after giving effect to the consummation of the transactions
contemplated hereby and the making of the Loans hereunder, if any, being
made on such date): (i) no Default or Unmatured Default has occurred
and is continuing; (ii) no injunction or temporary restraining order
which would prohibit the making of any Loans or other litigation which
could reasonably be expected to have a Material Adverse Effect is
pending or, to the best of such Person's knowledge, threatened; (iii)
all orders, consents, approvals, licenses, authorizations, or
validations of, or filings, recordings or registrations with, or
exemptions by, any Governmental Authority required in connection with
the execution, delivery and performance of this Agreement have been or,
prior to the time required, will have been, obtained, given, filed or
taken and are or will be in full force and effect (or the relevant Loan
Party has obtained effective judicial relief with respect to the
application thereof) and all applicable waiting periods have expired;
(iv) each of the representations and warranties set forth in Article V
of this Agreement is true and correct on and as of the Restatement
Effective Date; and (v) since December 31, 1996, no event or change has
occurred that has caused or evidences a Material Adverse Effect.

(ei Legal Opinion. A written opinion of Brobeck, Phleger &
Harrison LLP., counsel to each Loan Party, addressed to the Agent and
the Lenders in form and substance acceptable to the Agent and its
counsel.

(fi Notes. Notes payable to the order of each of the Lenders duly
executed by the Borrower.

(gi Loan Documents. Executed originals of this Agreement and each
of the Loan Documents, which shall be in full force and effect, together
with all schedules, exhibits, certificates, instruments, opinions,
documents and financial statements required to be delivered pursuant
hereto and thereto.

(hi Letters of Direction. Written money transfer instructions with
respect to

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<PAGE>

the initial Advances and to future Advances in form and substance
acceptable to the Agent and its counsel addressed to the Agent and signed
by an Authorized Officer, together with such other related money transfer
authorizations as the Agent may have reasonably requested.

(ii Solvency Certificate. A written solvency certificate from the
chief financial officer of the relevant Loan Party in form and content
satisfactory to the Agent with respect to the value, Solvency and other
factual information, or relating to, as the case may be, of such Loan
Party on a consolidated basis.

(ji Regulatory Matters. Receipt of any required regulatory
approvals from any Governmental Authority.

(ki Investment Policy Guidelines. Certified copy of the investment
policy guidelines adopted by the finance committee of the board of
directors of Parent and the board of directors of the Borrower.

(li Other. Such other documents as the Agent, any Lender or their
counsel may have reasonably requested.

4.2. Each Future Advance. The Lenders shall not be required to make any
Advance unless on the applicable Borrowing Date:

(ai There exists no Default or Unmatured Default and none would
result from such Advance;

(bi The representations and warranties contained in Article V are
true and correct as of such Borrowing Date (except to the extent such
representations and warranties are expressly made as of a specified
date, in which event such representations and warranties shall be true
and correct as of such specified date);

(ci A Borrowing Notice shall have been properly submitted; and

(di All legal matters incident to the making of such Advance shall
be satisfactory to the Lenders and their counsel.

Each Borrowing Notice with respect to each such Advance shall constitute
a representation and warranty by each Loan Party that the conditions
contained in Section 4.2(a), (b) and (c) have been satisfied. Any Lender may
require a duly completed compliance certificate in substantially the form of
Exhibit B hereto as a condition to making an Advance.

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<PAGE>

ARTICLE V

REPRESENTATIONS AND WARRANTIES

Each Loan Party represents and warrants to the Lenders that:

5.1. Corporate Existence and Standing. Each Loan Party and each of its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and
is duly qualified and in good standing as a foreign corporation and is duly
authorized to conduct its business in each jurisdiction in which its business
is conducted or proposed to be conducted, except where the failure to be so
qualified could not reasonably be expected to have a Material Adverse Effect.

5.2. Authorization and Validity. Each Loan Party has all requisite
power and authority (corporate and otherwise) and legal right to execute and
deliver each of the Loan Documents to which it is a party and to perform its
obligations thereunder. The execution and delivery by each Loan Party of the
Loan Documents to which it is a party and the performance of its obligations
thereunder have been duly authorized by proper corporate proceedings and the
Loan Documents constitute legal, valid and binding obligations of such Loan
Party enforceable against it in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.

5.3. Compliance with Laws and Contracts. Each Loan Party and each of
its Subsidiaries have complied in all material respects with all applicable
statutes, rules, regulations, orders and restrictions of any domestic or
foreign government or any instrumentality or agency thereof, having
jurisdiction over the conduct of their respective businesses or the ownership
of their respective properties, except where the failure to so comply could
not reasonably be expected to have a Material Adverse Effect. Neither the
execution and delivery by either Loan Party of the Loan Documents to which it
is party, the application of the proceeds of the Loans or the consummation of
the transactions contemplated in the Loan Documents, nor compliance with the
provisions of the Loan Documents will, or at the relevant time did, (a)
violate any law, rule, regulation (including Regulations G, T, U and X),
order, writ, judgment, injunction, decree or award binding on such Loan Party
or any of its Subsidiaries or the charter, articles or certificate of
incorporation or by-laws of such Loan Party or any of its Subsidiaries, (b)
violate the provisions of or require the approval or consent of any party to
any indenture, instrument or agreement to which such Loan Party or any of its
Subsidiaries is a party or is subject, or by which it, or its property, is
bound, or conflict with or constitute a default thereunder, or result in the
creation or imposition of any Lien (other than Liens permitted by, the Loan
Documents) in, of or on the property of such Loan Party or any of its
Subsidiaries pursuant to the terms of any such indenture, instrument or
agreement, or (c) require any consent of the stockholders of any Person,
except for approvals or consents which will be obtained on or before the
initial Advance

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<PAGE>

and are disclosed on Schedule 5.3, except for any violation of, or failure to
obtain an approval or consent required under, any such indenture, instrument
or agreement that could not reasonably be expected to have a Material Adverse
Effect.

5.4. Governmental Consents. No order, consent, approval, qualification,
license, authorization, or validation of, or filing, recording or
registration with, or exemption by, or other action in respect of, any court,
governmental or public body or authority, or any subdivision thereof, any
securities exchange or other Person is or at the relevant time was required
to authorize, or is or at the relevant time was required in connection with
the execution, delivery, consummation or performance of, or the legality,
validity, binding effect or enforceability of, any of the Loan Documents or
the application of the proceeds of the Loans or any other transaction
contemplated in the Loan Documents. No Loan Party nor any of its
Subsidiaries is in default under or in violation of any foreign, federal,
state or local law, rule, regulation, order, writ, judgment, injunction,
decree or award binding upon or applicable to such Loan Party or such
Subsidiary, in each case the consequences of which default or violation could
reasonably be expected to have a Material Adverse Effect.

5.5. Financial Statements. The Borrower has heretofore furnished to
each of the Lenders (a) the December 31, 1996 unaudited consolidated
financial statements of Parent and its Subsidiaries, (b) the unaudited
consolidated financial statements of Parent and its Subsidiaries as of March
31, 1997, (c) the December 31, 1996 audited financial statements of Charter
Group, Inc. and its Subsidiaries, (d) the December 31, 1996 audited financial
statements of Valley Insurance Co. and its Subsidiaries, (e) the December 31,
1996 audited balance sheet of the Borrower and its Subsidiaries, (f) the
March 31, 1997 unaudited balance sheets and income statements of Parent, the
Borrower (excluding White Mountains Insurance Company related transactions),
White Mountains Insurance Company (as if no business was reinsured through
Valley Insurance Company), SOMSC, Financial Security Assurance Holdings Ltd.,
Folksamerica Holding Company, Inc. and Main Street America Holdings, Inc.,
(g) the December 31, 1996 unaudited consolidated financial statements of the
Borrower and its Subsidiaries, (h) the December 31, 1996 Annual Statement of
each Insurance Subsidiary and (i) the March 31, 1997 Quarterly Statement of
each Insurance Subsidiary (collectively, the "Financial Statements"). Each
of the Financial Statements (other than as described in clause (f)) was
prepared in accordance with Agreement Accounting Principles or SAP, as
applicable, and fairly presents the consolidated financial condition and
operations of the Person which is the subject of such Financial Statements at
such dates and the consolidated results of their operations for the
respective periods then ended (except, in the case of such unaudited
statements, for normal year-end audit adjustments).

5.6. Material Adverse Change. No material adverse change in the business,
Property, condition (financial or otherwise), performance, prospects or results
of operations of the Borrower and its Subsidiaries has occurred since December
31, 1996, except as specifically

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<PAGE>

disclosed in the Financial Statements.

5.7. Taxes. Neither Loan Party nor any of its Subsidiaries is required
to file United States federal, foreign, state or local tax returns. As of the
date hereof, the United States income tax returns of Holdings on a consolidated
basis have been audited by the Internal Revenue Service through its fiscal
period ending December 31, 1985, and all tax years beginning on or after
January 1, 1986 are currently being audited or are subject to audit. No tax
liens have been filed and no claims are being asserted with respect to any taxes
of Holdings which could reasonably be expected to have a Material
Adverse - Effect. The charges, accruals and reserves on the books of Holdings
in respect of any taxes or other governmental charges of Holdings are in
accordance with Agreement Accounting Principles.

5.8. Litigation and Contingent Obligations. There is no litigation,
arbitration, proceeding, inquiry or governmental investigation pending or, to
the knowledge of any of their officers, threatened against or affecting
either Loan Party or any of its Subsidiaries or any of their respective
properties which could reasonably be expected to have a Material Adverse
Effect or to prevent, enjoin or unduly delay the making of the Loans under
this Agreement. No Loan Party nor any of its Subsidiaries has any material
contingent obligations incurred outside of the ordinary course of its
business except as set forth on Schedule 5.16 or disclosed in the Financial
Statements or in the financial statements required to be delivered under
Section 6.1(a) and (b) and as permitted under this Agreement.

5.9. Capitalization. Schedule 5.9 hereto contains (a) an accurate
description of each Loan Party's capitalization as of March 31, 1997 (after
giving effect to the application of the proceeds of Loans incurred by the
Borrower on the initial Borrowing Date and to the FAE Merger) and (b) an
accurate list of all of the existing Subsidiaries of each Loan Party as of
the date of this Agreement, setting forth their respective jurisdictions of
incorporation and the percentage of their capital stock owned by such Loan
Party or its other Subsidiaries. All of the issued and outstanding shares of
capital stock of each Loan Party and of each Subsidiary of such Loan Party
have been duly authorized and validly issued, are fully paid and
non-assessable, and are free and clear of all Liens. No authorized but
unissued or treasury shares of capital stock of each Loan Party or any of its
Subsidiaries are subject to any option, warrant, right to call or commitment
of any kind or character. Except as set forth on Schedule 5.9 or pursuant to
management incentive plans implemented after the date of this Agreement, no
Loan Party nor any of its Subsidiaries has any outstanding stock or
securities convertible into or exchangeable for any shares of its capital
stock, or any right issued to any Person (either preemptive or other) to
subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to any of its capital
stock or any stock or securities convertible into or exchangeable for any of
its capital stock other than as expressly set forth in the certificate or
articles of incorporation of such Loan Party or such Subsidiary. No Loan
Party nor any of its Subsidiaries is subject to any obligation (contingent or
otherwise) to repurchase or otherwise

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acquire or retire any shares of its capital stock or any convertible
securities, rights or options of the type described in the preceding sentence
except as otherwise set forth on Schedule 5.9 or pursuant to management
incentive plans implemented after the date of this Agreement.

5.10. ERISA. Except as disclosed on Schedule 5.10, no Loan Party nor
any other member of the Controlled Group maintains any Single Employer Plans,
and no Single Employer Plan has any Unfunded Liability. No Loan Party nor
any other member of the Controlled Group maintains, or is obligated to
contribute to, any Multiemployer Plan or has incurred, or is reasonably
expected to incur, any withdrawal liability to any Multiemployer Plan. Each
Plan complies in all material respects with all applicable requirements of
law and regulations other than any such failure to comply which could not
reasonably be expected to have a Material Adverse Effect. No Loan Party nor
any member of the Controlled Group has, with respect to any Plan, failed to
make any contribution or pay any amount required under Section 412 of the
Code or Section 302 of ERISA or the terms of such Plan. There are no pending
or, to the knowledge of either Loan Party, threatened claims, actions,
investigations or lawsuits against any Plan, any fiduciary thereof, or either
Loan Party or any member of the Controlled Group with respect to a Plan. No
Loan Party nor any member of the Controlled Group has engaged in any
prohibited transaction (as defined in Section 4975 of the Code or Section 406
of ERISA) in connection with any Plan which would subject such Person to any
material liability. Within the last five years no Loan Party nor any member
of the Controlled Group has engaged in a transaction which resulted in a
Single Employer Plan with an Unfunded Liability being transferred out of the
Controlled Group which could reasonably be expected to have a Material
Adverse Effect. No Termination Event has occurred or is reasonably expected
to occur with respect to any Plan which is subject to Title IV of ERISA which
could reasonably be expected to have a Material Adverse Effect.

5.11. Defaults. No Default or Unmatured Default has occurred and is
continuing.

5.12. Federal Reserve Regulations. No Loan Party nor any of its
Subsidiaries is engaged, directly or indirectly, principally, or as one of
its important activities, in the business of extending, or arranging for the
extension of, credit for the purpose of purchasing or carrying Margin Stock.
No part of the proceeds of any Loan will be used in a manner which would
violate, or result in a violation of, Regulation G, Regulation T, Regulation
U or Regulation X. Neither the making of any Advance hereunder nor the use
of the proceeds thereof will violate or be inconsistent with the provisions
of Regulation G, Regulation T, Regulation U or Regulation X.

5.13. Investment Company. No Loan Party nor any of its Subsidiaries
is, or after giving effect to any Advance will be, an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

5.14. Certain Fees. No broker's or finder's fee or commission was, is
or will be

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<PAGE>

payable by either Loan Party or any of its Subsidiaries with respect to any
of the transactions contemplated by this Agreement, except as described in
Section 9.5. Each Loan Party hereby agrees to indemnify the Agent and the
Lenders against and agrees that it will hold each of them harmless from any
claim, demand or liability for broker's or finder's fees or commissions
alleged to have been incurred by either Loan Party in connection with any of
the transactions contemplated by this Agreement and any expenses (including,
without limitation, attorneys' fees and time charges of attorneys for the
Agent or any Lender, which attorneys may be employees of the Agent or any
Lender) arising in connection with any such claim, demand or liability. No
other similar fee or commissions will be payable by either Loan Party or any
of its Subsidiaries for any other services rendered to such Loan Party or
such Subsidiary ancillary to any of the transactions contemplated by this
Agreement.

5.15. Solvency. As of the date hereof, after giving effect to the
consummation of the transactions contemplated by the Loan Documents and the
payment of all fees, costs and expenses payable by each Loan Party or any of
its Subsidiaries with respect to the transactions contemplated by the Loan
Documents and the application of the proceeds of Loans incurred by the
Borrower on the initial Borrowing Date, each Loan Party and each of its
Subsidiaries is Solvent.

5.16. Indebtedness. Attached hereto as Schedule 5.16 is a complete and
correct list of all Indebtedness of each Loan Party and each of its
Subsidiaries outstanding on the date of this Agreement (other than
Indebtedness in a principal amount not exceeding $100,000 for a single item
of Indebtedness and $1,000,000 in the aggregate for all such Indebtedness
listed, it being understood and agreed that any such Indebtedness shall be
permitted to exist pursuant to Section 6.11(b) notwithstanding the absence
thereof on Schedule 5.16), showing the aggregate principal amount which was
outstanding on such date after giving effect to the application of the
proceeds of Loans incurred by the Borrower on the initial Borrowing Date.

5.17. Insurance Licenses. Schedule 5.17 hereto lists all of the
jurisdictions in which any Insurance Subsidiary holds a License and is
authorized to and does transact insurance business as of the date of this
Agreement. No such License, the loss of which could reasonably be expected
to have a Material Adverse Effect, is the subject of a proceeding for
suspension or revocation. To each Loan Party's knowledge, there is no
sustainable basis for such suspension or revocation, and no such suspension
or revocation has been threatened by any Governmental Authority.

5.18. Material Agreements. Except as set forth in Schedule 5.18 and
except for agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries, no Loan Party nor any of its Subsidiaries is a party
to any agreement or instrument or subject to any charter or other corporate
restriction which could reasonably be expected to have a Material Adverse
Effect or which restricts or imposes conditions upon the ability of any
Subsidiary of a

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<PAGE>

Loan Party (other than Unrestricted Subsidiary) to (a) pay dividends or make
other distributions on its capital stock (b) make loans or advances to either
Loan Party, (c) repay loans or advances from either Loan Party or (d) grant
Liens to the Agent to secure the Obligations. No Loan Party nor any of its
Subsidiaries is in default in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any agreement to
which it is a party, which default could reasonably be expected to have a
Material Adverse Effect.

5.19. Environmental Laws. There are no claims, investigations,
litigation, administrative proceedings, notices, requests for information
(each a "Proceeding"), whether pending or threatened, or judgments or orders
asserting violations of applicable federal, state and local environmental,
health and safety statutes, regulations, ordinances, codes, rules, orders,
decrees, directives and standards ("Environmental Laws") or relating to any
toxic or hazardous waste, substance or chemical or any pollutant,
contaminant, chemical or other substance defined or regulated pursuant to any
Environmental Law, including, without limitation, asbestos, petroleum, crude
oil or any fraction thereof ("Hazardous Materials") asserted against either
Loan Party or any of its Subsidiaries, other than in connection with an
insurance policy issued in the ordinary course of business to any Person
(other than Holdings or any Subsidiary of Holdings), which, in any case,
could reasonably be expected to have a Material Adverse Effect. As of the
date hereof, Parent and its Subsidiaries do not have liabilities exceeding
$100,000 in the aggregate for all of them with respect to compliance with
applicable Environmental Laws or related to the generation, treatment,
storage, disposal, release, investigation or cleanup of Hazardous Materials,
and no facts or circumstances exist which could give rise to such liabilities
with respect to compliance with applicable Environmental Laws and the
generation, treatment, storage, disposal, release, investigation or cleanup
of Hazardous Materials.

5.20. Insurance. Each Loan Party and each of its Subsidiaries
maintain with financially sound and reputable insurance companies insurance
on their Property in such amounts and covering such risks as is consistent
with sound business practice.

5.21. Disclosure. No information, exhibit or report furnished by either
Loan Party or any of its Subsidiaries to the Agent or to any Lender in
connection with the negotiation of, or compliance with, the Loan Documents
contained any material misstatement of fact or omitted to state a material
fact or any fact necessary to make the statements contained therein not
materially misleading. There is no fact known to either Loan Party (other
than matters of a general economic or political nature) that has had or could
reasonably be expected to have a Material Adverse Effect and that has not
been disclosed herein or in such other documents, certificates and statements
furnished to the Lenders for use in connection with the transactions
contemplated by this Agreement.

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<PAGE>

ARTICLE VI

COVENANTS

During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:

6.1. Financial Reporting. Parent will maintain, for itself and each of its
Subsidiaries, a system of accounting established and administered in accordance
with generally accepted accounting principles, consistently applied, and furnish
to the Lenders:

(ai As soon as practicable and in any event within 100 days after
the close of each of its Fiscal Years, an unqualified audit report
certified by independent certified public accountants, acceptable to the
Lenders, prepared in accordance with Agreement Accounting Principles on
a consolidated and consolidating basis (consolidating statements need
not be certified by such accountants) for itself and its Subsidiaries,
including balance sheets as of the end of such period and related
statements of income, retained earnings and cash flows accompanied by a
certificate of said accountants that, in the course of the examination
necessary for their certification of the foregoing, they have obtained
no knowledge of any Default or Unmatured Default, or if, in the opinion
of such accountants, any Default or Unmatured Default shall exist,
stating the nature and status thereof.

(bi As soon as practicable and in any event within 60 days after
the close of each of the first three Fiscal Quarters of each of its
Fiscal Years, for itself and its Subsidiaries, consolidated and
consolidating unaudited balance sheets as at the close of each such
period and consolidated and consolidating statements of income, retained
earnings and cash flows for the period from the beginning of such Fiscal
Year to the end of such quarter, all certified by its chief financial
officer.

(ci (i) Upon the earlier of (A) fifteen (15) days after the
regulatory filing date or (B) seventy-five (75) days after the close of
each fiscal year of each Insurance Subsidiary of the Parent, copies of
the unaudited Annual Statement of such Insurance Subsidiary, certified
by the chief financial officer or the treasurer of such Insurance
Subsidiary, all such statements to be prepared in accordance with SAP
and (ii) no later than each June 15, copies of financial statements
prepared in accordance with SAP, or generally accepted accounting
principles with a reconciliation to SAP, and certified by independent
certified public accountants of recognized national standing.

(di Upon the earlier of (i) ten (10) days after the regulatory
filing date or (ii) sixty (60) days after the close of each of the first
three (3) fiscal quarters of each fiscal

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<PAGE>

year of each Insurance Subsidiary of the Parent, copies of the unaudited
Quarterly Statement of each of the Insurance Subsidiaries of the Parent,
certified by the chief financial officer or the treasurer of such
Insurance Subsidiary, all such statements to be prepared in accordance
with SAP.

(ei Promptly and in any event within ten (10) days after (i)
learning thereof, notification of any changes after the date of this
Agreement in the rating given by A.M. Best & Co. in respect of any
Insurance Subsidiary of the Parent and (ii) receipt thereof, copies of
any ratings analysis by A.M. Best & Co. relating to any Insurance
Subsidiary of the Parent.

(fi Copies of any outside actuarial reports prepared with respect
to any valuation or appraisal of any Insurance Subsidiary of the Parent,
promptly after the receipt thereof.

(gi Together with the financial statements required by clauses (a)
and (b) above, a compliance certificate in substantially the form of
Exhibit B hereto signed by the Borrower's chief financial officer
showing the calculations necessary to determine compliance with this
Agreement and stating that no Default or Unmatured Default exists, or if
any Default or Unmatured Default exists, stating the nature and status
thereof.

(hi Promptly after the same becomes available after the close of
each Fiscal Year, a statement of the Unfunded Liabilities of each Single
Employer Plan, certified as correct by an actuary enrolled under ERISA.

(ii As soon as possible and in any event within 10 days after such
Loan Party knows that any Termination Event has occurred with respect to
any Plan, a statement, signed by the chief financial officer of such
Loan Party, describing said Termination Event and the action which such
Loan Party proposes to take with respect thereto.

(ji As soon as possible and in any event within 10 days after
receipt by such Loan Party, a copy of (i) any notice, claim, complaint
or order to the effect that such Loan Party or any of its Subsidiaries
is or may be liable to any Person as a result of the release by such
Loan Party or any of its Subsidiaries of any Hazardous Materials into
the environment or requiring that action be taken to respond to or clean
up a Release of Hazardous Materials into the environment, and (ii) any
notice, complaint or citation alleging any violation of any
Environmental Law or Environmental Permit by such Loan Party or any of
its Subsidiaries. Within ten days of such Loan Party or any of its
Subsidiaries having knowledge of the enactment or promulgation of any
Environmental Law which could reasonably be expected to have a Material
Adverse Effect, such Loan Party shall provide the Agent with written
notice thereof.

<PAGE>

(ki Promptly upon the furnishing thereof to the shareholders of such
Loan Party, copies of all financial statements, reports and proxy
statements so furnished.

(li Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which
such Loan Party or any of its Subsidiaries files with the Securities and
Exchange Commission, the National Association of Securities Dealers, any
securities exchange, the NAIC or any insurance commission or department or
analogous Governmental Authority (including any filing made by such Loan
Party or any of its Subsidiaries pursuant to any insurance holding company
act or related rules or regulations), but excluding routine or non-material
filings with the NAIC, any insurance commissioner or department or
analogous Governmental Authority.

(mi Promptly and in any event within ten (10) days after learning
thereof, notification of (i) any material tax assessment, demand, notice of
proposed deficiency or notice of deficiency received by Holdings or any
other Consolidated Person or (ii) the filing of any tax Lien or
commencement of any judicial proceeding by or against any such Consolidated
Person, if any such assessment, demand, notice, Lien or judicial proceeding
relates to tax liabilities in excess of ten percent (10%) of the net worth
(determined according to generally accepted accounting standards and
without reduction for any reserve for such liabilities) of such Loan Party
and its Subsidiaries taken as a whole.

(ni Promptly after available, any management letter prepared by the
accountants conducting the audit of the financial statements delivered
pursuant to Section 6.1(a).

(oi Promptly after reviewed by the relevant board of directors, a
copy of the Borrower's and Parent's investment policy compliance report.

(pi Such other information (including, without limitation, the annual
Best's Advance Report Service report prepared with respect to each
Insurance Subsidiary of the Parent rated by A.M. Best & Co. and
non-financial information) as the Agent or any Lender may from time to time
reasonably request.

6.2. Use of Proceeds. The Borrower will, and will cause each of
its Subsidiaries to, use the proceeds of the Advances to meet the working
capital and general corporate needs of the Borrower and its Subsidiaries,
including but not limited to the purchase of Finance Assets. The Borrower
will not, nor will it permit any of its Subsidiaries to, use any of the
proceeds of the Advances in any manner which would violate, or result in the
violation of, Regulation G, Regulation T, Regulation U or Regulation X or to
finance the Purchase of any Person which has

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<PAGE>

not been approved and recommended by the board of directors (or functional
equivalent thereof) of such Person.

6.3. Notice of Default. The Borrower will give prompt notice in
writing to the Lenders of the occurrence of (a) any Default or Unmatured
Default, (b) of any other event or development, financial or other, relating
specifically to either Loan Party or any of its Subsidiaries (and not of a
general economic or political nature) which could reasonably be expected to
have a Material Adverse Effect, (c) receipt by either Loan Party or any of
its Subsidiaries of any notice from any Governmental Authority of the
expiration without renewal, revocation or suspension of, or the institution
of any proceedings to revoke or suspend, any License now or hereafter held by
any Insurance Subsidiary of the Parent which is required to conduct insurance
business in compliance with all applicable laws and regulations and the
expiration, revocation or suspension of which could reasonably be expected to
have a Material Adverse Effect, (d) receipt by either Loan Party or any of
its Subsidiaries of any notice from any Governmental Authority of the
institution of any disciplinary proceedings against or in respect of any
Insurance Subsidiary of the Parent, or the issuance of any order, the taking
of any action or any request for an extraordinary audit for cause by any
Governmental Authority which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect, (e) any material judicial or
administrative order of which either Loan Party or any of its Subsidiaries is
aware limiting or controlling the insurance business of any Insurance
Subsidiary (and not the insurance industry generally) which has been issued
or adopted or (f) the commencement of any litigation of which either Loan
Party or any of its Subsidiaries is aware which could reasonably be expected
to create a Material Adverse Effect.

6.4. Conduct of Business. Each Loan Party will, and will cause
each of its Subsidiaries to, (a) carry on and conduct its business in
substantially the same manner as it is presently conducted, (b) not conduct
any significant business except for financial services, (c) do all things
necessary to remain duly incorporated, validly existing and in good standing
as a domestic corporation in its jurisdiction of incorporation and maintain
all requisite authority to conduct its business in each jurisdiction in which
its business is conducted except where the failure to maintain such authority
could not reasonably be expected to have a Material Adverse Effect and (d) do
all things necessary to renew, extend and continue in effect all Licenses
which may at any time and from time to time be necessary for any Insurance
Subsidiary of the Parent to operate its insurance business in compliance with
all applicable laws and regulations except for any License the loss of which
could not reasonably be expected to have a Material Adverse Effect; provided,
that any Insurance Subsidiary of the Parent may withdraw from one or more
states (other than its state of domicile) as an admitted insurer if such
withdrawal is determined by such Loan Party's Board of Directors to be in the
best interest of such Loan Party and could not reasonably be expected to have
a Material Adverse Effect.

6.5. Taxes. At any time on and after the date Parent or any of its
Subsidiaries is

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<PAGE>

required to do so, each Loan Party will, and will cause each of its Subsidiaries
to, timely file complete and correct United States federal and applicable
foreign, state and local tax returns required by applicable law and pay when due
all taxes, assessments and governmental charges and levies upon it or its
income, profits or Property, except those which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves
have been set aside in accordance with generally accepted accounting principles
or SAP, as applicable.

6.6. Insurance. Each Loan Party will, and will cause each of its
Subsidiaries to, maintain with financially sound and reputable insurance
companies insurance on all their Property in such amounts and covering such
risks as is consistent with sound business practice, and the Borrower will
furnish to the Agent and any Lender upon request full information as to the
insurance carried.

6.7. Compliance with Laws. Each Loan Party will, and will cause
each of its Subsidiaries to, comply with all laws, rules, regulations,
orders, writs, judgments, injunctions, decrees or awards to which it may be
subject, the failure to comply with which could reasonably be expected to
have a Material Adverse Effect.

6.8. Maintenance of Properties. Each Loan Party will, and will
cause each of its Subsidiaries to, do all things necessary to maintain,
preserve, protect and keep its Property in good repair, working order and
condition, and make all necessary and proper repairs, renewals and
replacements so that its business carried on in connection therewith may be
properly conducted at all times.

6.9. Inspection. Each Loan Party will, and will cause each of its
Subsidiaries to, at reasonable times during normal business hours and upon
reasonable notice, permit the Agent and the Lenders, by their respective
representatives and agents, to inspect any of the Property, corporate books
and financial records of such Loan Party and such Subsidiary, to examine and
make copies of the books of accounts and other financial records of such Loan
Party and such Subsidiary, and to discuss the affairs, finances and accounts
of such Loan Party and such Subsidiary with, and to be advised as to the same
by, their respective officers at such reasonable times and intervals as the
Lenders may designate. Each Loan Party will keep or cause to be kept, and
cause each of its Subsidiaries to keep or cause to be kept, appropriate
records and books of account in which complete entries are to be made
reflecting its and their business and financial transactions, such entries to
be made in accordance with Agreement Accounting Principles or SAP, as
applicable.

6.10. Dividends. The Borrower may declare and pay dividends or make
distributions to Parent.

6.11. Indebtedness. No Loan Party will, nor will it permit any of its
Subsidiaries

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<PAGE>

(other than an Unrestricted Subsidiary) to, create, incur or suffer to exist any
Indebtedness, except:

(a) the Loans;

(b) Indebtedness existing on the date hereof and described in
Schedule 5.16 hereto and any renewals, extensions, refundings or
refinancings of such Indebtedness; provided that the amount thereof is not
increased and the maturity of principal thereof is not shortened (unless to
a maturity occurring after the Facility Termination Date);

(c) Indebtedness owing by (x) either Loan Party to any Wholly-Owned
Subsidiary of a Loan Party and (y) any Wholly-Owned Subsidiary to a
Wholly-Owned Subsidiary of a Loan Party or either Loan Party;

(d) Indebtedness permitted under the White Mountains Credit
Agreement and the SOMSC Credit Agreement;

(e) Indebtedness secured by Liens permitted pursuant to Section
6.15(f); and

(f) other Indebtedness of either Loan Party or any of its
Subsidiaries to the extent not otherwise included in subparagraphs (a)
through (e) of this Section 6.11, or in Section 6.14, in an aggregate
amount outstanding at any one time not to exceed $5,000,000.

6.12. Merger. No Loan Party will, nor will it permit any Significant
Subsidiary to, merge or consolidate with or into any other Person, except that:

(a) a Wholly-Owned Subsidiary may merge with (i) either Loan Party,
(ii) any Wholly-Owned Subsidiary of either Loan Party or (iii) any other
Person so long as no Default or Unmatured Default shall have occurred or be
continuing before and after giving effect to such merger and the surviving
entity of such merger is a Wholly-Owned Subsidiary of either Loan Party;

(b) a Significant Subsidiary (other than the Borrower and FAE (as
defined after giving effect to the FAE Merger)) may merge or consolidate
with any Person so long as neither Parent, the Borrower, nor any of their
Subsidiaries shall hold any capital stock of such Significant Subsidiary
after giving effect to such merger or consolidation;

(c) either Loan Party may merge into any Person so long as (i) such
Loan Party is the surviving entity of such merger, (ii) no Default or
Unmatured Default shall have occurred or be continuing before and after
giving effect to such merger and (iii) the

<PAGE>

covenants contained in Section 6.20 shall be complied with on a pro forma basis
on the date of, and after giving effect to, such merger;

(d) the FAE Merger shall be permitted; and

(e) after consummation of the FAE Merger, FAE and any subsidiary of
FAE may merge or consolidate with any other Person.

6.13. Investments and Purchases. No Loan Party will, and will not
permit any of its Subsidiaries (other than an Unrestricted Subsidiary) to, make
or suffer to exist any Investments (including, without limitation, loans and
advances to, and other Investments in, Subsidiaries of either Loan Party), or
commitments therefor, or create any Subsidiary or become or remain a partner in
any partnership or joint venture, or make any Purchases, except:

(a) Investments in existence on the date hereof;

(b) loans and advances to employees in the ordinary course of
business and consistent with past practices;

(c) Investments made in Subsidiaries and in Main Street America
Holdings, Inc., Folksamerica Holding Company Inc. and Financial Security
Assurance Holdings Ltd.;

(d) Purchases of businesses or entities engaged in the insurance
and/or insurance services business which do not constitute hostile
takeovers; and

(e) other Investments, so long as any such Investment is materially
consistent with such Loan Party's investment policy guidelines as approved
from time to time by the finance committee of the board of directors of
Parent and the board of directors of the Borrower (a copy of the current
version of such guidelines having been delivered to each Lender); provided
that any change from the guidelines previously submitted to the Lenders
shall not materially adversely affect the Lenders.

6.14. Contingent Obligations. No Loan Party will, nor will it permit
any of its Subsidiaries (other than an Unrestricted Subsidiary) to, make or
suffer to exist any Contingent Obligation (including, without limitation, any
Contingent Obligation with respect to the obligations of a Subsidiary of either
Loan Party), except (a) the issuance of financial guarantees in the ordinary
course of business, (b) by endorsement of instruments for deposit or collection
in the ordinary course of business, (c) for insurance policies issued in the
ordinary course of business and (d) the issuance of intercompany guarantees so
long as the primary obligation is permitted under this Agreement.

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<PAGE>

6.15. Liens. No Loan Party will, nor will it permit any of its
Subsidiaries (other than an Unrestricted Subsidiary) to, create, incur, or
suffer to exist any Lien in, of or on the Property (other than Margin Stock) of
such Loan Party or any of its Subsidiaries (other than an Unrestricted
Subsidiary), except:

(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;

(e) Liens existing on the date hereof and described in Schedule
6.15 hereto;

(f) Liens in, of or on Property acquired after the date of this
Agreement (by purchase, construction or otherwise) by either Loan Party or
any of its Subsidiaries, each of which Liens either (1) existed on such
Property before the time of its acquisition and was not created in
anticipation thereof, or (2) was created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including the cost of construction) of such Property; provided that
no such Lien shall extend to or cover any Property of such Loan Party or
such Subsidiary other than the Property so acquired and improvements
thereon; and provided, further, that the principal amount of Indebtedness
secured by any such Lien shall at the time the Lien is incurred not exceed
75% of the fair market value (as determined in good faith by a financial
officer of such Loan Party and, in the case of any Property having a fair
market value in excess of $500,000, certified by such officer to the
Agent, with a copy for each Lender)

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<PAGE>

of the Property at the time it was so acquired; and

(g) Liens not otherwise permitted by the foregoing clauses (a) through (f)
securing any Indebtedness of either Loan Party, provided that the aggregate
principal amount of Indebtedness secured by Liens permitted by this clause (g)
shall not exceed $3,000,000 at any time.

6.16. Affiliates. No Loan Party will, and will not permit any of its
Subsidiaries to, enter into any material transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliates (other than a Wholly-Owned Subsidiary of
either Loan Party), except in the ordinary course of business and pursuant to
the reasonable requirements of such Loan Party's or such Subsidiary's business
and upon fair and reasonable terms no less favorable to such Loan Party or such
Subsidiary than such Loan Party or such Subsidiary would obtain in a comparable
arms-length transactions, except that any Unrestricted Subsidiary may make loans
to Holdings.

6.17. Environmental Matters. Each Loan Party shall and shall cause
each of its Subsidiaries to (a) at all times comply in all material respects
with all applicable Environmental Laws and (b) promptly take any and all
necessary remedial actions in response to the presence, storage, use, disposal,
transportation or Release of any Hazardous Materials on, under or about any real
property owned, leased or operated by such Loan Party or any of its
Subsidiaries.

6.18. Change in Corporate Structure; Fiscal Year. No Loan Party shall,
nor shall it permit any of its Subsidiaries to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders or (b)
change its Fiscal Year to end on any date other than December 31 of each year.

6.19. Inconsistent Agreements. No Loan Party shall, nor shall it
permit any of its Subsidiaries (other than an Unrestricted Subsidiary) to, enter
into any indenture, agreement, instrument or other arrangement which by its
terms (a) other than pursuant to the White Mountains Credit Agreement or
pursuant to agreements or arrangements with regulatory agencies with regard to
Insurance Subsidiaries, directly or indirectly contractually prohibits or
restrains, or has the effect of contractually prohibiting or restraining, or
contractually imposes materially adverse conditions upon, the incurrence of the
Obligations, the granting of Liens to secure the Obligations, the amending of
the Loan Documents or the ability of any Subsidiary to (i) pay dividends or make
other distributions on its capital stock, (ii) make loans or advances to such
Loan Party or (iii) repay loans or advances from such Loan Party or (b) contains
any provision which would be violated or breached by the making of Advances or
by the performance by such Loan Party or any of its Subsidiaries of any of its
obligations under any Loan Document.

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6.20. Financial Covenants. Parent shall (or, in the case of
Section 6.20.5, shall cause its Insurance Subsidiaries to):

6.20.1. Minimum Adjusted Net Worth. At all times after the date hereof,
maintain a minimum Adjusted Net Worth at least equal to the sum of (a) an amount
equal to 85% of Net Worth (without giving effect to Parent's equity interests in
FAE (as defined after giving effect to the FAE Merger) and SOMSC) as of July 31,
1997, plus (b) an amount equal to 85% of the cash and non-cash proceeds of any
equity securities issued by Parent after July 30, 1997, plus (c) an amount equal
to (i) $75,000,000 minus (ii) the aggregate amount of mandatory commitment
reductions pursuant to Section 2.7(b)(i) of the White Mountains Credit Agreement
which occur after July 30, 1997 from the Net Available Proceeds (as defined in
the White Mountains Credit Agreement) of all sales by Parent of its equity
interests in FAE (as defined after giving effect to the FAE Merger) or SOMSC
minus (iii) the aggregate amount of Permitted Reinvestments made by Parent after
July 30, 1997 utilizing proceeds of sales of its equity interests in FAE (as
defined after giving effect to the FAE Merger) or SOMSC ("Specified Permitted
Reinvestments"), plus (d) an amount equal to 85% of Specified Permitted
Reinvestments made after July 30, 1997.

6.20.2. Leverage Ratio. At all times after the date hereof, maintain a
Leverage Ratio of not greater than 30% through and including December 31, 1999
and (b) not greater than 25% at all times thereafter.

6.20.3. Fixed Charges Coverage Ratio. As of the end of each Fiscal
Quarter maintain a Fixed Charges Coverage Ratio of not less than 1.5:1.0

6.20.4 Finance Assets Ratio. At any time Loans are outstanding and the
sum of cash and Money Market Investments of Parent is less than the aggregate
outstanding principal amount of Funded Indebtedness of Parent at such time,
maintain a Finance Assets Ratio of not less than 2.5:1.0.

6.20.5 Statutory Surplus. At all times, maintain Statutory Surplus for
each Insurance Subsidiary of Parent in an amount not less than an amount equal
to (a) 85% of the Statutory Surplus of each such Insurance Subsidiary on
September 30, 1996, plus (b) 85% of all subsequent capital contributions to each
such Insurance Subsidiary, less (c) in the event such Insurance Subsidiary
dividends or otherwise distributes to its parent all the capital stock of a
Wholly-Owned Insurance Subsidiary, 100% of the book value (calculated in
accordance with SAP) of such Wholly-Owned Insurance Subsidiary at the time of
such dividend or distribution.

6.21. Tax Consolidation. No Loan Party will and will not permit any
of its Subsidiaries to (a) file or consent to the filing of any consolidated,
combined or unitary income tax return with any Person other than Holdings and
its Subsidiaries or (b) amend, terminate or fail to enforce any existing tax
sharing agreement or similar arrangement if such action would

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cause a Material Adverse Effect.

6.22. ERISA Compliance.

With respect to any Plan, no Loan Party nor any of its Subsidiaries
shall:

(b) incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) in excess of $100,000, whether or not
waived, or permit any Unfunded Liability to exceed $100,000;

(c) permit the occurrence of any Termination Event which could result
in a liability to either Loan Party or any other member of the Controlled
Group in excess of $100,000;

(e) permit the establishment or amendment of any Plan or fail to
comply with the applicable provisions of ERISA and the Code with respect to
any Plan which could result in liability to either Loan Party or any other
member of the Controlled Group which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.

ARTICLE VII

DEFAULTS

The occurrence of any one or more of the following events shall constitute
a Default:

7.1. Any representation or warranty made or deemed made by or on
behalf of either Loan Party or any of its Subsidiaries to the Lenders or the
Agent under or in connection with this Agreement, any other Loan Document,
any Loan, or any certificate or information delivered in connection with this
Agreement or any other Loan Document shall be false in any material

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respect on the date as of which made.

7.2. Nonpayment of (a) any principal of any Note when due, or (b)
any interest upon any Note or any commitment fee or other fee or obligations
under any of the Loan Documents within five days after the same becomes due.

7.3. The breach by either Loan Party of any of the terms or
provisions of Section 6.2, Section 6.3(a) or Sections 6.10 through 6.16 or
Section 6.18 through 6.22.

7.4. The breach by either Loan Party (other than a breach which
constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or
provisions of this Agreement which is not remedied within twenty (20) days
after written notice from the Agent or any Lender.

7.5. The default by either Loan Party or any of its Subsidiaries
(or, at any time Parent is a Subsidiary of Holdings, by Holdings) in the
performance of any term, provision or condition contained in any agreement or
agreements under which any Funded Indebtedness aggregating in excess of
$2,000,000 ($10,000,000 in the case of Holdings and FAE and $20,000,000, or
such lower cross default threshold amount as is provided in the SOMSC Credit
Agreement, in the case of SOMSC) was created or is governed, or the
occurrence of any other event or existence of any other condition, the effect
of any of which is to cause, or to permit the holder or holders of such
Funded Indebtedness to cause, such Funded Indebtedness to become due prior to
its stated maturity; or any such Funded Indebtedness of either Loan Party or
any of its Subsidiaries or Holdings shall be declared to be due and payable
or required to be prepaid (other than by a regularly scheduled payment) prior
to the stated maturity thereof.

7.6. Either Loan Party or any of its Significant Subsidiaries shall
(a) have an order for relief entered with respect to it under the Federal
bankruptcy laws as now or hereafter in effect, (b) make an assignment for the
benefit of creditors, (c) apply for, seek, consent to, or acquiesce in, the
appointment of a receiver, custodian, trustee, examiner, liquidator or
similar official for it or any substantial portion of its Property, (d)
institute any proceeding seeking an order for relief under the Federal
bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief
of debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (e) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 7.6, (f) fail to contest in good faith any appointment or proceeding
described in Section 7.7 or (g) become unable to pay, not pay, or admit in
writing its inability to pay, its debts generally as they become due.

7.7. Without the application, approval or consent of the relevant
Loan Party or any of

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its Significant Subsidiaries, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for either Loan Party or any of its
Significant Subsidiaries or any substantial portion of its Property, or a
proceeding described in Section 7.6(d) shall be instituted against either Loan
Party or any of its Significant Subsidiaries and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a period
of sixty consecutive days.

7.8. Either Loan Party or any of its Subsidiaries shall fail within
thirty days to pay, bond or otherwise discharge any judgment or order for the
payment of money in excess of $1,000,000 (or multiple judgments or orders for
the payment of an aggregate amount in excess of $5,000,000), which is not
stayed on appeal or otherwise being appropriately contested in good faith and
as to which no enforcement actions have been commenced.

7.9. Any Change in Control shall occur.

7.11. Any License of any Insurance Subsidiary of Parent (a) shall be
revoked by the Governmental Authority which issued such License, or any action
(administrative or judicial) to revoke such License shall have been commenced
against such Insurance Subsidiary and shall not have been dismissed within
thirty (30) days after the commencement thereof, (b) shall be suspended by such
Governmental Authority for a period in excess of thirty (30) days or (c) shall
not be reissued or renewed by such Governmental Authority upon the expiration
thereof following application for such reissuance or renewal of such Insurance
Subsidiary, which in any case, could reasonably be expected to have a Material
Adverse Effect.

7.12. Any Insurance Subsidiary of Parent shall be the subject of a
final non-appealable order imposing a fine by or at the request of any state
insurance regulatory agency as a result of the violation by such Insurance
Subsidiary of such state's applicable insurance laws or the regulations
promulgated in connection therewith which could reasonably be expected to have a
Material Adverse Effect.

7.13. Any Insurance Subsidiary of Parent shall become subject to any
conservation, rehabilitation or liquidation order, directive or mandate issued
by any Governmental Authority or any Insurance Subsidiary shall become subject
to any other directive or mandate issued by any Governmental Authority in either
case which could reasonably be expected to have a Material Adverse Effect and
which is not stayed within thirty (30) days.

7.14. The Guaranty shall fail to remain in full force or effect or any
action shall be

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taken to discontinue or to assert the invalidity or unenforceability of the
Guaranty, or Parent shall fail to comply with any of the terms or provisions of
the Guaranty, or shall deny, or give notice to such effect, that it has any
further liability under the Guaranty.

ARTICLE VIII

ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

8.2. Amendments. Subject to the provisions of this Article VIII,
the Required Lenders (or the Agent with the consent in writing of the
Required Lenders) and the Loan Parties may enter into agreements supplemental
hereto for the purpose of adding or modifying any provisions to the Loan
Documents or changing in any manner the rights of the Lenders or either Loan
Party hereunder or waiving any Default hereunder; provided, however, that no
such supplemental agreement shall, without the consent of each Lender:

(a) Extend the final maturity of any Loan or Note or reduce the
principal amount thereof, or, subject to Section 2.11, reduce the rate or
extend the time of payment of interest or fees thereon;

(b) Reduce the percentage specified in the definition of
Required Lenders;

(c) Reduce the amount of or extend the date for the mandatory
payments and commitment reductions required under Section 2.1(b) or 2.7, or
increase the amount of

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the Commitment of any Lender hereunder;

(d) Extend the Facility Termination Date or reduce the amount or
extend the time of any mandatory commitment reduction required by Section
2.7;

(e) Amend this Section 8.2;

(f) Release Parent from the Guaranty; or

(g) Permit any assignment by either Loan Party of its Obligations or
its rights hereunder.

8.3. Preservation of Rights. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
either Loan Party to satisfy the conditions precedent to such Loan shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid in
full.

ARTICLE IX

GENERAL PROVISIONS

9.1. Survival of Representations. All representations and warranties of
each Loan Party contained in this Agreement or either Loan Party or any of its
Subsidiaries contained in any Loan Document shall survive delivery of the Notes
and the making of the Loans herein contemplated.

9.2. Governmental Regulation. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.

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9.4. Headings. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.

9.5. Entire Agreement. The Loan Documents embody the entire agreement and
understanding among the Loan Parties, the Agent and the Lenders and supersede
all prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof other than the fee letter, dated
July 30, 1997, in favor of First Chicago.

9.7. Expenses; Indemnification. Each Loan Party agrees to reimburse the
Agent for any costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, amendment, modification,
and administration of the Loan Documents. Each Loan Party also agrees to
reimburse the Agent and the Lenders for any reasonable costs, internal charges
and out-of-pocket expenses (including attorneys' fees and time charges of
attorneys for the Agent and the Lenders, which attorneys may be employees of the
Agent or the Lenders) paid or incurred by the Agent or any Lender in connection
with the collection and enforcement of the Loan Documents. Each Loan Party
further agrees to indemnify the Agent and each Lender, its directors, officers
and employees against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Agent or any Lender is a
party thereto) which any of them may pay or incur arising out of or relating to
this Agreement, the other Loan Documents, the transactions contemplated hereby
or thereby or the direct or indirect application or proposed application of the
proceeds of any Loan hereunder arising from claims or assertions by third
parties except to the extent that they arise out of the gross negligence or
willful misconduct of the party seeking indemnification. The obligations of
each Loan Party under this Section shall survive the termination of this
Agreement.

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9.11. Nonliability of Lenders. The relationship between the Borrower
and the Lenders and the Agent shall be solely that of borrower and lender.
Neither the Agent nor any Lender shall have any fiduciary responsibilities to
either Loan Party. Neither the Agent nor any Lender undertakes any
responsibility to either Loan Party to review or inform either Loan Party of any
matter in connection with any phase of either Loan Party's business or
operations. Each Loan Party shall rely entirely upon its own judgment with
respect to its business, and any review, inspection or supervision of, or
information supplied to either Loan Party by the Agent or the Lenders is for the
protection of the Agent and the Lenders and no Loan Party nor any other Person
is entitled to rely thereon. Whether or not such damages are related to a
claim that is subject to the waiver effected above and whether or not such
waiver is effective, neither the Agent nor any Lender shall have any liability
with respect to, and each Loan Party hereby waives, releases and agrees not to
sue for, any special, indirect or consequential damages suffered by either Loan
Party in connection with, arising out of, or in any way related to the Loan
Documents or the transactions contemplated thereby or the relationship
established by the Loan Documents, or any act, omission or event occurring in
connection therewith.

9.13. CONSENT TO JURISDICTION. EACH LOAN PARTY HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR
ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO ANY LOAN DOCUMENTS AND EACH LOAN PARTY HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND

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DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL
LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST EITHER
LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY
EITHER LOAN PARTY AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT
OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING
OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN
A COURT IN CHICAGO, ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN
OTHER COURTS IF JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO,
ILLINOIS.

9.14. WAIVER OF JURY TRIAL. EACH LOAN PARTY, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.

9.15. Disclosure. Each Loan Party and each Lender hereby (a)
acknowledge and agree that First Chicago and/or its Affiliates from time to time
may hold other investments in, make other loans to or have other relationships
with either Loan Party, including, without limitation, in connection with any
interest rate hedging instruments or agreements or swap transactions, and (b)
waive any liability of First Chicago or such Affiliate to either Loan Party or
any Lender, respectively, arising out of or resulting from such investments,
loans or relationships other than liabilities arising out of the gross
negligence or willful misconduct of First Chicago or its Affiliates to the
extent that such liability would not have arisen but for First Chicago's status
as Agent hereunder.

9.16. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by
each Loan Party, the Agent and the Lenders and each party has notified the Agent
that it has taken such action.

9.17. Treatment of Certain Information: Confidentiality.

(a) Each Loan Party acknowledges that (i) services may be
offered or provided to it (in connection with this Agreement or otherwise) by
each Lender or by one or more subsidiaries or affiliates of such Lender and
(ii) information delivered to each Lender by

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such Loan Party and its Subsidiaries may be provided to each such Subsidiary
and Affiliate, it being understood that any such Subsidiary or Affiliate
receiving such information shall be bound by the provisions of clause (b)
below as if it were a Lender hereunder.

(b) Each Lender and the Agent agrees (on behalf of itself and each
of its affiliates, directors, officers, employees and representatives) to use
reasonable precautions to keep confidential, in accordance with their
customary procedures for handling confidential information of this nature and
in accordance with safe and sound banking practices, any non-public
information supplied to it by either Loan Party pursuant to this Agreement,
provided that nothing herein shall limit the disclosure of any such
information (i) to the extent required by statue, rule, regulation or
judicial process, (ii) to counsel for any of the Lenders or the Agent, (iii)
to bank examiners, auditors or accountants, (iv) to the Agent or any other
Lender (or to First Chicago Capital Markets, Inc.), (v) in connection with
any litigation to which any one or more of the Lenders or the Agent is a
party, (vi) to a subsidiary or affiliate of such Lender as provided in clause
(a) above, (vii) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee
or participant) agrees with the respective Lender to keep such information
confidential on substantially the terms set forth in this Section 9.17(b),
(viii) to any other Person as may be reasonably required in the course of the
enforcement of any Lender's rights or remedies hereunder or under any of such
Lender's Note, or (ix) to any other creditor of either Loan Party or any of
its Subsidiaries at any time during the continuance of a Default; provided
that in no event shall any Lender or the Agent be obligated or required to
return any materials furnished by either Loan Party.

ARTICLE X

THE AGENT

10.1. Appointment. First Chicago is hereby appointed Agent hereunder
and under each other Loan Document, and each of the Lenders authorizes the Agent
to act as the agent of such Lender. The Agent agrees to act as such upon the
express conditions contained in this Article X. The Agent shall not have a
fiduciary relationship in respect of either Loan Party or any Lender by reason
of this Agreement.

10.3. General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to either Loan Party or any Lender
for any action taken or omitted to be

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taken by it or them hereunder or under any other Loan Document or in connection
herewith or therewith except for its or their own gross negligence or willful
misconduct.

10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible for
or have any duty to ascertain, inquire into, or verify (a) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder, (b) the performance or observance of any of the covenants
or agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (c) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered to the Agent and not waived at
closing, or (d) the validity, effectiveness, sufficiency, enforceability or
genuineness of any Loan Document or any other instrument or writing furnished in
connection therewith. The Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by either Loan Party to the
Agent at such time, but is voluntarily furnished by either Loan Party to the
Agent (either in its capacity as Agent or in its individual capacity).

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<PAGE>

10.8. Agent's Reimbursement and Indemnification. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (a) for any amounts not
reimbursed by either Loan Party for which the Agent is entitled to reimbursement
by such Loan Party under the Loan Documents, (b) for any other expenses incurred
by the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents, and
(c) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby, or
the enforcement of any of the terms thereof or of any such other documents;
provided, that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Agent. The
obligations of the Lenders under this Section 10.8 shall survive payment of the
Obligations and termination of this Agreement.

10.9. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.

10.10. Rights as a Lender. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender, including, without limitation, pursuant to Article XII
hereof, and may exercise the same as though it were not the Agent, and the term
"Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the
context otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of trust, debt, equity or other transaction, in addition to those contemplated
by this Agreement or any other Loan Document, with either Loan Party or any of
its Subsidiaries in which such Loan Party or such Subsidiary is not restricted
hereby from engaging with any other Person.

10.11. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and
based on the financial statements prepared by the Loan Parties and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and
without reliance upon the Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue
to make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents.

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10.12. Successor Agent. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, on behalf of the Lenders, a successor Agent, which
successor Agent, so long as no Default is continuing, shall be reasonably
acceptable to the Borrower. If no successor Agent shall have been so appointed
by the Required Lenders and shall have accepted such appointment within thirty
days after the resigning Agent's giving notice of its intention to resign, then
the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Agent, which successor Agent, so long as no Default is continuing,
shall be reasonably acceptable to the Borrower. If the Agent has resigned and
no successor Agent has been appointed, the Lenders may perform all the duties of
the Agent hereunder and the Borrower shall make all payments in respect of the
Obligations to the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to be appointed
hereunder until such successor Agent has accepted the appointment. Any such
successor Agent shall be a commercial bank having capital and retained earnings
of at least $50,000,000 and with a Lending Installation in the United States of
America. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the resigning
Agent. Upon the effectiveness of the resignation of the Agent, the resigning
Agent shall be discharged from its duties and obligations hereunder and under
the Loan Documents. After the effectiveness of the resignation of an Agent, the
provisions of this Article X shall continue in effect for its benefit in respect
of any actions taken or omitted to be taken by it while it was acting as the
Agent hereunder and under the other Loan Documents.

ARTICLE XI

SETOFF; RATABLE PAYMENTS

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demand, to purchase a portion of the Loans held by the other Lenders so that
after such purchase each Lender will hold its ratable proportion of Loans. If
any Lender, whether in connection with setoff or amounts which might be subject
to setoff or otherwise, receives collateral or other protection for its
Obligations or such amounts which may be subject to setoff, such Lender agrees,
promptly upon demand, to take such action necessary such that all Lenders share
in the benefits of such collateral ratably in proportion to their Loans. In
case any such payment is disturbed by legal process, or otherwise, appropriate
further adjustments shall be made. If an amount to be setoff is to be applied
to Indebtedness of the Borrower to a Lender, other than Indebtedness evidenced
by any of the Notes held by such Lender, such amount shall be applied ratably to
such other Indebtedness and to the Indebtedness evidenced by such Notes.

ARTICLE XII

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

12.1. Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of each Loan Party and
the Lenders and their respective successors and assigns, except that (a) no Loan
Party shall have the right to assign its rights or obligations under the Loan
Documents, and (b) any assignment by any Lender must be made in compliance with
Section 12.3. Notwithstanding clause (b) of the preceding sentence, any Lender
may at any time, without the consent of either Loan Party or the Agent, assign
all or any portion of its rights under this Agreement and its Notes to a Federal
Reserve Bank; provided, however, that no such assignment to a Federal Reserve
Bank shall release the transferor Lender from its obligations hereunder. The
Agent may treat the payee of any Note as the owner thereof for all purposes
hereof unless and until such payee complies with Section 12.3 in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Agent. Any assignee or transferee of a Note
agrees by acceptance thereof to be bound by all the terms and provisions of the
Loan Documents. Any request, authority or consent of any Person, who at the
time of making such request or giving such authority or consent is the holder of
any Note, shall be conclusive and binding on any subsequent holder, transferee
or assignee of such Note or of any Note or Notes issued in exchange therefor.

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<PAGE>

12.2. Participations.

12.2.1. Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities ("Participants") participating
interests in any Loan owing to such Lender, any Note held by such Lender, any
Commitment of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating interests
to a Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and each Loan Party and
the Agent shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under the Loan Documents.

12.2.2. Voting Rights. Each Lender shall retain the sole
right to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other than any
amendment, modification or waiver which effects any of the modifications
referenced in clauses (a) through (f) of Section 8.2.

12.2.3. Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in Section
11.1 in respect of its participating interest in amounts owing under the Loan
Documents to the same extent as if the amount of its participating interest
were owing directly to it as a Lender under the Loan Documents; provided,
that each Lender shall retain the right of setoff provided in Section 11.1
with respect to the amount of participating interests sold to each
Participant. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in Section 11.1,
agrees to share with each Lender, any amount received pursuant to the
exercise of its right of setoff, such amounts to be shared in accordance with
Section 11.2 as if each Participant were a Lender.

12.3. Assignments.

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<PAGE>

12.3.1. Permitted Assignments. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any time
assign to one or more banks or other entities ("Purchasers") all or any part
of its rights and obligations under the Loan Documents; provided, however,
that in the case of an assignment to an entity which is not a Lender or an
Affiliate of a Lender, such assignment shall be in a minimum amount (when
added to the amount of the assignment of such Lender's obligations under the
White Mountains Credit Agreement) of $5,000,000 (or, if less, the entire
amount of such Lender's Commitment). Such assignment shall be substantially
in the form of Exhibit C hereto or in such other form as may be agreed to by
the parties thereto. The consent of the Agent and, so long as no Default
under Section 7.2, 7.6 or 7.7 is continuing, the Borrower, shall be required
prior to an assignment becoming effective with respect to a Purchaser which
is not a Lender or an Affiliate thereof. Such consent shall not be
unreasonably withheld. Notwithstanding anything to the contrary contained
herein, any assignment by a Lender of its rights and obligations under the
Loan Documents shall be accompanied by an assignment to the same assignee of
the same ratable share of the rights and obligations of such Lender under the
White Mountains Credit Agreement in respect of its obligations thereunder.

12.3.2. Effect; Effective Date. Upon (a) delivery to the Agent of
a notice of assignment, substantially in the form attached as Exhibit I to
Exhibit C hereto (a "Notice of Assignment"), together with any consents
required by Section 12.3.1, and (b) payment of a $3,000 fee to the Agent for
processing such assignment, such assignment shall become effective on the
effective date specified in such Notice of Assignment. On and after the
effective date of such assignment, (a) such Purchaser shall for all purposes
be a Lender party to this Agreement and any other Loan Document executed by
the Lenders and shall have all the rights and obligations of a Lender under
the Loan Documents, to the same extent as if it were an original party
hereto, and (b) the transferor Lender shall be released with respect to the
percentage of the Aggregate Commitment and Loans assigned to such Purchaser
without any further consent or action by the Borrower, the Lenders or the
Agent. Upon the consummation of any assignment to a Purchaser pursuant to
this Section 12.3.2, the transferor Lender, the Agent and the Borrower shall
make appropriate arrangements so that replacement Notes are issued to such
transferor Lender and new Notes or, as appropriate, replacement Notes, are
issued to such Purchaser, in each case in principal amounts reflecting their
Commitment, as adjusted pursuant to such assignment.

12.4. Dissemination of Information. Subject to Section 9.18(b), each
Loan Party authorizes each Lender to disclose to any Participant or Purchaser or
any other Person acquiring an interest in the Loan Documents by operation of law
(each a "Transferee") and any prospective Transferee any and all information in
such Lender's possession concerning the creditworthiness of such Loan Party and
its Subsidiaries.

12.5. Tax Treatment. If any interest in any Loan Document is
transferred to any

60
<PAGE>

Transferee which is organized under the laws of any jurisdiction other than the
United States or any State thereof, the transferor Lender shall cause such
Transferee, concurrently with the effectiveness of such transfer, to comply with
the provisions of Section 2.18.

ARTICLE XIII

NOTICES

13.2. Change of Address. Either Loan Party, the Agent and any Lender
may each change the address for service of notice upon it by a notice in writing
to the other parties hereto.

ARTICLE XIV

GUARANTY

14.1. Parent hereby absolutely, irrevocably and unconditionally
guarantees prompt, full and complete payment when due, whether at stated
maturity, upon acceleration or otherwise, and at all times thereafter, of (a)
the principal of and interest on the Advances made by the Lenders to, and the
Notes held by the Lenders of, the Borrower and (b) all other amounts from time
to time owing to the Lenders by the Borrower under this Agreement, the Notes and
the other Loan Documents, including without limitation all Obligations of the
Borrower (solely for purposes of this Article XIV, collectively referred to as
the "Guaranteed Debt"). This is a guaranty of payment, not a guaranty of
collection.

14.2. Parent waives notice of the acceptance of this Article XIV
(solely for purposes of this Article XIV, referred to as the "Guaranty") and of
the extension or incurrence of the Guaranteed Debt or any part thereof. Parent
further waives all setoffs and counterclaims and presentment, protest, notice,
filing of claims with a court in the event of receivership, bankruptcy or
reorganization of the Borrower, demand or action on delinquency in respect of
the Guaranteed

61
<PAGE>

Debt or any part thereof, including any right to require the Agent or any Lender
to sue the Borrower, or any other person obligated with respect to the
Guaranteed Debt or any part thereof, or otherwise to enforce payment thereof
against any collateral securing the Guaranteed Debt or any part thereof.

14.3. Parent hereby agrees that, to the fullest extent permitted by
law, its obligations hereunder shall be continuing, absolute and unconditional
under any and all circumstances and not subject to any reduction, limitation,
impairment, termination, defense (other than indefeasible payment in full),
setoff, counterclaim or recoupment whatsoever (all of which are hereby expressly
waived by it to the fullest extent permitted by law), whether by reason of any
claim of any character whatsoever, including, without limitation, any claim of
waiver, release, surrender, alteration or compromise. The validity and
enforceability of this Guaranty shall not be impaired or affected by any of the
following: (a) any extension, modification or renewal of, or indulgence with
respect to, or substitution for, the Guaranteed Debt or any part thereof or any
agreement relating thereto at any time; (b) any failure or omission to perfect
or maintain any lien on, or preserve rights to, any security or collateral or to
enforce any right, power or remedy with respect to the Guaranteed Debt or any
part thereof or any agreement relating thereto, or any collateral securing the
Guaranteed Debt or any part thereof; (c) any waiver of any right, power or
remedy or of any default with respect to the Guaranteed Debt or any part thereof
or any agreement relating thereto or with respect to any collateral securing the
Guaranteed Debt or any part thereof; (d) any release, surrender, compromise,
settlement, waiver, subordination or modification, with or without
consideration, of any collateral securing the Guaranteed Debt or any part
thereof, any other guaranties with respect to the Guaranteed Debt or any part
thereof, or any other obligations of any person or entity with respect to the
Guaranteed Debt or any part thereof; (e) the enforceability or validity of the
Guaranteed Debt or any part thereof or the genuineness, enforceability or
validity of any agreement relating thereto or with respect to any collateral
securing the Guaranteed Debt or any part thereof; (f) the application of
payments received from any source to the payment of indebtedness other than the
Guaranteed Debt, any part thereof or amounts which are not covered by this
Guaranty even though the Agent or any Lender might lawfully have elected to
apply such payments to any part or all of the Guaranteed Debt or to amounts
which are not covered by this Guaranty; (g) any change of ownership of the
Borrower or the insolvency, bankruptcy or any other change in the legal status
of the Borrower; (h) any change in, or the imposition of, any law, decree,
regulation or other governmental act which does or might impair, delay or in any
way affect the validity, enforceability or the payment when due of the
Guaranteed Debt; (i) the failure of the Borrower to maintain in full force,
validity or effect or to obtain or renew when required all governmental and
other approvals, licenses or consents required in connection with the Guaranteed
Debt or this Guaranty, or to take any other action required in connection with
the performance of all obligations pursuant to the Guaranteed Debt or this
Guaranty; (j) the existence of any claim, setoff or other rights which Parent
may have at any time against the Borrower in connection herewith or with any
unrelated transaction; (k) the Agent's or any Lender's election, in any case or
proceeding instituted under chapter 11 of the

62
<PAGE>

Bankruptcy Code, of the application of section 1111(b)(2) of the Bankruptcy
Code; (l) any borrowing, use of cash collateral, or grant of a security interest
by the Borrower, as debtor in possession, under section 363 or 364 of the United
States Bankruptcy Code; (m) the disallowance of all or any portion of the
Lender's claims for repayment of the Guaranteed Debt under section 502 or 506 of
the United States Bankruptcy Code; or (n) any other fact or circumstance which
might otherwise constitute grounds at law or equity for the discharge or release
of Parent from its obligations hereunder, all whether or not Parent shall have
had notice or knowledge of any act or omission referred to in the foregoing
clauses (a) through (n) of this paragraph. It is agreed that Parent's
liability hereunder is independent of any other guaranties or other obligations
at any time in effect with respect to the Guaranteed Debt or any part thereof
and that Parent's liability hereunder may be enforced regardless of the
existence, validity, enforcement or non-enforcement of any such other guaranties
or other obligations or any provision of any applicable law or regulation
purporting to prohibit payment by the Borrower of the Guaranteed Debt in the
manner agreed upon between the Agent, the Lenders and the Borrower.

14.4. Credit may be granted or continued from time to time by the Agent
and/or any Lender to the Borrower without notice to or authorization from Parent
regardless of the Borrower's financial or other condition at the time of any
such grant or continuation. Neither the Agent nor any Lender shall have any
obligation to disclose or discuss with Parent its assessment of the financial
condition of the Borrower.

14.5. Until the irrevocable payment in full of the Obligations and
termination of all commitments which could give rise to any Obligation, Parent
shall have no right of subrogation with respect to the Guaranteed Debt and
hereby waives any right to enforce any remedy which the Agent and/or the Lenders
now has or may hereafter have against the Borrower, any endorser or any other
guarantor of all or any part of the Guaranteed Debt, and Parent hereby waives
any benefit of, and any right to participate in, any security or collateral
given to the Agent and/or the Lenders to secure payment of the Guaranteed Debt
or any part thereof or any other liability of the Borrower to the Agent and/or
the Lenders.

14.6. Parent authorizes the Agent and the Lenders to take any action or
exercise any remedy with respect to any collateral from time to time securing
the Guaranteed Debt, which the Agent and the Lenders in their sole discretion
(but subject, as applicable, to the terms of this Agreement and of any
documentation pursuant to which a Lien in such collateral is granted) shall
determine, without notice to Parent. Notwithstanding any reference herein to
any collateral securing any of the Guaranteed Debt, it is acknowledged that, on
the date hereof, neither Parent nor any of its Subsidiaries has granted, or has
any obligation to grant, any security interest in or other lien on any of its
property as security for the Guaranteed Debt.

14.7. In the event the Agent and the Lenders in their sole discretion
elect to give notice

63
<PAGE>

of any action with respect to any collateral securing the Guaranteed Debt or any
part thereof, ten (10) days' written notice mailed to Parent by ordinary mail at
the address shown hereon shall be deemed reasonable notice of any matters
contained in such notice. Parent consents and agrees that neither the Agent nor
any Lender shall be under any obligation to marshall any assets in favor of
Parent or against or in payment of any or all of the Guaranteed Debt.

14.8. In the event that acceleration of the time for payment of any of
the Guaranteed Debt is stayed upon the insolvency, bankruptcy or reorganization
of the Borrower, or otherwise, all such amounts shall nonetheless be payable by
Parent forthwith upon demand by the Agent. Parent further agrees that, to the
extent that the Borrower makes a payment or payments to the Agent or any Lender
on the Guaranteed Debt, or the Agent or any Lender receives any proceeds of
collateral securing the Guaranteed Debt, which payment or receipt of proceeds or
any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be returned or repaid to the Borrower,
its estate, trustee, receiver, debtor in possession or any other party,
including, without limitation, Parent, under any insolvency or bankruptcy law,
state or federal law, common law or equitable cause, then to the extent of such
payment, return or repayment, the obligation or part thereof which has been
paid, reduced or satisfied by such amount shall be reinstated and continued in
full force and effect as of the date when such initial payment, reduction or
satisfaction occurred.

14.9. No delay on the part of the Agent or any Lender in the exercise
of any right, power or remedy shall operate as a waiver thereof, and no single
or partial exercise by the Agent or any Lender of any right, power or remedy
shall preclude any further exercise thereof; nor shall any amendment,
supplement, modification or waiver of any of the terms or provisions of this
Guaranty be binding upon the Agent or any Lender, except as expressly set forth
in a writing duly signed and delivered by the Agent and the Lenders. The
failure by the Agent or any Lender at any time or times hereafter to require
strict performance by the Borrower or Parent of any of the provisions,
warranties, terms and conditions contained in any promissory note, security
agreement, agreement, guaranty, instrument or document now or at any time or
times hereafter executed pursuant to the terms of, or in connection with, this
Agreement by the Borrower or Parent and delivered to the Agent or any Lender
shall not waive, affect or diminish any right of the Agent or any Lender at any
time or times hereafter to demand strict performance thereof, and such right
shall not be deemed to have been waived by any act or knowledge of the Agent or
any Lender, its agents, officers or employees, unless such waiver is contained
in an instrument in writing duly signed and delivered by the Agent or such
Lender. No waiver by the Agent or any Lender of any default shall operate as a
waiver of any other default or the same default on a future occasion, and no
action by the Agent or any Lender permitted hereunder shall in any way affect or
impair the Agent's or such Lender's rights or powers, or the obligations of
Parent under this Guaranty. Any determination by a court of competent
jurisdiction of the amount of any Guaranteed Debt owing by the Borrower to the
Agent and the Lender shall be conclusive and binding on Parent irrespective of
whether Parent was a party to the suit or action in which such

64
<PAGE>

determination was made.

14.10. Subject to the provisions of Section 14.8, this guaranty shall
continue in effect until this Agreement has terminated, the Guaranteed Debt has
been paid in full and the other conditions of this guaranty have been satisfied.

ARTICLE XV

AMENDMENT AND RESTATEMENT

15.1. (a) This Agreement amends and restates in its entirety the Credit
Agreement, dated as of November 26, 1996, among Parent, the Borrower, the
financial institutions from time to time party thereto and First Chicago, as
agent (as amended, supplemented or otherwise modified through the date hereof,
the "Prior Credit Agreement") and, upon the Restatement Effective Date, the
terms and provisions of the Prior Credit Agreement shall, subject to this
Article XV, be superseded hereby and thereby. Prior to the Restatement
Effective Date, the Prior Credit Agreement shall continue to govern the making
of any Loans and any outstanding Loans and Obligations.

(b) Notwithstanding the amendment and restatement of the Prior
Credit Agreement by this Agreement, the Loans under, and as defined in, the
Prior Credit Agreement ("Continuing Loans") and all accrued interest, fees
and expenses owing to First Chicago and Fleet National Bank by the Borrower
shall remain outstanding as of the Restatement Effective Date and constitute
continuing Obligations under this Agreement. The Continuing Loans shall in
all respects be continuing, and this Agreement shall not be deemed to
evidence or result in a novation or repayment and re-borrowing of the
Continuing Loans. In furtherance of and without limiting the foregoing (i)
all interest, fees and expenses which have arisen under the Prior Credit
Agreement shall be paid on the applicable due date therefor specified in this
Agreement and (ii) from and after the Restatement Effective Date, the terms,
conditions and covenants governing the Continuing Loans shall be solely as
set forth in this Agreement, which shall supersede the Prior Credit Agreement
to the extent provided in this Article XV.

[signature pages to follow]

<PAGE>

IN WITNESS WHEREOF, each Loan Party, the Lenders and the Agent have
executed this Agreement as of the date first above written.

VALLEY GROUP, INC.

By:

Print Name:

Title:

Address: 80 South Main Street
Hanover, New Hampshire 03755

Attn:

Fax No.:
Tel. No.:

WHITE MOUNTAINS HOLDINGS, INC.

By:

Print Name:

Title:

Address: 80 South Main Street
Hanover, New Hampshire 03755

Attn:

Fax No.:
Tel. No.:

Commitments

THE FIRST NATIONAL BANK OF CHICAGO,
Commitment $ Individually and as Agent

66
<PAGE>

By:

Print Name:

Title:

Address: 153 West 51st Street
New York, NY 10019
Attn: Samuel W. Bridges
First Vice President

Fax No.: (212) 373-1393
Tel. No.: (212) 373-1142

$ [OTHER LENDERS]

Aggregate Initial
Commitment $

67
<PAGE>
Schedule 1
To Credit Agreement

Margins

Leverage Ratio is: LESS THAN 15% $15% LESS THAN 15% $15%

If Fixed Charges GREATER THAN 2:1 GREATER THAN 2:1 #2:1 #2:1
Coverage Ratio is:

The applicable
margin will be:

Applicable Facility .150% .175% .175% .200%
Fee Margin

Applicable .350% .450% .450% .550%
Eurodollar Margin
</TABLE>

The Leverage Ratio and Fixed Charges Coverage Ratio shall be
calculated by Parent as of the end of each of its Fiscal Quarters commencing
September 30, 1997 and shall be reported to the Agent pursuant to a
certificate executed by an authorized officer of Parent and delivered in
accordance with Section 6.1(g) of the Agreement. The foregoing margins shall
be adjusted, if necessary, quarterly as of the fifth day after the delivery
of the certificate provided for above; provided that if such certificate,
together with the financial statements to which such certificate relates, are
not delivered by the fifth day after the due date therefor specified in
Section 6.1(g), then until the fifth day after such delivery, each of the
margins specified above shall be as set forth in Column IV above. Until
adjusted as described above after September 30, 1997, the Applicable
Eurodollar Margin and Applicable Facility Fee Margin, as the case may be,
shall be as specified in Column II above.

<PAGE>

Exhibit 10(g)

FIRST AMENDMENT TO CREDIT AGREEMENT

This First Amendment (this "Amendment") is entered into as November 20,
1997 by and among White Mountains Holdings, Inc., a New Hampshire corporation
(the "Borrower"), The First National Bank of Chicago, individually and as agent
(the "Agent"), and the other financial institutions signatory hereto (the
"Lenders").

RECITALS

A. The Borrower, the Agent and the Lenders are party to that certain
Amended and Restated Credit Agreement, dated as of July 30, 1997 (the "Credit
Agreement"). Unless otherwise specified herein, capitalized terms used in this
Amendment shall have the meanings ascribed to them by the Credit Agreement.

B. The Borrower, the Agent and the Lenders wish to amend the Credit
Agreement on the terms and conditions set forth below.

Now, therefore, in consideration of the mutual execution hereof and other
good and valuable consideration, the parties hereto agree as follows:

I. AMENDMENTS

1. Article I of the Credit Agreement is hereby amended by inserting
the phrase ", ML (Bermuda) Holdings Ltd., TRG Associates, LLC" immediately after
the phrase "Folksamerica Holding Company Inc." appearing in clause (ii) of the
definition "Fixed Charges Covering Ratio" contained herein.

2. Section 6.11 of the Credit Agreement is amended by (i) deleting
the word "and" appearing at the end of clause (e) contained therein and (ii)
deleting clause (f) contained therein in its entirety and inserting in lieu
thereof the following new clauses (f) and (g):

"(f) Contingent Obligations permitted under Section 6.14; and

(g) other Indebtedness of the Borrower or any Subsidiary to the extent
not otherwise included in subparagraphs (a) through (f) of this
Section 6.11, in an aggregate amount outstanding at any one time not
to exceed $5,000,000.".

3. Section 6.14 of the Credit Agreement is amended by (i) deleting
the word "and" appearing at the end of clause (c) contained therein in its
entirety and inserting a comma in lieu thereof, (ii) deleting the period
appearing at the end of clause (d) contained therein in its entirety

<PAGE>

and inserting the word "and" in lieu thereof and (iii) inserting the following
new clause (e):

"(e) issuance of financial guarantees to the holders of seller notes
issued by ML (Bermuda) Holdings Ltd. or any of its Subsidiaries,
provided that the aggregate principal amount of all such financial
guarantees shall not at any time exceed 6,500,000 British Pounds.".

II. MISCELLANEOUS

1. Representations and Warranties of the Borrower. The Borrower
represents and warrants that:

(a) each of the representation and warranties set for in Article V of
the Credit Agreement is true and correct in all material respects on the
date hereof as if made on the date hereof; and

(b) immediately upon giving effect to this Amendment, no Default of
Unmatured Default has occurred and is continuing.

2. Conditions to Occurrence of Effective Date. This Amendment shall
become effective as of the date first written above upon the execution and
delivery of this Amendment by the Borrower and the Required Lenders.

3. Reference to and Effect Upon the Credit Agreement.

(a) Except as specifically amended above, the Credit Agreement and
the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.

(b) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Agent or any
Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document. Upon
the effectiveness of the amendment to the Credit Agreement effected by this
Amendment, each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of similar import shall mean and
be a reference to the Credit Agreement as amended hereby.

4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.

<PAGE>

5. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purposed.

6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
such counterparts shall constitute one of the same instrument.

* * *

3
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.

WHITE MOUNTAINS HOLDINGS, INC.

By _______________________________________

Title: _____________________________________

THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent

By _______________________________________

Title: _____________________________________

FLEET NATIONAL BANK

By ______________________________________

Title _____________________________________

<PAGE>

Exhibit 10(h)

FIRST AMENDMENT TO CREDIT AGREEMENT

This First Amendment (this "Amendment") is entered into as November 20,
1997 by and among Valley Group, Inc., an Oregon corporation (the "Borrower"),
White Mountains Holdings, Inc., a New Hampshire corporation ("Parent"), The
First National Bank of Chicago, individually and as agent (the "Agent"), and the
other financial institutions signatory hereto (the "Lenders").

RECITALS

A. The Borrower, Parent, the Agent and the Lenders are party to that
certain Amended and Restated Credit Agreement, dated as of July 30, 1997 (the
"Credit Agreement"). Unless otherwise specified herein, capitalized terms used
in this Amendment shall have the meanings ascribed to them by the Credit
Agreement.

B. The Borrower, Parent, the Agent and the Lenders wish to amend the
Credit Agreement on the terms and conditions set forth below.

Now, therefore, in consideration of the mutual execution hereof and other
good and valuable consideration, the parties hereto agree as follows:

I. AMENDMENTS

"(f) Contingent Obligations permitted under Section 6.14; and

(g) other Indebtedness of either Loan Party or any of its Subsidiaries
to the extent not otherwise included in subparagraphs (a) through (f)
of this Section 6.11, in an aggregate amount outstanding at any one
time not to exceed $5,000,000.".

<PAGE>

and inserting the word "and" in lieu thereof and (iii) inserting the following
new clause (e):

"(e) issuance by Parent of financial guarantees to the holders of
seller notes issued by ML (Bermuda) Holdings Ltd. or any of its
Subsidiaries, provided that the aggregate principal amount of all such
financial guarantees shall not at any time exceed 6,500,000 British
Pounds.".

II. MISCELLANEOUS

1. Representations and Warranties of the Borrower and Parent. The
Borrower and Parent each represent and warrant that:

(a) each of the representation and warranties set for in Article V of
the Credit Agreement is true and correct in all material respects on the
date hereof as if made on the date hereof; and

(b) immediately upon giving effect to this Amendment, no Default of
Unmatured Default has occurred and is continuing.

3. Reference to and Effect Upon the Credit Agreement.

(a) Except as specifically amended above, the Credit Agreement and
the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.

<PAGE>

5. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purposed.

* * *

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.

VALLEY GROUP, INC.

By
-----------------------------------------
Title:
-------------------------------------

WHITE MOUNTAINS HOLDINGS, INC.

By
-----------------------------------------
Title:
-------------------------------------

THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent

By
-----------------------------------------
Title:
-------------------------------------

FLEET NATIONAL BANK

By
-----------------------------------------
Title
-------------------------------------

<PAGE>
Exhibit 10(l)

SUBSCRIPTION AGREEMENT

This SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered into in
accordance with Section 503 of the New York Business Corporation Law as of the
6th day of November, 1997, by and among FOLKSAMERICA HOLDING COMPANY, INC., a
New York corporation (the "Company"), FUND AMERICAN ENTERPRISES HOLDINGS, INC.,
a Delaware corporation, ("Fund American"), WHITE MOUNTAINS HOLDINGS, INC., a
Delaware corporation ("White Mountains"; Fund American and White Mountains being
collectively referred to herein as "Fund American"), FOLKSAM MUTUAL GENERAL
INSURANCE COMPANY, an entity organized under the laws of Sweden ("Folksam
Mutual"), FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (publ), an entity organized
under the laws of Sweden ("Folksam International"; Folksam Mutual and Folksam
International being collectively referred to herein as "Folksam"), WIENER
STAEDTISCHE ALLGEMEINE VERSICHERUNG AG, a corporation organized under the laws
of Austria ("Wiener"), P&V ASSURANCES S.C., a corporation organized under the
laws of Belgium ("P&V"), and SAMVIRKE SKADEFORSIKRING AS, a corporation
organized under the laws of the Kingdom of Norway ("SAMVIRKE"); (collectively
Fund American, Folksam, Wiener, P&V and Samvirke are referred to herein as the
"Shareholders").

WHEREAS, the Company has 20,760,000 authorized shares of common stock, par
value $.01 per share ("Common Stock"), of which 6,920,000 are issued and
outstanding and 13,840,000 are currently reserved, and 20,760,000 shares of
authorized Preferred Stock, par value $.01 per share, of which 6,920,000 are
issued and outstanding; and

WHEREAS, the Shareholders wish to amend the Company Charter to increase the
number of authorized shares of Common Stock by 3,127,814; and

WHEREAS, the Shareholders wish to purchase 3,127,814 shares of newly issued
Common Stock at a price of $13.33 per share (the "New Shares"); and

WHEREAS, Folksam, P&V, Wiener and Samvirke collectively own of record and
beneficially all of the issued and outstanding shares of the Company's Common
Stock, and Fund American owns all of the issued and outstanding shares of the
Company's Series B Preferred Stock, par value $.01 per share ("Series B
Preferred Stock"), which Common Stock and Series B Preferred Stock constitute
all of the issued and outstanding voting capital stock of the Company; and

WHEREAS, Fund American also holds a Class A Warrant Certificate, pursuant to
which it is the registered owner of 6,920,000 warrants to purchase the same
number of shares of the

<PAGE>

Company's common stock;

WHEREAS, the Company and the Shareholders believe it is in the best interest
of the Company to (i) increase the surplus of Folksamerica Reinsurance Company
("Folksamerica Reinsurance") and (ii) to reduce Company debt owed pursuant to a
Loan Agreement between the Company and Swedbank (Sparbanken Sverige AB (publ)),
New York Branch ("Swedbank"), dated November 12, 1991, as amended (the "Swedbank
Loan") and (iii) to eliminate entirely the debt owed by the Company to Folksam
pursuant to the Evidence of Indebtedness Agreement dated June 13, 1996 (the
"Folksam Debt Agreement"); and

WHEREAS, the Company intends to apply $14,446,900 of the $41,693,760.50
aggregate proceeds from the sale of the New Shares towards the reduction of the
Swedbank Loan; and

WHEREAS, the Shareholders, the Company and Swedbank have agreed to eliminate
the Guarantee Obligations of P&V and Wiener, dated November 12, 1991, as
confirmed by a reconfirmation letter dated April 25, 1996, and November 13,
1991, as confirmed by a reconfirmation letter dated May 17, 1996, respectively,
supporting the Swedbank Loan and to reduce the Guarantee Obligation dated
November 12, 1991, as confirmed by a reconfirmation letter dated November 25,
1995, of Samvirke to Swedbank (collectively, the "Guarantee Obligations"); and

WHEREAS, the Shareholders wish to amend (i) the Shareholders Agreement dated
March 6, 1996 by and among the Company, Fund American, Folksam, Wiener, P&V and
Samvirke (the "Fund American Shareholders Agreement"), (ii) the Amended and
Restated Investor Stockholders' Agreement, dated as of June 19, 1996 by and
among the Company, Folksam, Wiener, P&V and Samvirke (the "Investor
Stockholders' Agreement") and (iii) the Registration Rights Agreement by and
among the Company and the Shareholders, dated as of June 19, 1996 (the
"Registration Rights Agreement"), and to make certain waivers in connection with
the purchase of the New Shares.

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:

1. COMMON STOCK SUBSCRIPTION

The Shareholders hereby subscribe for and agree to purchase, severally and
not jointly, the number of New Shares set forth opposite their names below and
agree to pay therefore in cash, the sum of U.S. $13.33 per share; provided,
however, that Folksam shall pay for its New

<PAGE>

Shares by exchanging (capitalizing) the remaining indebtedness of U.S.
$4,000,000 due from the Company pursuant to the Folksam Debt Agreement (the
aggregate payment by each Shareholder for their respective New Shares, or, in
the case of Folksam, the aggregate amount of exchanged (capitalized) debt, is
referred to herein as the "Purchase Price"). The Company shall pay to Folksam
upon the Closing (as defined below) all accrued but unpaid interest through
the date of the Closing.

<PAGE>

<TABLE>
<CAPTION>
TOTAL
NEW ADDITIONAL SHAREHOLDER VOTING
SHARES INVESTMENT SHARES* VOTING %
---------- ---------------------- ------------ -----------
<S> <C> <C> <C> <C>
Fund American....................................... 1,563,907 U.S. $20,846,880.00 8,483,907 50.0
Folksam............................................. 300,075 4,000,000.00 3,585,075 21.1
P & V............................................... 472,618 6,299,997.90 1,877,618 11.1
Samvirke............................................ 138,551 1,846,884.80 763,551 4.5
Wiener.............................................. 652,663 8,699,997.80 2,257,663 13.3
---------- ---------------------- ------------ -----
3,127,814 U.S. $41,693,760.50 16,967,814 100.0
</TABLE>

- ------------------------
* Following purchase of the New Shares

2. DELIVERY OF COMMON STOCK/USE OF PROCEEDS

a. On November 20, 1997 or as soon as practicable following the satisfaction
or waiver of the conditions enumerated under Section 3 below (and in any event
within 5 business days following satisfaction of the conditions listed in
Section 3 below) a closing of the purchase of the New Shares shall be held (the
"Closing") in the offices of the Company at One Liberty Plaza, 19th Floor, New
York, New York 10006. At the Closing, (x) the Company shall issue a stock
certificate or certificates to each Shareholder representing their respective
New Shares (each stock certificate so delivered shall, to the extent applicable,
bear the legend provided for in Section 5 of the Amended and Restated Investor
Stockholders' Agreement dated June 19, 1996, (y) each of Fund American, P&V,
Samvirke and Wiener shall pay their respective Purchase Prices by wire transfer
of immediately available funds to the respective accounts designated at least
five (5) business days prior to the Closing, by the Company and Swedbank and (z)
Folksam shall deliver evidence satisfactory to the Company that the Folksam Debt
Agreement has been terminated and that the underlying indebtness has been
forgiven in full.

b. The Company agrees to use $14,446,900 of the Purchase Price received
from P&V ($6,299,997.90), Samvirke ($1,846,884.80) and Wiener ($6,300,017.30)
in accordance with this Agreement to re-pay a portion of the Swedbank Loan
(and in furtherance hereof the Company shall instruct such Shareholder to pay
such portion of Purchase Price payable by them directly to Swedbank as
necessary to effect such repayment) and the balance of the cash proceeds
shall be used to increase the Surplus of Folksamerica Reinsurance as directed
by the Board of Directors of the Company.

3. CONDITIONS TO PURCHASE AND DELIVERY OF COMMON STOCK

The Company shall issue, and each of the Shareholders (severally and not
jointly) shall

<PAGE>

purchase in accordance with the terms hereof, the New Shares
subscribed to herein upon the satisfaction or waiver of each of the following
conditions:

a. Receipt by the Company from Fund American, P&V, Wiener and Samvirke
of their respective Purchase Prices pursuant to Section 2(a)(y) and a
receipt from Folksam pursuant to Section 2(a)(z) of evidence satisfactory to
the Company that the entire debt evidenced by the Folksam Debt Agreement has
been extinguished in full.

b. Receipt by the Company and each of the Shareholders of a duly
executed amendment to the Fund American Shareholders Agreement in the form
attached hereto as Exhibit A.

c. Approval by the Board of Directors and the Shareholders of (i) an
amendment to the Company Charter in the form attached hereto as Exhibit
B, increasing the authorized shares of Common Stock by the amount
necessary to issue the New Shares and (ii) the transactions contemplated
herein as provided for in the resolutions attached as Exhibit C.

d. Prior to the closing, receipt, satisfactory to P&V and Wiener, of
instruments evidencing that, upon payment of the portion of the Purchase
Price payable by them to Swedbank, their respective Guarantee Obligations to
Swedbank will be released and discharged and receipt satisfactory to
Samvirke of an instrument evidencing that, upon payment of the portion of
the Purchase Price payable by it to Swedbank, its Guarantee Obligation will
be reduced to reflect Samvirke's purchase of 138,551 shares of Common Stock
as provided herein.

e. Receipt by the Shareholders of the opinion of Donald A. Emeigh, Jr.,
General Counsel of the Company, in the form attached hereto as Exhibit D.

f. Receipt by the Company and the Shareholders of a duly executed
amendment to the Registration Rights Agreement in the form attached hereto
as Exhibit E.

g. Receipt by the Company and the Shareholders of a duly executed
amendment to the Investor Stockholders' Agreement in the form attached
hereto as Exhibit F.

h. In the case of the Shareholders, (i) the representations and
warranties of the Company contained in this Agreement or in any certificate
or documents delivered to the Shareholders pursuant hereto shall be deemed
to have been made again at and as of the Closing of the transactions
provided for herein and shall then be true in all material respects and (ii)
the Company shall have performed and complied in all material respects with
all agreements and covenants required by this Agreement to be performed or
complied with by the Company prior to or at the Closing, and the
Shareholders shall have been furnished with a certificate of an appropriate
officer of the Company, dated the day of the Closing (the "Closing Date"),
certifying to the effect of clauses (i) and (ii) of this Section 3(h).

<PAGE>

4. CERTAIN WAIVERS

The Company and the Shareholders, respectively, hereby agree as follows:

a. Fund American hereby agrees to the issuance of the New Shares and
agrees in connection with the transactions contemplated by this Agreement to
a one time waiver of (i) all requirements set forth in Section 8.3 of the
Securities Purchase Agreement by and between Fund American and the Company
dated March 6, 1996, relating to the issuance of Common Stock by the
Company, (ii) any claim that the New Shares have been issued for an
amount of consideration per share less than the fair market value per
share as determined for purposes of Section 4 of the Class A Warrant
Certificate, and (iii) the notice requirement set forth in Section 4(k) of the
Class A Warrant Certificate. Fund American further acknowledges receipt of the
notice (a copy of which is attached hereto as Exhibit G) required
pursuant to Article Fourth, Clause A, Section, Section 3(d) of the Company's
Certificate of Incorporation and agrees that the calculation set forth
therein is correct.

b. The Company and the Shareholders each agree, in connection with the
transactions contemplated by this Agreement, to a one-time waiver of (i)
Section 8, Section 9(b) and Section 9(d) of the Fund American Shareholders
Agreement and (ii) Section 1 of the Guarantee Fee Agreement to the extent
necessary to permit the consummation of the transactions contemplated
hereby. In addition, the Company, Folksam, P&V, Samvirke and Wiener each
agrees, in connection with the transactions contemplated by this Agreement,
to a one-time waiver of Section 7(vi) and Section 12 of the Investor
Stockholders' Agreement to the extent necessary to permit the consummation
of the transactions contemplated hereby.

5. REPRESENTATION/WARRANTIES

Each of the signatories for the Shareholders represents and warrants that he
has been duly authorized to execute this Agreement, the amendment to the Fund
American Shareholders' Agreement, the amendment to the Investor Stockholders
Agreement and the amendment to the Registration Rights Agreement (collectively,
the "Agreements") and that all corporate action necessary to complete the
transactions contemplated herein has been authorized.

The Company represents and warrants to the Shareholders:

(a) Organization of the Company; Authority. The Company is a corporation
duly organized, validly existing and in good standing under the laws of its
state of organization and has all the requisite corporate power and authority to
carry on its business as now being conducted and to own and use the properties
owned and used by it. The Company is qualified to do business in each
jurisdiction in which the nature of its business requires it to be so qualified.
The Company has full corporate power and authority to enter into each of the
Agreements and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of each of the Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of the Company.

<PAGE>

Assuming the due authorization, execution and delivery hereof and thereof by
the Shareholders, the Agreement has been (and each of the other Agreements
will be at the Closing) duly executed and delivered by the Company and
constitutes (and each of the other Agreements will constitute at the Closing)
the valid, binding and enforceable obligation of the Company, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally or by general equitable
principles.

(b) Capitalization of the Company; Ownership. The authorized, issued and
outstanding capital stock of the Company prior to and immediately after giving
effect to, the issuance of the New Shares is set forth on Schedule 1. All of the
issued and outstanding shares of capital stock of the Company are duly
authorized, validly issued, fully paid and non-assessable. Except for the Class
A Warrant Certificate and the Series B Preferred Stock currently held by Fund
American, there are not other outstanding options, warrants or rights of any
kind to acquire any additional shares of capital stock of the Company or
securities convertible into or exchangeable for, or which otherwise confer on
the holder thereto, any right to acquire, any such additional shares, nor is the
Company committed to issue any such option, warrant, right or securities.

(c) Ability to Carry Out the Agreements. Except as provided for herein and
assuming the fulfillment of all of the conditions provided for under Section 3,
the Company is not subject to or bound by any provision of:

(i) any law, statute rule, regulation or judicial or administrative
decision,

(ii) the articles or certificate or incorporation or by-laws of the
Company,

(iii) any mortgage, deed of trust, lease, note, shareholders' agreement,
partnership agreement, bond, indenture, license, permit, trust, or

(iv) any judgment, order, writ, injunction or decree or any court,
governmental body, administrative agency or arbitrator,

that would prevent or be violated by or under which there would be a default
as a result of the execution of any of the Agreements nor is there required
any consent of any person under any contract or agreement which has not been
obtained for, the execution, delivery and performance by the Company of any
of the Agreements and the transactions contemplated hereby, other than
violations, defaults or failures to obtain consents which have not had and
are not reasonably likely to have a material adverse effect on the ability of
the Company to perform its obligations under any of the Agreements.

<PAGE>

7. COUNTERPARTS

This Agreement may be executed in one or more counterparts, and by different
parties on separate counterparts each of which shall be deemed an original, but
all of which will constitute one and the same instrument.

8. GOVERNING LAW

This Agreement shall be governed by, construed and enforced in accordance
with the laws of the State of New York applicable to contracts made and to be
performed therein without reference to any applicable principals of conflicts of
laws. The parties agree that the exclusive place of jurisdiction for any action
brought hereunder shall be in the City and State of New York.

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its duly authorized officer as of the date first
written above.

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

By: ____________________
Name:
Title:

WHITE MOUNTAINS HOLDINGS, INC.

By: ____________________
Name:
Title:

FOLKSAMERICA HOLDING COMPANY, INC.

By: ____________________
Name:
Title:

FOLKSAM MUTUAL GENERAL INSURANCE COMPANY

By: ____________________
Name:
Title:

By: ____________________
Name:

<PAGE>

Title:

<PAGE>

FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (Publ)

By: ____________________
Name:
Title:

WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG

By: ____________________
Name:
Title:

P&V ASSURANCES S.C.

By: ____________________
Name:
Title:

SAMVIRKE SKADEFORSIKRING AS

By: ____________________
Name:
Title:

<PAGE>

SCHEDULE 1

FOLKSAMERICA HOLDING COMPANY, INC.

<TABLE>
<CAPTION>
PRESENT REVISED
OWNERSHIP OWNERSHIP
VOTING SHARES % NEW SHARES VOTING SHARES %
------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Fund American.................................... 6,920,000 50.0 1,563,907 8,483,907* 50.0
Folksam.......................................... 3,285,000 23.7 300,075 3,585,075** 21.1
P&V Assurances................................... 1,405,000 10.2 472,618 1,877,618 11.1
Samvirke......................................... 625,000 4.5 138,551 763,551 4.5
Wiener Staedtische............................... 1,605,000 11.6 652,663 2,257,663 13.3
------------- --------- ----------- ------------- ---------
13,840,000 100.0 3,127,814 16,967,814
100.0
</TABLE>

- ------------------------
* Fund American

<TABLE>
<S> <C>
Series B Voting Preferred........................................................ 6,920,000
Common Shares.................................................................... 1,563,907
---------
Total Shares..................................................................... 8,483,907
</TABLE>

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

<TABLE>
<S> <C>
**Folksam Mutual General-Common Shares........................................... 3,285,000
Folksam International-Common Shares.............................................. 300,075
---------
Total Shares..................................................................... 3,585,075
</TABLE>

<PAGE>

EXHIBIT A

AMENDMENT TO THE SHAREHOLDERS AGREEMENT

This Amendment to the Shareholders Agreement described below is entered
into as of November 6, 1997 by and among FOLKSAMERICA HOLDING COMPANY, INC.,
a New York corporation (the "Company"), FUND AMERICAN ENTERPRISES HOLDINGS,
INC., a Delaware corporation, ("Fund American"), WHITE MOUNTAINS HOLDINGS,
INC., a Delaware corporation ("White Mountains"; Fund American and White
Mountains being collectively referred to herein as "Fund American"), FOLKSAM
MUTUAL GENERAL INSURANCE COMPANY, an entity organized under the laws of
Sweden ("Folksam Mutual"), FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (publ),
an entity organized under the laws of Sweden ("Folksam International";
Folksam Mutual and Folksam International being collectively referred to
herein as "Folksam"), WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG, a
corporation organized under the laws of Austria ("Wiener"), P&V ASSURANCES
S.C., a corporation organized under the laws of Belgium ("P&V"), and SAMVIRKE
SKADEFORSIKRING AS, a corporation organized under the laws of the Kingdom of
Norway ("SAMVIRKE"); (collectively Fund American, Folksam, Wiener, P&V and
Samvirke are referred to herein as the "Shareholders"). Capitalized terms
used herein and not otherwise defined herein shall have the respective
meanings assigned to them in the Shareholders Agreement.

WHEREAS, the Company and the Shareholders (other than White Mountains and
Folksam International) entered into the Shareholders Agreement dated as of March
6, 1996 (the "Shareholders Agreement"); and

WHEREAS, in connection with the transactions contemplated by the
Subscription Agreement dated as of November 6, 1997 among the Company and the
Shareholders (the "Subscription Agreement"), the Company and the Shareholders
desire to amend the Shareholders Agreement;

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

1. Effective upon the consummation of the Closing under the Subscription
Agreement, the Shareholders Agreement shall be automatically and without further
act amended as follows:

a. All references to the "Purchaser" contained in the Shareholders
Agreement shall be deemed to refer collectively to Fund American and White
Mountains, and White

<PAGE>

Mountains, by execution and delivery hereof, acknowledges that it is a party
to the Shareholders Agreement and agrees to be bound by all obligations of
the Purchaser thereunder.

b. All references to "Folksam" contained in the Shareholders Agreement,
including with respect to the definition of Existing Shareholders, shall be
deemed to refer collectively to Folksam Mutual and Folksam International, and
Folksam International, by execution and delivery hereof, shall become a party
to the Shareholders Agreement and agrees to be bound by all obligations of
Folksam thereunder.

c. All references to "Equity Securities" contained in the Shareholders
Agreement shall be deemed to include, in addition to the securities included
therein as specified in the Shareholders Agreement, the New Shares (as
defined in the Subscription Agreement) purchased by Fund American.

d. Section 2(b) of the Shareholders Agreement is hereby amended to
delete the parenthetical clause contained in clause (i) thereof and
substituting the following in lieu thereof:

"(but in no event shall the aggregate number of director designees for the
Existing Shareholders taken as a whole exceed eight)".

e. All references contained in the Shareholders Agreement to the
"Existing Shareholders Agreement" shall be deemed to be references to the
"Amended and Restated Investor Stockholders' Agreement by and among the
Company and the Existing Shareholders dated as of June 19, 1996, as the same
may be amended from time to time".

f. The table contained in Section 2(b) of the Shareholders Agreement is
hereby amended in its entirety to read as follows:

NUMBER OF EQUITY NUMBER OF PURCHASER DESIGNEES:
SECURITIES OWNED ------------------------------
BENEFICIALLY BOARD EACH BOARD COMMITTEE
- -------------------------------------- ----- --------------------
<S> <C> <C>
4,900,000 or more..................... Two One
2,450,000 to 4,899,000................ One One
less than 2,450,000................... None None

</TABLE>

g. Section 7 of the Shareholders Agreement is hereby amended by changing
the reference to "six hundred and ninety two thousand (692,000)" to "eight
hundred and forty eight thousand three hundred and ninety (848,390)."

<PAGE>

h. All references to the "Existing Shareholders" contained in Section 9
of the Shareholders Agreement shall refer only to Folksam Mutual and Samvirke
and shall expressly not be deemed to refer to Wiener or P&V.

i. Section 19 of the Shareholders Agreement is hereby amended by
changing the reference to "five hundred thousand (500,000)" to "six hundred
and thirteen thousand (613,000)".

2. This Agreement shall be of no force or effect if the Closing under the
Subscription Agreement shall fail to occur.

3. This Agreement may be executed in one or more counterparts, and by
different parties on separate counterparts each of which shall be deemed an
original, but all of which will constitute one and the same instrument.

4. This Agreement shall be governed by, construed and enforced in accordance
with the laws of the State of New York applicable to contracts made and to be
performed therein without reference to any applicable principles of conflicts of
laws. The parties agree that the exclusive place of jurisdiction for any action
brought hereunder shall be in the City and State of New York.

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its duly authorized officer as of the date first
written above.

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

By: ____________________
Name:
Title:

WHITE MOUNTAINS HOLDINGS, INC.

By: ____________________
Name:
Title:

FOLKSAMERICA HOLDING COMPANY, INC.

By: ____________________
Name:

<PAGE>

Title:

<PAGE>

FOLKSAM MUTUAL GENERAL INSURANCE COMPANY

By: ____________________
Name:
Title:

FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (Publ)

By: ____________________
Name:
Title:

WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG

By: ____________________
Name:
Title:

P&V ASSURANCES S.C.

By: ____________________
Name:
Title:

SAMVIRKE SKADEFORSIKRING AS

By: ____________________
Name:

<PAGE>

Title:

<PAGE>

EXHIBIT B

CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF FOLKSAMERICA HOLDING COMPANY, INC.
UNDER SECTION 805 OF THE BUSINESS
CORPORATION LAW OF THE STATE OF NEW YORK

The undersigned, being the President and Secretary, respectively, of
Folksamerica Holding Company, Inc. (the "Corporation"), a corporation organized
and existing under the Business Corporation Law of the State of New York (the
"BCL"), hereby certify and set forth the following:

1. The name of the Corporation is Folksamerica Holding Company, Inc.

2. The certificate of incorporation of the Corporation was filed by the
Department of State of on April 10, 1985. A restated certificate of
incorporation of the Corporation was filed by the Department of State on
December 16, 1993. A certificate of amendment of the certificate of
incorporation of the Corporation was filed by the Department of State on June
17, 1996.

3. The certificate of incorporation of the Corporation, as heretofore
amended, is hereby amended, pursuant to Section 501 of the BCL, to increase the
number of shares which the Corporation is authorized to issue from 41,520,000
shares to 44,647,814 shares, of which 23,887,814 shares shall be designated as
Common Stock, par value $0.01 per share, and 20,760,000 shares shall be
designated as Preferred Stock, par value $0.01 per share.

4. To accomplish the foregoing amendment the certificate of incorporation of
the Corporation, as heretofore amended, is amended by deleting the first
sentence of Article FOURTH and substituting therefore the following:

"The number of shares which the Corporation is authorized to issue is
44,647,814 shares, of which 23,887,814 shares shall be designated as Common
Stock, par value $0.01 per share ("Common Stock"), and the remaining 20,760,000
shares shall be designated as Preferred Stock, par value $0.01 per share
("Preferred Stock")."

5. The amendment referred to herein was authorized by a resolution adopted
by a unanimous vote of the board of directors of the Corporation at a meeting of
the board duly called and held on November 6, 1997, and adopted by the unanimous
written consent of all of the shareholders of the Corporation dated November 6,
1997.

<PAGE>

IN WITNESS WHEREOF, we have executed this Certificate on this 6th day of
November, 1997 and do affirm the statements contained herein are true under the
penalties of perjury.

___________________________________
Name: Steven E. Fass
Title: President & C.E.O.

___________________________________
Name: Donald A. Emeigh, Jr.
Title: S.V.P., General Counsel & Secretary

<PAGE>

SHAREHOLDER UNANIMOUS
WRITTEN CONSENT IN LIEU OF MEETING
FOLKSAMERICA HOLDING COMPANY, INC.

THE UNDERSIGNED, which include all of the Shareholders of Folksamerica
Holding Company, Inc., a New York corporation (the "Company" or "Folksamerica"),
DO HEREBY CONSENT, pursuant to Section 615(a) of the New York Business
Corporation Law, to the following resolutions as the duly adopted resolutions of
the Shareholders of the Company, said resolutions to be and read as follows:

RESOLVED, that the form, terms and provisions of the Subscription
Agreement attached as Exhibit A (the "Subscription Agreement") by and among
the Company, White Mountains, Fund American, Folksam, Folksam International,
Wiener, P&V and Samvirke, a copy of which has been presented to the
Shareholders and filed with the records of the Company, with such changes,
additions or deletions to any or all of the terms and provisions thereof as
the officer executing the same may approve, the execution and delivery
thereof to be conclusive evidence of such approval, (provided that (i) any
such change, addition or deletion that is for the purpose of curing an
ambiguity, omission, defect or inconsistency (an "Administrative Change")
shall not require any further approval or authorization, (ii) any such
change, addition or deletion which is not an Administrative Change, but which
does not alter a material term shall be approved by a committee consisting of
Thomas Kemp, Anders Henriksson and Peter Hagen (the "Approval Committee") and
(iii) any such change, addition or deletion which alters a material term
shall be approved by the Board of Directors of the Company), be, and the same
hereby are, together with the transactions contemplated therein, authorized,
approved and adopted in all respects and the Subscription Agreement as so
executed and delivered be, and the same hereby is, authorized, approved and
adopted; and further

RESOLVED, the Shareholders hereby ratify approve the issuance of the New
Shares referenced in the Subscription Agreement for a price of U.S. $13.33 per
share, which price is acknowledged to represent a reasonable good faith
judgement of the Directors of the fair market value per share, and further
specifically acknowledge and approve that Folksam International Insurance Co.
Ltd (publ) shall pay for the New Shares referenced in the Subscription Agreement
by exchanging (capitalizing) the remaining indebtedness of $4,000,000 due from
the Company; and further

RESOLVED, the Shareholders hereby approve the Certificate of Amendment to
the Certificate of Incorporation attached as Exhibit B (the "Certificate of
Amendment"), a copy of which

<PAGE>

has been presented to the Shareholders and filed with the records of the
Company, and, subject to the satisfaction of the conditions of delivery of
the Common Stock as provided for in the Subscription Agreement, the officers
of the Company be, and any one or more hereby are authorized, empowered and
directed in the name and on behalf of the Company, to execute, acknowledge,
file and record the Certificate of Amendment with the Secretary of State of
the State of New York; and further

RESOLVED, upon (i) the filing of the Certificate of Amendment, and (ii) the
satisfaction of the terms and conditions to closing set forth in the
Subscription Agreement, 3,127,814 shares of authorized but unissued shares of
the Company's Common Stock shall be issued to the Shareholders and the Company
shall use the proceeds thereof as directed in the Subscription Agreement; and
further

RESOLVED, that all officers of the Company be, and any one or more of them
hereby are, authorized, empowered and directed to execute, in the name and on
behalf of the Company, and to cause to be issued and delivered to the
Shareholders, one or more certificates representing such shares, and when
issued, such Common Stock will be duly authorized, validly issued, fully paid
and (except with respect to claims pursuant to Section 630 of the New York
Business Corporation Law) non-assessable; and further

RESOLVED, that in accordance with Article III, Section 11 of the Company
By-Laws, Terry L. Baxter is hereby appointed to the Board of Directors in
replacement of Allan L. Waters who is hereby removed as a director; and further

RESOLVED, that the officers of the Company be, and any one or more of them
hereby are, authorized, empowered and directed, acting alone, in the name and on
behalf of the Company, to do and perform all such further acts and things, to
execute and deliver in the name and on behalf of the Company, and, if requested
or required, under its corporate seal duly attested by the Secretary of the
Company, and where necessary or appropriate, to file with the appropriate
governmental authorities, all such further certificates, instruments, or other
documents, and to make all such payments as in their judgment, or in the
judgment of any one of them, shall be deemed necessary or advisable in order to
carry out, comply with, and effectuate the intent and purposes of the foregoing
resolutions, and any or all of the transactions contemplated therein or thereby,
the authority therefor to be conclusively evidenced by the taking of such
action;

RESOLVED, that the Shareholders hereby ratify and approve the actions of the
Human Resources Committee and the Board of Directors in accordance with the
Committees written consent of November 6, 1997; and further

RESOLVED, that the Secretary of the Company shall file this Written Consent
in Lieu of

<PAGE>

Meeting as a record of the minutes of the actions taken hereby.

<PAGE>

IN WITNESS WHEREOF, the undersigned authorized signatories of the
Shareholders have executed this written consent effective the date first written
above. This Unanimous Consent in Lieu of Meeting may be signed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall be deemed one and the same Consent of the Shareholder.

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

By: ____________________
Name:
Title:

WHITE MOUNTAINS HOLDINGS, INC.

By: ____________________
Name:
Title:

FOLKSAMERICA HOLDING COMPANY, INC.

By: ____________________
Name:
Title:

FOLKSAM MUTUAL GENERAL INSURANCE COMPANY

By: ____________________
Name:
Title:

WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG

By: ____________________
Name:
Title:

By: ____________________
Name:

<PAGE>

Title:

P&V ASSURANCES S.C.

By: ____________________
Name:
Title:

SAMVIRKE SKADEFORSIKRING AS

By: ____________________
Name:
Title:

<PAGE>

EXHIBIT C

Subject to the approval of the Shareholders of the Subscription Agreement and
Charter Amendment as provided for in the "Consent in Lieu of Meeting", the
Directors will be asked to approve the following resolutions:

RESOLVED, that the form, terms and provisions of the Subscription
Agreement attached hereto as Exhibit A (the "Subscription Agreement") by and
among the Company, White Mountains, Fund American, Folksam Mutual, Folksam
International, Wiener, P&V and Samvirke, a copy of which has been presented
to this Board of Directors and filed with the records of the Company, with
such changes, additions or deletions to any or all of the terms and
provisions thereof as the officer executing the same may approve, the
execution and delivery thereof to be conclusive evidence of such approval
(provided that (i) any such change, addition or deletion that is for the
purpose of curing an ambiguity, omission, defect or inconsistency (an
"Administrative Change") shall not require any further approval or
authorization, (ii) any such change, addition or deletion which is not an
Administrative Change, but which does not alter a material term shall be
approved by a committee consisting of Thomas Kemp, Anders Henriksson and
Peter Hagen (the "Approval Committee") and (iii) any such change, addition or
deletion which alters a material term shall be approved by the Board of
Directors of the Company), be, and the same hereby are, together with the
transactions contemplated therein and the Exhibits attached thereto
(including without limitation the Amendment to the Fund American
Shareholders' Agreement, the Amendment to the Investor Stockholders'
Agreement, the Amendment to the "Registration Rights Agreement" and the use
of the proceeds from the sale of the New Shares as provided for in Provision
2(b) of the Subscription Agreement), authorized, approved and adopted in all
respects and the Subscription Agreement as so executed and delivered be, and
the same hereby is, authorized, approved and adopted; and further

RESOLVED, the Directors hereby approve the issuance of the New Shares
referenced in the Subscription Agreement for a price of U.S. $13.33 per share,
which price represents a reasonable good faith judgement of the Directors of the
fair market value per share, and further specifically acknowledge and approve
that Folksam International Insurance Co. Ltd. (publ) shall pay for the New
Shares referenced in the Subscription Agreement by exchanging the remaining
indebtedness of $4,000,000 due from the Company; and further

<PAGE>

RESOLVED, the Directors hereby approve the Certificate of Amendment to the
Certificate of Incorporation attached hereto as Exhibit B (the "Certificate of
Amendment"), a copy of which shall be presented to the Shareholders of the
Company for approval, and subject to the satisfaction of the conditions of
delivery of the Common Stock as provided for in the Subscription Agreement, the
officers of the Company be, and any one or more hereby are, authorized,
empowered and directed in the name and on behalf of the Company, to execute,
acknowledge, file and record the Certificate of Amendment with the State of New
York; and further

RESOLVED, that, pursuant to the Subscription Agreement and upon (i) the
filing of the Certificate of Amendment, and (ii) the satisfaction of the terms
and conditions to closing set forth in the Subscription Agreement, 3,127,814
shares of authorized but unissued shares of the Company's Common Stock shall be
issued to the Shareholders, and that all officers of the Company be, and any one
or more of them hereby are, authorized, empowered and directed to execute, in
the name and on behalf of the Company, and to cause to be issued and delivered
to the Shareholders, one or more certificates representing such shares, and when
issued, such Common Stock will be duly authorized, validly issued, fully paid
and (except with respect to claims pursuant to Section 630 of the New York
Business Corporation Law) non-assessable;

RESOLVED, that the Board of Directors hereby ratify and approve the actions
of the Human Resources Committee in accordance with the Committees written
consent of November 6, 1997; and further

<PAGE>

EXHIBIT D

[Don Emeigh Legal Opinion]

1
<PAGE>

EXHIBIT D

[Don Emeigh Legal Opinion]

1
<PAGE>

EXHIBIT E

AMENDMENT TO THE REGISTRATION RIGHTS AGREEMENT

This Amendment to the Registration Rights Agreement described below is
entered into as of November 6, 1997 by and among FOLKSAMERICA HOLDING COMPANY,
INC., a New York corporation (the "Company"), FUND AMERICAN ENTERPRISES
HOLDINGS, INC., a Delaware corporation, ("Fund American"), WHITE MOUNTAINS
HOLDINGS, INC., a Delaware corporation ("White Mountains"; Fund American and
White Mountains being collectively referred to herein as "Fund American"),
FOLKSAM MUTUAL GENERAL INSURANCE COMPANY, an entity organized under the laws of
Sweden ("Folksam Mutual"), FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (publ), an
entity organized under the laws of Sweden ("Folksam International"; Folksam
Mutual and Folksam International being collectively referred to herein as
"Folksam"), WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG, a corporation
organized under the laws of Austria ("Wiener"), P&V ASSURANCES S.C., a
corporation organized under the laws of Belgium ("P&V"), and SAMVIRKE
SKADEFORSIKRING AS, a corporation organized under the laws of the Kingdom of
Norway ("SAMVIRKE"); (collectively Fund American, Folksam, Wiener, P&V and
Samvirke are referred to herein as the "Shareholders"). Capitalized terms used
herein and not otherwise defined herein shall have the respective meanings
assigned to them in the Registration Rights Agreement.

WHEREAS, the Company and the Shareholders (other than White Mountains and
Folksam International) entered into the Registration Rights Agreement dated as
of March 6, 1996 (the "Registration Rights Agreement"); and

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

1
<PAGE>

1. Effective upon the consummation of the Closing under the Subscription
Agreement, the Registration Rights Agreement shall be automatically and without
further act amended as follows:

a. For all purposes of the Registration Rights Agreement, the
definition of "Registrable Securities" contained in Section 1 of the
Registration Rights Agreement shall be automatically amended without further
act by including in each of clauses (i) and (ii) thereof (including, without
limitation, for purposes of clause (iii) thereof) the New Shares (as defined
in the Subscription Agreement), and the first proviso contained in such
definition shall not apply to the New Shares.

b. All references to "Folksam" contained in the Registration Rights
Agreement, including with respect to the definition of "Existing
Shareholders," shall be deemed to refer collectively to Folksam Mutual and
Folksam International, and Folksam International, by execution and delivery
hereof, shall become a party to the Registration Rights Agreement and agrees
to be bound by all obligations of Folksam thereunder.

2. This Agreement shall be of no force or effect if the Closing under the
Subscription Agreement shall fail to occur.

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its duly authorized officer as of the date first
written above.

FUND AMERICAN ENTERPRISES HOLDINGS, INC.

By: ____________________
Name:
Title:

WHITE MOUNTAINS HOLDINGS, INC.

<PAGE>

By: ____________________
Name:
Title:

<PAGE>

FOLKSAMERICA HOLDING COMPANY, INC.

By: ____________________
Name:
Title:

FOLKSAM MUTUAL GENERAL INSURANCE COMPANY

By: ____________________
Name:
Title:

FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (Publ)

By: ____________________
Name:
Title:

WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG

By: ____________________
Name:
Title:

4
<PAGE>

P&V ASSURANCES S.C.

By: ____________________
Name:
Title:

SAMVIRKE SKADEFORSIKRING AS

By: ____________________
Name:
Title:

5
<PAGE>

EXHIBIT F

AMENDMENT TO THE AMENDED AND RESTATED
INVESTORS STOCKHOLDERS' AGREEMENT

This Amendment to the Amended and Restated Investor Stockholders'
Agreement described below is entered into as of November 6, 1997 by and among
FOLKSAMERICA HOLDING COMPANY, INC., a New York corporation (the "Company"),
FOLKSAM MUTUAL GENERAL INSURANCE COMPANY, an entity organized under the laws
of Sweden ("Folksam Mutual"), FOLKSAM INTERNATIONAL INSURANCE CO. LTD.
(publ), an entity organized under the laws of Sweden ("Folksam
International"; Folksam Mutual and Folksam International being collectively
referred to herein as "Folksam"), WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG
AG, a corporation organized under the laws of Austria ("Wiener"), P&V
ASSURANCES S.C., a corporation organized under the laws of Belgium ("P&V"),
and SAMVIRKE SKADEFORSIKRING AS, a corporation organized under the laws of
the Kingdom of Norway ("SAMVIRKE"); (collectively Folksam, Wiener, P&V and
Samvirke are referred to herein as the "Shareholders"). Capitalized terms
used herein and not otherwise defined herein shall have the respective
meanings assigned to them in the Investor Stockholders' Agreement.

WHEREAS, the Company and the Shareholders (other than Folksam International)
entered into the Amended and Restated Investor Stockholders' Agreement dated as
of March 6, 1996 (the "Investor Stockholders' Agreement"); and

WHEREAS, in connection with the transactions contemplated by the
Subscription Agreement dated as of November 6, 1997 among the Company, the
Shareholders and certain other parties (the "Subscription Agreement"), the
Company and the Shareholders desire to amend the Investor Stockholders'
Agreement;

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

1. Effective upon the consummation of the Closing under the Subscription
Agreement, the Investor Stockholders' Agreement shall be automatically and
without further act

1
<PAGE>

amended as follows:

a. All references to "FMGIC" contained in the Investor Stockholders'
Agreement, including with respect to the definition of Investor Stockholders,
shall be deemed to refer collectively to Folksam Mutual and Folksam
International, and Folksam International, by execution and delivery hereof,
shall become a party to the Investor Stockholders' Agreement and agrees to be
bound by all obligations of FMGIC thereunder.

b. The definition of "Original Equity" contained in Section 1 thereof
shall be amended to read as follows:

"Original Equity" shall mean the 8,483,907 shares of Common Stock
issued and outstanding upon the Closing under the Subscription Agreement
dated as of November 6, 1997 by and among the Company, the Investor
Stockholders, FA and certain other parties and which are beneficially
owned by the Investor Stockholders, and any shares issued with respect
thereto as a stock dividend or in connection with any reclassification,
stock split or recapitalization."

c. Section 2(a) thereof shall be amended to read in its entirety as
follows:

"(a) Each Investor Stockholder hereby agrees that during the period
commencing on the date hereof and ending upon the termination of this
Agreement it will vote all of the shares of Voting Stock beneficially
owned by it so as to elect and, during such period, to continue in office
a Board of Directors of the Company consisting of not more than eleven
members and which shall include the following:

(i) a number of designees of each Investor Stockholder at any time
that most appropriately reflects the percentage of Original Equity
beneficially owned by such Investor Stockholder as compared to the
respective percentages of Original Equity beneficially owned by the
other Investor Stockholders at such time; provided that the aggregate
number of designees of the Investor Stockholders shall not exceed
eight (8) designees; and provided further that each Investor
Stockholder that beneficially owns 6.25% or more of the Original
Equity shall be entitled to at least one designee; and

(ii) the designees of FA designated in accordance with the terms of
the FA Stockholders Agreement;

Accordingly, pursuant to clause (i) of Section 2(a), as of the date of the
closing

2
<PAGE>

under the Subscription Agreement (the "Subscription Closing Date") each
of the Investor Stockholders is entitled to designate, based on the
percentage of the Original Equity beneficially owned by it as of the
Subscription Closing Date, the following number of designees:

(I) 3 designees of FMGIC;

(II) 2 designees of WSA;

(III) 2 designees of P&V; and

(IV) 1 designee of SS."

d. Section 2(d) thereof shall be amended to read in its entirety as
follows:

"In the event that any Investor Stockholder becomes entitled to a lesser or
greater number of designees under Section 2(a) than are then designated by
such Investor Stockholder and acting as members of the Board of Directors,
each Investor Stockholder shall vote all of the shares of Voting Stock
beneficially owned by it so as to remove or add such director designated by
such Investor Stockholder that is entitled to a lesser or greater number
of designees and (to the extent necessary) to amend the By-laws to reduce
or, subject to Section 2(a), increase the authorized number of members of
the Board of Directors by the director or directors so removed or added;
provided that each Investor Stockholder shall have the exclusive right to
determine which of the directors previously designated by it shall be
removed."

e. Section 2(e) thereof is amended by deleting said Section in its
entirety and substituting therefor the following: "(e) [Reserved]".

f. Solely for purposes of Section 12 of the Investor Stockholders'
Agreement, all references in said Section 12 shall be deemed to refer only to
FMGIC and SS and shall be deemed expressly not to refer to WSA or P&V.

2. This Agreement shall be of no force or effect if the Closing under the
Subscription Agreement shall fail to occur.

3. This Agreement may be executed in one or more counterparts, and by
different parties on separate counterparts each of which shall be deemed an
original, but all of which will

3
<PAGE>

constitute one and the same instrument.

<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its duly authorized officer as of the date first
written above.

FOLKSAMERICA HOLDING COMPANY, INC.

By: ____________________
Name:
Title:

FOLKSAM MUTUAL GENERAL INSURANCE COMPANY

By: ____________________
Name:
Title:

FOLKSAM INTERNATIONAL INSURANCE CO. LTD. (Publ)

By: ____________________
Name:
Title:

WIENER STAEDTISCHE ALLGEMEINE VERSICHERUNG AG

By: ____________________
Name:
Title:

<PAGE>

P&V ASSURANCES S.C.

By: ____________________
Name:
Title:

SAMVIRKE SKADEFORSIKRING AS

By: ____________________
Name:
Title:

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1997

FULL NAME OF SUBSIDIARY PLACE OF INCORPORATION
- ----------------------- ----------------------

CHARTER INDEMNITY COMPANY TEXAS, USA

FUND AMERICAN CASUALTY REINSURANCE, LTD. ISLANDS OF BERMUDA

FUND AMERICAN ENTERPRISES, INC. DELAWARE, USA

SOURCE ONE MORTGAGE SERVICES
CORPORATION and subsidiaries DELAWARE, USA

VALLEY INSURANCE COMPANY CALIFORNIA, USA

VALLEY NATIONAL INSURANCE COMPANY KANSAS, USA

VALLEY PROPERTY & CASUALTY INSURANCE COMPANY OREGON, USA

WHITE MOUNTAINS HOLDINGS, INC. DELAWARE, USA

WHITE MOUNTAINS INSURANCE COMPANY NEW HAMPSHIRE, USA

<PAGE>

EXHIBIT 23(a)

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Fund American Enterprises Holdings, Inc.:

We consent to the incorporation by reference in the registration statements, as
amended, No. 33-5287 on Form S-8 pertaining to the Long-Term Incentive Plan, No.
33-54006 on Form S-3 pertaining to the Medium-Term Notes Series A, No. 33-54749
on Form S-3 pertaining to Common Stock Warrants, No. 333-30233 on Form S-8
pertaining to Valley Group Employees' 401(k) Savings Plan, No. 333-13027 on Form
S-8 pertaining to the Source One Mortgage Services Corporation Employee Stock
Ownership and 401(k) Plan of our report dated January 29, 1998 with respect to
the consolidated balance sheet of the Company as of December 31, 1997, and the
related consolidated income statement and consolidated statements of
shareholders' equity and cash flows and the related schedule for the year ended
December 31, 1997, which report appears in the Company's 1997 Annual Report on
Form 10-K.

/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
March 27, 1998

<PAGE>

EXHIBIT 23(b)

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration
Statements, as amended, pertaining to the Long-Term Incentive Plan (Form S-8,
No. 33-5297), Medium-Term Notes Series A (Form S-3, No. 33-54006) and Common
Stock Warrants (Form S-3, No. 33-54749) of Fund American Enterprises Holdings,
Inc. and to the Source One Mortgage Services Corporation Employee Stock
Ownership and 401(K) Plan (Form S-8, No. 333-13027) of our report dated March
21, 1997, with respect to the consolidated financial statements and schedules of
Fund American Enterprises Holdings, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1996.

/s/ Ernst & Young LLP
New York, New York
March 27, 1998

<PAGE>

EXHIBIT 23(c)

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference (from the 1997 Annual Report
on Form 10-K filed by Financial Security Assurance Holdings Ltd. ("FSA") -- in
which filing our report was incorporated by reference from FSA's Annual Report
to Shareholders) in the Registration Statements, as amended, pertaining to the
Long-Term Incentive Plan (Form S-8, No. 33-5297), Medium-Term Notes Series A
(Form S-3, No. 33-54006), Common Stock Warrants (Form S-3, No. 33-54749) and the
Valley Group Employees' 401(K) Savings Plan (Form S-8, No. 333-30233) of Fund
American Enterprises Holdings, Inc. and to the Source One Mortgage Services
Corporation Employee Stock Ownership and 401(K) Plan (Form S-8, No. 333-13027)
of our report dated January 26, 1998 with respect to the consolidated financial
statements of Financial Security Assurance Holdings Ltd. and Subsidiaries as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 and to the incorporation by reference in such Registration
Statements of our report dated February 14, 1997 with respect to the
consolidated financial statements of Valley Group, Inc. and Subsidiaries as of
December 31, 1996 and for the year then ended (which is included as an exhibit
in this Annual Report on Form 10-K).

/s/ Coopers & Lybrand L.L.P.

New York, New York
March 27, 1998

<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that John J. Byrne does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Raymond Barrette
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ John J. Byrne
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Howard L. Clark does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Patrick M. Byrne
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Howard L. Clark
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Howard L. Clark, Jr. does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Howard L. Clark, Jr.
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Robert P. Cochran does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Robert P. Cochran
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that George J. Gillespie III does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ George J. Gillespie III
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Gordon S. Macklin does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Gordon S. Macklin
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Frank A. Olson does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Frank A. Olson
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Michael S. Paquette does hereby make,
constitute and appoint K. Thomas Kemp the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Michael S. Paquette
<PAGE>

FUND AMERICAN ENTERPRISES HOLDINGS, INC.
POWER OF ATTORNEY

KNOW ALL MEN by these presents, that Arthur Zankel does hereby make, constitute
and appoint K. Thomas Kemp the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney or such substitute shall lawfully do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has duly executed these presents this 24th
day of February, 1998.

/s/ Arthur Zankel

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7
<SECURITIES> 503
<RECEIVABLES> 134
<ALLOWANCES> (13)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,033
<CURRENT-LIABILITIES> 0
<BONDS> 304
0
44
<COMMON> 387
<OTHER-SE> 287
<TOTAL-LIABILITY-AND-EQUITY> 2,033
<SALES> 0
<TOTAL-REVENUES> 411
<CGS> 0
<TOTAL-COSTS> 277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 75
<INCOME-TAX> 30
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> (6)
<CHANGES> 0
<NET-INCOME> 39
<EPS-PRIMARY> 5.98
<EPS-DILUTED> 5.40

</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 5 3
<SECURITIES> 560 585
<RECEIVABLES> 149 91
<ALLOWANCES> (15) (14)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,981 1,872
<CURRENT-LIABILITIES> 0 0
<BONDS> 424 407
0 0
44 44
<COMMON> 398 408
<OTHER-SE> 289 292
<TOTAL-LIABILITY-AND-EQUITY> 1,981 1,872
<SALES> 0 0
<TOTAL-REVENUES> 371 261
<CGS> 0 0
<TOTAL-COSTS> 287 173
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 10 7
<INTEREST-EXPENSE> 50 46
<INCOME-PRETAX> 24 35
<INCOME-TAX> 19 17
<INCOME-CONTINUING> 5 18
<DISCONTINUED> 0 66
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5 84
<EPS-PRIMARY> .66 10.30
<EPS-DILUTED> .60 9.36

</TABLE>

<PAGE>

[Page 25 of 1997 Annual Report to Shareholders]

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Financial Security Assurance Holdings Ltd.:

We have audited the accompanying consolidated balance sheets of Financial
Security Assurance Holdings Ltd. and Subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Financial Security
Assurance Holdings Ltd. and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.

New York, New York
January 26, 1998
<PAGE>

[Page 26 of 1997 Annual Report to Shareholders]

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Bonds at market value (amortized cost of $1,230,479 and $1,058,417) $ 1,268,158 $ 1,072,439
Equity investments at market value (cost of $29,430 and $8,336) 30,539 8,336
Short-term investments 132,931 73,641
----------- -----------
Total investments 1,431,628 1,154,416
Cash 12,475 8,146
Deferred acquisition costs 171,098 146,233
Prepaid reinsurance premiums 173,123 151,224
Reinsurance recoverable on unpaid losses 30,618 29,875
Receivable for securities sold 20,623 --
Other assets 61,079 47,848
----------- -----------
TOTAL ASSETS $ 1,900,644 $ 1,537,742
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Deferred premium revenue $ 595,196 $ 511,196
Losses and loss adjustment expenses 75,417 72,079
Deferred federal income taxes 56,872 41,167
Ceded reinsurance balances payable 11,199 12,599
Payable for securities purchased 72,979 14,390
Notes payable 130,000 30,000
Accrued expenses and other liabilities 76,621 55,051
----------- -----------
TOTAL LIABILITIES 1,018,284 736,482
----------- -----------

COMMITMENTS AND CONTINGENCIES

Preferred stock (3,000,000 shares authorized; 2,000,000
issued and outstanding; par value of $.01 per share) 20 20
Common stock (50,000,000 shares authorized; 32,276,301
issued; par value of $.01 per share) 323 323
Additional paid-in capital - preferred 680 680
Additional paid-in capital - common 693,851 695,118
Unrealized gain on investments (net of deferred income tax
provision of $13,575 and $4,908) 25,212 9,114
Accumulated earnings 231,124 142,721
Deferred equity compensation 26,181 12,069
Less treasury stock at cost (3,521,847 and 2,303,407 shares held) (95,031) (58,785)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 882,360 801,260
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,900,644 $ 1,537,742
=========== ===========
</TABLE>

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

2
<PAGE>

[Page 27 of 1997 Annual Report to Shareholders]

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net premiums written (net of premiums ceded of
$63,513, $55,965 and $33,166, of which
$38,105, $35,299 and $20,582 were ceded to
affiliates) $ 172,878 $ 121,000 $ 77,576
Increase in deferred premium revenue (63,367) (30,552) (8,229)
--------- --------- ---------
Premiums earned (net of premiums ceded of
$41,198, $38,723 and $38,013) 109,511 90,448 69,347
Net investment income 72,085 65,064 48,965
Net realized gains 11,522 3,189 5,120
Other income 9,303 297 3,841
--------- --------- ---------
TOTAL REVENUES 202,421 158,998 127,273
--------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses:
Related to Merger -- -- 15,400
Other (net of reinsurance recoveries of
$3,605, ($2,249) and $9,101, of which
$3,199, ($3,084) and $7,111 were ceded
to affiliates) 9,156 6,874 6,258
Policy acquisition costs 27,962 23,829 16,888
Other operating expenses 26,804 18,524 13,685
--------- --------- ---------
TOTAL EXPENSES 63,922 49,227 52,231
--------- --------- ---------
INCOME BEFORE INCOME TAXES 138,499 109,771 75,042
--------- --------- ---------
Provision (benefit) for income taxes:
Current 30,960 27,227 23,187
Deferred 7,037 1,784 (3,183)
--------- --------- ---------
Total provision 37,997 29,011 20,004
--------- --------- ---------
NET INCOME $ 100,502 $ 80,760 $ 55,038
========= ========= =========
Basic earnings per common share $ 3.35 $ 2.64 $ 2.13
========= ========= =========
Diluted earnings per common share $ 3.25 $ 2.61 $ 2.13
========= ========= =========
</TABLE>

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

3
<PAGE>

[Page 28 of 1997 Annual Report to Shareholders]

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
Additional Additional Unrealized
Paid-In Paid-In Gain Deferred
Preferred Common Capital - Capital - (Loss) on Accumulated Equity Treasury
Stock Stock Preferred Common Investment Earnings Compensation Stock Total
----- ----- --------- ------ ---------- -------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ 20 $ 262 $ 680 $544,266 $(21,709) $ 25,647 $ -- $ (3,730) $545,436

Net income for the year 55,038 55,038

Net change in unrealized gain on
investments (net of deferred
income taxes of $22,421) 41,640 41,640

Issuance of common stock - 6,051,661
shares 61 151,987 152,048

Dividends paid on common
stock ($0.32 per share) (8,275) (8,275)

Deferred equity compensation 6,504 6,504

Purchase of 591,714 shares of
common stock (14,444) (14,444)
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 20 323 680 696,253 19,931 72,410 6,504 (18,174) 777,947

Net income for the year 80,760 80,760

Net change in unrealized loss on
investments (net of deferred
income tax benefit of $5,823) (10,817) (10,817)

Dividends paid on common
stock ($0.35 per share) (10,536) (10,536)

Deferred equity compensation 5,565 5,565

Purchase of 1,529,131 shares of
common stock (40,611) (40,611)

Other common stock transactions (1,135) (1,135)

Adjustment to prior-year disposal of
subsidiary 87 87
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 20 323 680 695,118 9,114 142,721 12,069 (58,785) 801,260

Net income for the year 100,502 100,502

Net change in unrealized gain on
investments (net of deferred
income taxes of $8,667) 16,098 16,098

Dividends paid on common stock
($0.405 per share) (12,099) (12,099)

Deferred equity compensation 17,781 17,781

Deferred equity payout 187 (3,287) 56 (3,044)

Purchase of 162,573 shares of
common stock (5,434) (5,434)

Issuance of 125,106 shares of
treasury stock for
options exercised 688 (382) 3,042 3,348

Forward share transactions:
Settlements with employees
and directors (2,142) (2,142)
Settlements with counterparties (33,910) (33,910)
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1997 $ 20 $ 323 $ 680 $693,851 $ 25,212 $231,124 $ 26,181 $(95,031) $882,360
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

4
<PAGE>

[Page 29 of 1997 Annual Report to Shareholders]

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net $ 171,145 $ 124,540 $ 85,481
Policy acquisition and other operating expenses
paid, net (43,279) (32,266) (36,067)
Recoverable advances received (paid) (7,629) 10,213 (9,419)
Losses and loss adjustment expenses paid (6,463) (15,473) (4,954)
Net investment income received 65,662 63,533 41,939
Federal income taxes paid (19,797) (34,595) (15,890)
Interest paid (5,158) (2,115) (95)
Other (2,017) (4,253) 9,872
----------- ----------- -----------
Net cash provided by operating activities 152,464 109,584 70,867
----------- ----------- -----------

Cash flows from investing activities:
Proceeds from sales of bonds 1,078,226 1,117,473 624,802
Proceeds from maturities of bonds 32,468 2,965 606
Purchases of bonds (1,254,274) (1,150,024) (713,799)
Net gain on sale of subsidiaries 7,986 -- --
Purchases of property and equipment (3,097) (2,188) (999)
Payment for purchase of subsidiary, net of cash
acquired -- -- (11,447)
Net decrease (increase) in short-term
investments (55,551) (18,586) 56,689
----------- ----------- -----------
Net cash used for investing activities (194,242) (50,360) (44,148)
----------- ----------- -----------

Cash flows from financing activities:
Issuance of notes payable, net 125,905 -- --
Repayment of notes payable (30,000) -- --
Dividends paid (12,099) (10,536) (8,275)
Treasury stock, net (36,246) (41,660) (14,444)
Payment of management notes -- -- (5,624)
Other (1,453) -- --
----------- ----------- -----------
Net cash provided by (used for) financing
activities 46,107 (52,196) (28,343)
----------- ----------- -----------

Net increase (decrease) in cash 4,329 7,028 (1,624)

Cash at beginning of year 8,146 1,118 2,742
----------- ----------- -----------
Cash at end of year $ 12,475 $ 8,146 $ 1,118
=========== =========== ===========
</TABLE>

Continued

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

5
<PAGE>

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income to net cash flows
from operating activities:
Net income $ 100,502 $ 80,760 $ 55,038
Decrease (increase) in accrued investment income (2,504) (578) 124
Increase in deferred premium revenue and related
foreign exchange adjustment 62,101 29,622 8,141
Increase in deferred acquisition costs (24,865) (13,282) (10,305)
Increase (decrease) in current federal income
taxes payable 7,891 (7,368) 7,297
Increase (decrease) in unpaid losses and loss
adjustment expenses 2,596 (8,023) 14,587
Increase in amounts withheld for others 133 52 30
Provision (benefit) for deferred income taxes 10,309 1,784 (3,183)
Net realized gains on investments (11,522) (3,189) (5,120)
Deferred equity compensation 14,299 5,565 5,735
Depreciation and accretion of bond discount (2,802) (1,735) (5,735)
Net gain on sale of subsidiaries (7,986) -- --
Change in other assets and liabilities 4,312 25,976 4,258
----------- ----------- -----------
Cash provided by operating activities $ 152,464 $ 109,584 $ 70,867
=========== =========== ===========
</TABLE>

Additional common stock was issued in relation to the Merger in 1995.

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

6
<PAGE>

[Pages 30 - 44 of 1997 Annual Report to Shareholders]

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. ORGANIZATION AND OWNERSHIP

Financial Security Assurance Holdings Ltd. (the Company) is a holding
company incorporated in the State of New York. The Company is principally
engaged (through its insurance subsidiaries) in providing financial guaranty
insurance on asset-backed and municipal obligations. The Company's underwriting
policy is to insure asset-backed and municipal obligations that it determines
would be of investment-grade quality without the benefit of the Company's
insurance. The asset-backed obligations insured by the Company are generally
issued in structured transactions and are backed by pools of assets such as
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. The municipal
obligations insured by the Company consist primarily of general obligation bonds
that are supported by the issuers' taxing power and of special revenue bonds and
other special obligations of states and local governments that are supported by
the issuers' ability to impose and collect fees and charges for public services
or specific projects. Financial guaranty insurance written by the Company
guarantees payment when due of scheduled payments on an issuer's obligation. In
the case of a payment default on an insured obligation, the Company is generally
required to pay the principal, interest or other amounts due in accordance with
the obligation's original payment schedule or, at its option, to pay such
amounts on an accelerated basis.

The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. The Company's insured portfolio consists
primarily of asset-backed and municipal obligations originated in the United
States, but the Company has also written and continues to pursue business in
Europe and the Pacific Rim.

On December 20, 1995, a subsidiary of the Company merged (the Merger) with
Capital Guaranty Corporation (CGC). The Merger provided for each CGC share to be
exchanged for 0.6716 share of the Company's common stock and cash of $5.69. The
Company issued in the aggregate 6,051,661 common shares and paid aggregate cash
consideration of $51,300,000. At December 31, 1995, the Company was owned 50.3%
by U S WEST, Inc. (U S WEST), 7.8% by Fund American Enterprises Holdings, Inc.
(Fund American), 6.1% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio
Marine) and 35.8% by the public and employees. At December 31, 1996, the Company
was owned 40.4% by U S WEST, 11.5% by Fund American, 6.4% by Tokio Marine and
41.7% by the public and employees. At December 31, 1997, the Company was owned
42.1% by U S WEST, 12.0% by Fund American, 6.7% by Tokio Marine and 39.2% by the
public and employees. These percentages are calculated based upon outstanding
shares, which are reduced by treasury shares as presented in these financial
statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), which, for the insurance
company subsidiaries, differ in certain material respects from the accounting
practices prescribed or permitted by insurance regulatory authorities (see Note
6). The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the Company's consolidated
balance sheets at December 31, 1997 and 1996 and the reported amounts of
revenues and expenses in the consolidated statements of income during the years
ended December 31, 1997, 1996 and 1995. Such estimates and assumptions include,
but are not limited to, losses and loss adjustment expenses and the deferral and
amortization of deferred policy acquisition costs. Actual results may differ
from those estimates. Significant accounting policies under GAAP are as follows:

7
<PAGE>

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly owned subsidiaries, FSA Portfolio Management
Inc., CGC, Transaction Services Corporation, Financial Security Assurance Inc.
(FSA), FSA Insurance Company, Financial Security Assurance of Oklahoma, Inc. and
Financial Security Assurance (U.K.) Limited (collectively, the Subsidiaries).
All intercompany accounts and transactions have been eliminated. Certain
prior-year balances have been reclassified to conform to the 1997 presentation.
The Merger was accounted for on a purchase accounting basis. In view of the
short period between the date of the Merger, December 20, 1995, and the
year-end, the date of the Merger for accounting purposes is considered to be
December 31, 1995. As a result, the accounting for the Merger has no effect on
the Company's consolidated statement of income for the year ended December 31,
1995, except for the recording of $15,400,000 in losses and loss adjustment
expenses to increase FSA's general reserve to provide for the insured portfolio
assumed by FSA in the Merger (see Notes 17 and 19).

Investments

Investments in debt securities designated as available for sale are
carried at market value. Any resulting unrealized gain or loss is reflected as a
separate component of shareholders' equity, net of applicable deferred income
taxes. All of the Company's long-term investments are classified as available
for sale.

Bond discounts and premiums are amortized on the effective yield method
over the remaining terms of the securities acquired. For mortgage-backed
securities, and any other holdings for which prepayment risk may be significant,
assumptions regarding prepayments are evaluated periodically and revised as
necessary. Any adjustments required due to the resulting change in effective
yields are recognized in current income. Short-term investments, which are those
investments with a maturity of less than one year at time of purchase, are
carried at market value, which approximates cost. Realized gains or losses on
sale of investments are determined on the basis of specific identification.
Investment income is recorded as earned.

To manage adverse movements in interest rates, the Company uses exchange
traded futures and options. Primarily, these contracts are designated as hedges
of specific identified securities and any gains or losses on these hedges are
deferred and included as part of the Company's unrealized gains or losses in
stockholders' equity until the disposition of the hedged assets. The Company
will discontinue to account for these contracts as hedges if there ceases to be
a high correlation between the change in price of the hedged assets and the
hedge. Other derivative positions, also in exchange traded futures contracts,
that are not accounted for as hedges are marked-to-market on a daily basis, and
any gains or losses are included in capital gains or losses.

Premium Revenue Recognition

Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent the portion of premium that is applicable
to coverage of risk to be provided in the future on policies in force. When an
insured issue is retired or defeased prior to the end of the expected period of
coverage, the remaining deferred premium revenue and prepaid reinsurance
premium, less any amount credited to a refunding issue insured by the Company,
are recognized.

Losses and Loss Adjustment Expenses

A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
current risk-free rates.

The general reserve is calculated by applying a loss factor to the total
net par amount outstanding of the Company's insured obligations over the term of
such insured obligations and discounting the result at risk-free rates. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and the Company's portfolio characteristics
and history. The general reserve is available to be applied against future
additions or accretions to existing case basis reserves or to new case basis
reserves to be established in the future.

Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the ultimate net cost of claims. The reserves are
necessarily based on estimates, and there can be no assurance that the ultimate
liability will not differ from such estimates. The Company will, on an

8
<PAGE>

ongoing basis, monitor these reserves and may periodically adjust such reserves
based on the Company's actual loss experience, its future mix of business, and
future economic conditions.

Deferred Acquisition Costs

Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs and the cost of acquired business are
amortized over the period in which the related premiums are earned.
Recoverability of deferred acquisition costs is determined by considering
anticipated losses and loss adjustment expenses.

Federal Income Taxes

The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.

Earnings per Common Share

In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share (EPS), specifying the computation,
presentation and disclosure requirements for EPS (see Note 20). The new standard
defines "basic" and "diluted" earnings per share. Basic earnings per share are
based on average basic shares outstanding, which is calculated by adding shares
earned but not issued under the Company's equity bonus and performance share
plans to the average common shares outstanding. Diluted earnings per share are
based on average diluted shares outstanding, which is calculated by adding
shares contingently issuable under stock options, the performance share plan and
the Company's convertible preferred stock to the average basic shares
outstanding. All earnings per share have been restated to reflect the adoption
of SFAS No. 128.

3. INVESTMENTS

Bonds at amortized cost of $11,025,000 and $17,669,000 at December 31,
1997 and 1996, respectively, were on deposit with state regulatory authorities
as required by insurance regulations.

Consolidated net investment income consisted of the following (in
thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Bonds $ 65,422 $ 61,740 $ 43,789
Equity investments 1,393 928 --
Short-term investments 7,206 3,966 6,070
Investment expenses (1,936) (1,570) (894)
-------- -------- --------
Net investment income $ 72,085 $ 65,064 $ 48,965
======== ======== ========
</TABLE>

The credit quality of the investment portfolio at December 31, 1997 was as
follows:

<TABLE>
<CAPTION>
Percent of
Rating Investment Portfolio
-------------------- ----------------------
<S> <C>
AAA 69.1%
AA 16.0
A 11.5
BBB 1.1
Other 2.3
</TABLE>

9
<PAGE>

The amortized cost and estimated market value of bonds were as follows (in
thousands):

<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1997 Cost Gains Losses Market Value
- ----------------- ---- ----- ------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $ 122,817 $ 799 $ (454) $ 123,162

Obligations of states and political
subdivisions 777,042 40,187 (135) 817,094

Foreign securities 48,078 -- (6,126) 41,952

Mortgage-backed securities 195,567 2,213 (27) 197,753

Corporate securities 66,014 1,375 (501) 66,888

Asset-backed securities 20,961 349 (1) 21,309
---------- ---------- ---------- ----------
Total $1,230,479 $ 44,923 $ (7,244) $1,268,158
========== ========== ========== ==========

December 31, 1996

U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $ 55,619 $ 1,103 $ (557) $ 56,165

Obligations of states and political
subdivisions 661,831 15,208 (2,870) 674,169

Foreign securities 15,019 197 (71) 15,145

Mortgage-backed securities 177,818 1,432 (906) 178,344

Corporate securities 76,760 381 (403) 76,738

Asset-backed securities 71,370 680 (172) 71,878
---------- ---------- ---------- ----------
Total $1,058,417 $ 19,001 $ (4,979) $1,072,439
========== ========== ========== ==========
</TABLE>

The change in net unrealized gains (losses) consisted of (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Bonds $ 23,657 $(16,640) $ 64,061
Equity investments 1,109 -- --
-------- -------- --------
Change in net unrealized gains (losses) $ 24,766 $(16,640) $ 64,061
======== ======== ========
</TABLE>

10
<PAGE>

The amortized cost and estimated market value of bonds at December 31,
1997 and 1996, by contractual maturity, are shown below (in thousands). Actual
maturities could differ from contractual maturities because borrowers have the
right to call or prepay certain obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 4,009 $ 4,007 $ 38,305 $ 38,626
Due after one year through five years 70,283 70,007 57,531 57,712
Due after five years through ten years 208,986 208,170 105,495 105,848
Due after ten years 730,673 766,912 607,898 620,031
Mortgage-backed securities (stated
maturities of 4 to 39 years) 195,567 197,753 177,818 178,344
Asset-backed securities (stated
maturities of 2 to 30 years) 20,961 21,309 71,370 71,878
---------- ---------- ---------- ----------
Total $1,230,479 $1,268,158 $1,058,417 $1,072,439
========== ========== ========== ==========
</TABLE>

Proceeds from sales of bonds during 1997, 1996 and 1995 were
$1,131,317,000, $1,118,112,000 and $608,773,000, respectively. Gross gains of
$12,659,000, $15,335,000 and $12,434,000 and gross losses of $1,440,000,
$12,146,000 and $7,314,000 were realized on sales in 1997, 1996 and 1995,
respectively.

To hedge against changes in yields on certain one-year corporate
securities, the Company entered into a series of Eurodollar futures contracts,
which were marked-to-market on a daily basis. These contracts were accounted for
as hedges. At year-end 1996, the net unrealized loss on the contracts, included
in the Company's unrealized gains in the stockholders' equity section, was not
material. The aggregate notional amount of these contracts was $83,728,000 as of
December 31, 1996.

The Company held open positions in U.S. Treasury bond futures contracts
with an aggregate notional amount of $33,300,000 and $20,600,000 as of December
31, 1997 and 1996, respectively. Such positions are marked-to-market on a daily
basis, and for the years ended December 31, 1997 and 1996, the Company reported
net realized gains of $190,000 and $923,000, respectively, which are included in
gross realized capital gains, above.

4. DEFERRED ACQUISITION COSTS

Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 146,233 $ 132,951 $ 91,839
--------- --------- ---------
Costs deferred during the period:
Ceding commission income (18,956) (15,956) (9,836)
Assumed commission expense 31 38 55
Premium taxes 5,554 3,718 2,537
Compensation and other acquisition costs 66,198 49,311 34,437
--------- --------- ---------
Total 52,827 37,111 27,193
--------- --------- ---------
Costs amortized during the period (27,962) (23,829) (16,888)
--------- --------- ---------
Balance of acquired subsidiary -- -- 30,807
--------- --------- ---------
Balance, end of period $ 171,098 $ 146,233 $ 132,951
========= ========= =========
</TABLE>

11
<PAGE>

5. OTHER OPERATING EXPENSES

Total salary expense and related benefits included in other operating
expenses were $19,796,000, $14,596,000 and $12,046,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.

6. STATUTORY ACCOUNTING PRACTICES

GAAP for the Subsidiaries differs in certain significant respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The principal differences result from the following statutory
accounting practices:

- Upfront premiums on municipal business are recognized as earned when
related principal and interest have expired rather than over the expected
coverage period;

- Acquisition costs are charged to operations as incurred rather than as
related premiums are earned;

- A contingency reserve (rather than a general loss reserve) is computed
based on the following statutory requirements:

(i) For all policies written prior to July 1, 1989, an amount equal
to 50% of cumulative earned premiums less permitted reductions, plus;

(ii) For all policies written on or after July 1, 1989, an amount
equal to the greater of 50% of premiums written for each category of
insured obligation or a designated percentage of principal guaranteed for
that category. These amounts are provided each quarter as either 1/60th or
1/80th of the total required for each category, less permitted reductions;

- Certain assets designated as "non-admitted assets" are charged
directly to statutory surplus but are reflected as assets under
GAAP;

- Federal income taxes are provided only on taxable income for which
income taxes are currently payable;

- Accruals for deferred compensation are not recognized;

- Purchase accounting adjustments are not recognized;

- Bonds are carried at amortized cost;

- Surplus notes are recognized as surplus rather than a liability.

A reconciliation of net income for the calendar years 1997, 1996 and 1995
and shareholders' equity at December 31, 1997, 1996 and 1995, reported by the
Company on a GAAP basis, to the amounts reported by the Subsidiaries on a
statutory basis, is as follows (in thousands):

<TABLE>
<CAPTION>
Net Income: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
GAAP BASIS $ 100,502 $ 80,760 $ 55,038
Non-insurance companies net loss (gain) (243) 95 (50)
Premium revenue recognition (23,130) (5,518) (4,805)
Losses and loss adjustment expenses incurred 4,653 (2,138) 10,871
Deferred acquisition costs (24,865) (12,482) (10,305)
Deferred income tax provision (benefit) 8,025 911 (3,055)
Amortization of bonds 56 566 1,195
Accrual of deferred compensation, net 26,681 12,737 5,663
Other (61) 1,404 (1,580)
--------- --------- ---------
STATUTORY BASIS $ 91,618 $ 76,335 $ 52,972
========= ========= =========
</TABLE>

12
<PAGE>

December 31,
------------------------------
Shareholders' Equity: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
GAAP BASIS $ 882,360 $ 801,260 $ 777,947
Non-insurance companies liabilities, net 15,500 14,072 12,039
Premium revenue recognition (74,863) (51,760) (46,248)
Loss and loss adjustment expense reserves 34,313 29,660 31,798
Deferred acquisition costs (171,098) (146,233) (132,951)
Contingency reserve (287,694) (227,139) (183,967)
Unrealized gain on investments, net of tax (43,027) (14,084) (30,298)
Deferred income taxes 59,867 41,682 43,205
Accrual of deferred compensation 41,451 18,390 5,653
Surplus notes 50,000 -- --
Other (12,841) (17,043) (16,492)
--------- --------- ---------
STATUTORY BASIS (SURPLUS) $ 493,968 $ 448,805 $ 460,686
========= ========= =========
SURPLUS PLUS CONTINGENCY RESERVE $ 781,661 $ 675,944 $ 644,653
========= ========= =========
</TABLE>

7. FEDERAL INCOME TAXES

For periods prior to May 13, 1994, the date of the initial public offering
when the Company became less than 80% owned by U S WEST, the Company and its
Subsidiaries joined with U S WEST and its subsidiaries in filing a consolidated
federal income tax return. Under a U S WEST practice, an income tax benefit or
liability was allocated to the Company to the extent that benefits were usable
or additional liabilities were incurred by U S WEST due to the Company's
inclusion in the U S WEST tax returns. For each year since the Company's
acquisition by U S WEST, the Company's resulting income tax provision has been
the same as if the allocation of taxes were based on a separate return
calculation. For the Subsidiaries, under a separate tax sharing agreement with U
S WEST, the allocation of income taxes was based upon separate return
calculations, which provided that benefits or liabilities created by the
Subsidiaries were allocated to the Subsidiaries regardless of whether the
benefits were usable or additional liabilities were incurred in the U S WEST tax
returns. For periods subsequent to May 12, 1994, the Company and all members of
its group elected to file consolidated federal income tax returns. The
calculation of each member's tax benefit or liability was controlled by a tax
sharing agreement that based the allocation of such benefit or liability upon a
separate return calculation.

The cumulative balance sheet effects of deferred tax consequences are (in
thousands):

December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Deferred acquisition costs $ 59,884 $ 51,182
Deferred premium revenue adjustments 8,424 3,520
Unrealized capital gains 15,618 7,952
Contingency reserves 38,037 30,893
Market discounts 2,016 1,950
--------- ---------
Total deferred tax liabilities 123,979 95,497
--------- ---------

Loss and loss adjustment expense reserves (12,009) (10,381)
Deferred compensation (21,503) (10,730)
Tax credits (1,807) (7,861)
Tax and loss bonds (30,520) (22,526)
Other, net (1,268) (2,832)
--------- ---------
Total deferred tax assets (67,107) (54,330)
--------- ---------
Total deferred income taxes $ 56,872 $ 41,167
========= =========
</TABLE>

No valuation allowance was necessary at December 31, 1997 or 1996.

13
<PAGE>

A reconciliation of the effective tax rate with the federal statutory rate
follows:

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 35.0% 35.0% 35.0%
Tax-exempt interest (7.9) (8.9) (8.5)
Other 0.3 0.3 0.2
---- ---- ----
Provision for income taxes 27.4% 26.4% 26.7%
==== ==== ====
</TABLE>

8. SHAREHOLDERS' EQUITY

On September 2, 1994, the Company issued to Fund American 2,000,000 shares
of Series A, non-dividend paying, voting, convertible preferred stock having an
aggregate liquidation preference of $700,000. The preferred stock is
convertible, at the option of the holder upon payment of the conversion price
therefor, into an equal number of shares of common stock (subject to
anti-dilutive adjustment). The conversion price per share (subject to
anti-dilutive adjustment) is $29.65. The preferred stock will be redeemed (if
then outstanding) on May 13, 2004 at a redemption price of $0.35 per share. Fund
American is entitled to one vote per share of preferred stock, voting together
as a single class with the holders of common stock on all matters upon which
holders of common stock are entitled to vote. As the holder of the preferred
stock, Fund American is not entitled to receive dividends or other distributions
of any kind payable to shareholders of the Company, except that, in the event of
the liquidation, dissolution or winding up of the Company, it is entitled to
receive out of the assets of the Company available therefor, before any
distribution or payment is made to the holders of common stock or to any other
class of capital stock of the Company ranking junior to the Company's preferred
stock, liquidation payments in the amount of $0.35 per share. Fund American may
not transfer the preferred stock, except to one of its majority-owned
subsidiaries.

On December 20, 1995, CGC merged with a subsidiary of the Company. The
Merger provided for each CGC share to be exchanged for 0.6716 share of the
Company's common stock and cash of $5.69. The Company issued in the aggregate
6,051,661 common shares and paid aggregate cash consideration of $51,300,000.

In May 1996, the Company repurchased 1,000,000 shares of its common stock
from U S WEST for a purchase price of $26.50 per share. At the same time, the
Company also entered into forward agreements with National Westminster Bank Plc
and Canadian Imperial Bank of Commerce (the Counterparties) in respect of
1,750,000 shares (the Forward Shares) of the Company's common stock. Under the
forward agreements, the Company has the obligation either: (i) to purchase the
Forward Shares from the Counterparties for a price equal to $26.50 per share
plus carrying costs or (ii) to direct the Counterparties to sell the Forward
Shares, with the Company receiving any excess or making up any shortfall between
the sale proceeds and $26.50 per share plus carrying costs in cash or additional
shares, at its option. Simultaneous with the Company entering into the forward
agreements, the Company made the economic benefit and risk of 750,000 of these
shares available for subscription by certain of the Company's employees and
directors. When an individual participant exercises Forward Shares under the
subscription program, the Company settles with the participant but does not
necessarily close out the corresponding forward share position with the
Counterparties. The cost of these settlements during 1997 was $2,142,000 and was
charged to additional paid-in capital. By the fourth quarter of 1997, such
exercises by participants had increased the number of shares allocated to the
Company from 1,000,000 shares to 1,187,800 shares. During the fourth quarter of
1997, the Company purchased 1,187,800 Forward Shares for $33,910,000 by
exercising rights under the forward agreements. At December 31, 1997, as a
result of the Company's exercise, the repurchased shares are held as treasury
stock, and the remaining 562,200 Forward Shares were allocated to the
subscription program.

14
<PAGE>

9. DIVIDENDS AND CAPITAL REQUIREMENTS

Under New York Insurance Law, FSA may pay a dividend to the Company
without the prior approval of the Superintendent of the New York State Insurance
Department only from earned surplus subject to the maintenance of a minimum
capital requirement. In addition, the dividend, together with all dividends
declared or distributed by FSA during the preceding twelve months, may not
exceed the lesser of 10% of its policyholders' surplus shown on FSA's last filed
statement, or adjusted net investment income, as defined, for such twelve-month
period. As of December 31, 1997, FSA had $49,846,000 available for the payment
of dividends over the next twelve months. In addition, the New York
Superintendent has approved the repurchase by FSA of up to $75,000,000 of its
shares from the Company through December 31, 1998, pursuant to which FSA has
repurchased $66,500,000 of its shares through December 31, 1997.

10. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES

The Company has a credit arrangement aggregating $150,000,000 at December
31, 1997, which is provided by commercial banks and intended for general
application to transactions insured by the Subsidiaries. At December 31, 1997,
there were no borrowings under this arrangement, which expires on November 23,
1999. In addition, there are credit arrangements assigned to specific insured
transactions. In August 1994, FSA entered into a facility agreement with
Canadian Global Funding Corporation and Hambros Bank Limited. Under the
agreement, FSA can arrange financing for transactions subject to certain
conditions. The amount of this facility was $186,911,000, of which $100,911,000
was unutilized at December 31, 1997.

FSA has a standby line of credit commitment in the amount of $240,000,000
with a group of international Aaa/AAA-rated banks to provide loans to FSA after
it has incurred, during the term of the facility, cumulative municipal losses
(net of any recoveries) in excess of the greater of $230,000,000 or 5.75% of
average annual debt service of the covered portfolio. The obligation to repay
loans made under this agreement is a limited recourse obligation payable solely
from, and collateralized by, a pledge of recoveries realized on defaulted
insured obligations including certain installment premiums and other collateral.
This commitment has a term beginning on April 30, 1997 and expiring on April 30,
2004 and contains an annual renewal provision subject to approval by the banks.
No amounts have been utilized under this commitment as of December 31, 1997.

In connection with the Merger, the Company assumed $30,000,000 of CGC's
senior notes. Interest on these notes was paid semiannually at the rate of 7.05%
per annum. These notes were repaid in September 1997.

On September 18, 1997, the Company issued $130,000,000 of 7.375% Senior
Quarterly Income Debt Securities (Senior QUIDS) due September 30, 2097 and
callable without premium or penalty on or after September 18, 2002. Interest on
these notes is paid quarterly beginning on December 31, 1997. Debt issuance
costs of $4,300,000 are being amortized over the life of the debt. The Company
used the proceeds to repay the CGC senior notes described above, to augment
capital in the Subsidiaries, to repurchase Forward Shares (see Note 8) and for
general corporate purposes.

11. EMPLOYEE BENEFIT PLANS

The Subsidiaries maintain both a qualified and a non-qualified
non-contributory defined contribution pension plan for the benefit of all
eligible employees. The Subsidiaries' contributions are based upon a fixed
percentage of employee compensation. Pension expense, which is funded as
accrued, amounted to $2,535,000, $2,215,000 and $1,898,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.

The Subsidiaries have an employee retirement savings plan for the benefit
of all eligible employees. The plan permits employees to contribute a percentage
of their salaries up to limits prescribed by the Internal Revenue Service (IRS
Code, Section 401(k)). The Subsidiaries' contributions are discretionary, and
none have been made.

15
<PAGE>

During 1991, the Subsidiaries established the Profit Participation Plan as
a long-term incentive compensation plan for the benefit of certain of its
employees. Prior to the Company's initial public offering in 1994, the Company
adopted a Supplemental Restricted Stock Plan. Pursuant to this plan, awards of
outstanding units to existing employees under the Profit Participation Plan were
valued at $0.20 per dollar of award ($0.70 per dollar of award in the case of
1994 regular units granted thereunder) and, at the election of each outstanding
employee, were exchanged for restricted shares of common stock valued at the
initial public offering price of $20.00 per share. All employees of the Company,
including all senior executives, exchanged their outstanding interests in the
Profit Participation Plan for restricted shares of common stock at the public
offering price under the Supplemental Restricted Stock Plan. In exchange for an
accrued balance of $7,126,000 in such Profit Participation Plan, the Company
issued 356,345 shares of restricted stock. This transaction was treated as a
non-cash financing transaction for cash flow purposes. The stock was restricted
because ownership of the shares by employees required continued employment. The
shares vested ratably over a three-year period on July 1, 1994, 1995 and 1996.

Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of common
stock, subject to anti-dilutive adjustment, were reserved for awards of options,
restricted shares of common stock, and performance shares to employees for the
purpose of providing, through the grant of long-term incentives, a means to
attract and retain key personnel and to provide to participating officers and
other key employees long-term incentives for sustained high levels of
performance. Shares available under the 1993 Equity Participation Plan were
increased from 1,810,780 to 2,110,780 in May 1995. The 1993 Equity Participation
Plan also contains provisions that permit the Human Resources Committee to pay
all or a portion of an employee's bonuses in the form of shares of common stock
credited to the employees at a 15% discount from current market value and paid
to employees five years from the date of award. Up to an aggregate of 10,000,000
shares may be allocated to such equity bonuses. Common stock to pay performance
shares, stock options and equity bonus awards is acquired by the Company through
open-market purchases by a trust established for such purpose.

During 1994, under the Company's 1993 Equity Participation Plan, the
Company granted to officers and employees, in respect of future performance,
non-qualified options to purchase an aggregate of 1,099,000 shares of common
stock, of which 39,000 were forfeited and 1,060,000 were still outstanding at
December 31, 1994, substantially all of which have an exercise price of $20.00
per share. (As described below, 1,025,500 of these options were converted to
performance shares.) The foregoing options vest, subject to continuation of
employment and other terms of the option grants, at the rate of 20% per year,
for five one-year periods, with the first period ending on July 1, 1994. Such
options expire ten years after the effective dates of their grant. In the fourth
quarter of 1994, holders of outstanding stock options under the 1993 Equity
Participation Plan were offered the right to exchange such stock options for an
equal number of performance shares under such Plan. Also, as a result of the
Merger, the Company granted stock options to acquire an aggregate of 169,956
shares of common stock with strike prices ranging from $18.63 to $23.53 per
share to employees of CGC in exchange for outstanding stock options of CGC.
During 1997, employees acquired 125,106 shares subject to options at an average
strike price of $22.32 per share and with an average market price of $41.47 per
share. In addition, options to purchase 20,194 shares were forfeited during
1997. Giving effect to such exchange and subsequent awards, at December 31,
1997, there were outstanding 1,366,375 performance shares and options to
purchase 56,656 shares of common stock.

Performance shares granted under the 1993 Equity Participation Plan were
as follows:

<TABLE>
<CAPTION>
Outstanding Granted Earned Forfeited Outstanding Market
at Beginning During During During at End Price at
of Year the Year the Year the Year of Year Grant Date
------- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1995 1,025,500 83,650 -- -- 1,109,150 $19.250
1996 1,109,150 282,490 -- 17,300 1,374,340 25.250
1997 1,374,340 253,057 201,769 59,253 1,366,375 35.500
</TABLE>

The Company applies APB Opinion 25 and related Interpretations in
accounting for its performance shares. The Company estimates the final cost of
these performance shares and accrues for this expense over the performance
period. The accrued expense for the performance shares was $29,500,000,
$13,741,000 and $5,744,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. In tandem with this accrued expense, the Company estimates those
performance shares that it expects to settle in stock and records this amount in
stockholders' equity as deferred compensation. The remainder of the accrual,
which represents the amount of performance shares that the Company estimates it
will settle in cash, is recorded in accrued expenses and other liabilities. In
1996, the Company adopted disclosure provisions of SFAS No. 123. Had the
compensation cost for the Company's performance shares been determined based
upon the provisions of SFAS No. 123, there would have been no effect on the
Company's reported net income and earnings per share.

16
<PAGE>

In November 1994, the Company appointed an independent trustee authorized
to purchase shares of the Company's common stock in open market transactions, at
times and prices determined by the trustee. These purchases are intended to fund
future obligations relating to equity bonuses, performance shares and stock
options under the 1993 Equity Participation Plan and are presented as treasury
stock in these financial statements. During 1997, 1996 and 1995, the total
number of shares purchased by the trust was 162,573, 529,131 and 591,714,
respectively, at a cost of $5,434,000, $14,111,000 and $14,444,000,
respectively. In 1996 and 1995, the Company also repurchased stock from its
employees in satisfaction of withholding taxes on shares distributed under its
restricted stock plan.

The Company does not currently provide post-retirement benefits, other
than under its defined contribution plans, to its employees, nor does it provide
post-employment benefits to former employees.

12. COMMITMENTS AND CONTINGENCIES

The Company and its Subsidiaries lease office space and equipment under
non-cancelable operating leases, which expire at various dates through 2005.

Future minimum rental payments are as follows (in thousands):

Year Ended December 31,
-----------------------
<S> <C>
1998 $ 2,477
1999 2,440
2000 2,301
2001 2,014
2002 1,739
Thereafter 5,071
-------
Total $16,042
=======
</TABLE>

Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$4,067,000, $3,816,000 and $3,712,000, respectively.

During the ordinary course of business, the Subsidiaries have become
parties to certain litigation. Management believes that these matters will be
resolved with no material financial impact on the Company.

13. REINSURANCE

The Subsidiaries reinsure portions of their risks with affiliated (see
Note 15) and unaffiliated reinsurers under quota share treaties and on a
facultative basis. The Subsidiaries' principal ceded reinsurance program
consisted in 1997 of two quota share treaties and three automatic facultative
facilities. One treaty covered all of the Subsidiaries' approved regular lines
of business, except U.S. municipal obligation insurance. Under this treaty in
1997, the Subsidiaries ceded 9.75% of each covered policy, up to a maximum of
$19,500,000 insured principal per policy. At their sole option, the Subsidiaries
could have increased, and in certain instances did increase, the ceding
percentage to 19.5% up to $39,000,000 of each covered policy. A second treaty
covered the Subsidiaries' U.S. municipal obligation insurance business. Under
this treaty in 1997, the Subsidiaries ceded 9% of each covered policy that is
classified by the Subsidiaries as providing U.S. municipal bond insurance as
defined by Article 69 of the New York Insurance Law up to a limit of $24,000,000
per single risk, which is defined by revenue source. At their sole option, the
Subsidiaries could have increased, and in certain instances did increase, the
ceding percentage to 35% up to $93,333,000 per single risk. These cession
percentages under both treaties were reduced on smaller-sized transactions.
Under the three automatic facultative facilities in 1997, the Subsidiaries at
their option could allocate up to a specified amount for each reinsurer (ranging
from $4,000,000 to $50,000,000 depending on the reinsurer) for each transaction,
subject to limits and exclusions, in exchange for which the Subsidiaries agreed
to cede in the aggregate a specified percentage of gross par insured by the
Subsidiaries. Each of the treaties and automatic facultative facilities allowed
the Subsidiaries to withhold a ceding commission to defray their expenses. The
Subsidiaries also employed non-treaty, quota share facultative reinsurance on
various transactions in 1997 in keeping with prior practices. In 1997, the
Subsidiaries also implemented facultative first-loss reinsurance on selected
asset-backed transactions.

17
<PAGE>

In the event (which management considers to be highly unlikely) that any
or all of the reinsuring companies were unable to meet their obligations to the
Subsidiaries, the Subsidiaries would be liable for such defaulted amounts. The
Subsidiaries have also assumed reinsurance of municipal obligations from
unaffiliated insurers.

Amounts reinsured were as follows (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Written premiums ceded $ 63,513 $ 55,965 $ 33,166
Written premiums assumed 1,352 1,873 1,684

Earned premiums ceded 41,713 38,723 38,013
Earned premiums assumed 5,121 6,020 2,759

Loss and loss adjustment expense payments
ceded 2,862 29,408 3,060
Loss and loss adjustment expense payments
assumed 2 3 3

Incurred losses and loss adjustment expenses ceded 3,605 (2,249) 9,101
Incurred losses and loss adjustment expenses
assumed 161 38 81

<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Principal outstanding ceded $24,547,361 $20,292,615
Principal outstanding assumed 1,670,468 1,995,752

Deferred premium revenue ceded 173,123 151,224
Deferred premium revenue assumed 14,128 18,929

Loss and loss adjustment expense reserves ceded 30,618 29,875
Loss and loss adjustment expense reserves assumed 865 705
</TABLE>

14. OUTSTANDING EXPOSURE AND COLLATERAL

The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1997 and 1996 (net of amounts ceded to other
insurers of $10,129 and $9,601 of asset-backed and $14,418 and $10,691 of
municipal, respectively) and the terms to maturity are as follows:

<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- ----------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years $ 7,553 $ 2,230 $ 7,424 $ 1,571
5 to 10 Years 5,637 5,683 3,920 3,841
10 to 15 Years 2,858 8,257 1,461 6,272
15 to 20 Years 524 14,340 714 11,433
20 Years and Above 11,917 16,479 9,681 12,877
------- ------- ------- -------
Total $28,489 $46,989 $23,200 $35,994
======= ======= ======= =======
</TABLE>

18
<PAGE>

The principal amount ceded as of December 31, 1997 and 1996 and the terms
to maturity are as follows (in millions):

December 31, 1997 December 31, 1996
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- ----------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years $ 3,828 $ 965 $ 3,695 $ 769
5 to 10 Years 2,118 1,693 2,413 1,192
10 to 15 Years 553 2,078 452 1,479
15 to 20 Years 257 3,005 302 2,345
20 Years and Above 3,373 6,677 2,739 4,906
------- ------- ------- -------
Total $10,129 $14,418 $ 9,601 $10,691
======= ======= ======= =======
</TABLE>

The Company limits its exposure to losses from writing financial
guarantees by underwriting investment-grade obligations, by diversifying its
portfolio and by maintaining rigorous collateral requirements on asset-backed
obligations. The gross principal amounts of insured obligations in the
asset-backed insured portfolio are backed by the following types of collateral
(in millions):

Net of Amounts Ceded Ceded
December 31, December 31,
------------ ------------
Types of Collateral 1997 1996 1997 1996
- ------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Residential mortgages $12,928 $10,987 $ 3,665 $ 3,077
Consumer receivables 10,659 7,548 4,601 3,735
Government securities 787 1,477 120 449
Pooled corporate obligations 3,004 1,663 540 852
Commercial mortgage portfolio:
Commercial real estate 98 113 418 463
Corporate secured 55 66 481 619
Investor-owned utility obligations 643 791 229 266
Other asset-backed obligations 315 555 75 140
------- ------- ------- -------
Total asset-backed obligations $28,489 $23,200 $10,129 $ 9,601
======= ======= ======= =======
</TABLE>

The asset-backed insured portfolio, which aggregated $38,618,244,000
principal before reinsurance at December 31, 1997, was collateralized by assets
with an estimated fair value of $44,382,716,000. At December 31, 1996, it
aggregated $32,792,722,000 principal before reinsurance and was collateralized
by assets with an estimated fair value of $38,323,180,000. Such estimates of
fair value are calculated at the inception of each insurance policy and are
changed only in proportion to changes in exposure. At December 31, 1997, the
estimated fair value of collateral and reserves over the principal insured
averaged from 100% for commercial real estate to 172% for corporate secured
obligations. At December 31, 1996, the estimated fair value of collateral and
reserves over the principal insured averaged from 100% for commercial real
estate to 168% for corporate secured obligations. Collateral for specific
transactions is generally not available to pay claims related to other
transactions. The amounts of losses ceded to reinsurers are determined net of
collateral.

The gross principal amount of insured obligations in the municipal insured
portfolio includes the following types of issues (in millions):

<TABLE>
<CAPTION>
Net of Amounts Ceded Ceded
December 31, December 31,
------------ ------------
Types of Issues 1997 1996 1997 1996
- --------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
General obligation bonds $17,101 $12,523 $ 3,182 $ 2,423
Housing revenue bonds 1,770 1,794 955 1,033
Municipal utility revenue bonds 5,892 4,671 2,294 1,472
Health care revenue bonds 3,924 2,854 2,175 2,049
Tax-supported bonds (non-general obligation) 11,210 8,805 3,526 2,152
Transportation revenue bonds 1,972 1,479 1,041 436
Other municipal bonds 5,120 3,868 1,245 1,126
------- ------- ------- -------
Total municipal obligations $46,989 $35,994 $14,418 $10,691
======= ======= ======= =======
</TABLE>

19
<PAGE>

In its asset-backed business, the Company considers geographic
concentration as a factor in underwriting insurance covering securitizations of
pools of such assets as residential mortgages or consumer receivables. However,
after the initial issuance of an insurance policy relating to such
securitization, the geographic concentration of the underlying assets may not
remain fixed over the life of the policy. In addition, in writing insurance for
other types of asset-backed obligations, such as securities primarily backed by
government or corporate debt, geographic concentration is not deemed by the
Company to be significant given other more relevant measures of diversification
such as issuer or industry.

The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in which municipalities
located therein issued an aggregate of 2% or more of the Company's net par
amount outstanding of insured municipal securities as of December 31, 1997:

Net Par Percent of Total Ceded Par
Number Amount Municipal Net Par Amount
State of Issues Outstanding Amount Outstanding Outstanding
----- --------- ----------- ------------------ -----------
(in millions) (in millions)
<S> <C> <C> <C> <C>
California 403 $ 7,832 16.7% $ 1,929
New York 281 4,307 9.2 2,163
Pennsylvania 231 3,125 6.6 650
New Jersey 207 2,730 5.8 1,260
Florida 103 2,669 5.7 817
Texas 294 2,472 5.3 669
Illinois 274 1,851 3.9 254
Massachusetts 101 1,460 3.1 553
Michigan 147 1,417 3.0 409
Minnesota 129 1,152 2.5 111
Wisconsin 179 1,138 2.4 206
All Other States 1,190 15,575 33.1 4,528
Non-U.S 29 1,261 2.7 869
------- ------- ----- -------
Total 3,568 $46,989 100.0% $14,418
======= ======= ===== =======
</TABLE>

15. RELATED PARTY TRANSACTIONS

The Subsidiaries ceded premiums of $21,216,000, $19,890,000 and
$13,061,000 to Tokio Marine for the years ended December 31, 1997, 1996 and
1995, respectively. The amounts included in prepaid reinsurance premiums at
December 31, 1997 and 1996 for reinsurance ceded to Tokio Marine were
$53,603,000 and $44,634,000, respectively. Reinsurance recoverable on unpaid
losses ceded to Tokio Marine was $613,000 and $477,000 at December 31, 1997 and
1996, respectively.

The Subsidiaries ceded premiums of $16,890,000, $15,409,000 and $7,522,000
on a quota share basis to affiliates of U S WEST for the years ended December
31, 1997, 1996 and 1995, respectively, of which $351,000, $372,000 and $629,000,
respectively, were ceded to Commercial Reinsurance Company (Commercial Re). The
amounts included in prepaid reinsurance premiums for reinsurance ceded to these
affiliates were $51,980,000 and $49,649,000 at December 31, 1997 and 1996,
respectively, of which $5,554,000 and $8,728,000, respectively, were ceded to
Commercial Re. The amounts of reinsurance recoverable on unpaid losses ceded to
these affiliates at December 31, 1997 and 1996 were $24,195,000 and $23,473,000,
respectively, of which $20,335,000 and $19,170,000, respectively, were ceded to
Commercial Re. The Commercial Re reinsurance agreement was subject to, and
received, the non-disapproval of the State of New York Insurance Department due
to its nature as an affiliate transaction. FSA has taken credit for the
reinsurance ceded to Commercial Re.

20
<PAGE>

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

Bonds -- The carrying amount of bonds represents fair value. The fair
value of bonds is based upon quoted market price.

Short-term investments -- The carrying amount is fair value, which
approximates cost due to the short maturity of these instruments.

Cash, receivable for investments sold and payable for investments
purchased -- The carrying amount approximates fair value because of the short
maturity of these instruments.

Deferred premium revenue, net of prepaid reinsurance premiums -- The
carrying amount of deferred premium revenue, net of prepaid reinsurance
premiums, represents the Company's future premium revenue, net of reinsurance,
on policies where the premium was received at the inception of the insurance
contract. The fair value of deferred premium revenue, net of prepaid reinsurance
premiums, is an estimate of the premiums that would be paid under a reinsurance
agreement with a third party to transfer the Company's financial guaranty risk,
net of that portion of the premiums retained by the Company to compensate it for
originating and servicing the insurance contracts.

Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the Company's
financial guaranty risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.

Losses and loss adjustment expenses, net of reinsurance recoverable on
unpaid losses -- The carrying amount is fair value, which is the present value
of the expected cash flows for specifically identified claims and potential
losses in the Company's insured portfolio.

<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
(In thousands) Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Bonds $1,268,158 $1,268,158 $1,072,439 $1,072,439
Short-term investments 132,931 132,931 73,641 73,641
Cash 12,475 12,475 8,146 8,146
Receivable for securities sold 20,623 20,623 -- --

Liabilities:
Deferred premium revenue, net of
prepaid reinsurance premiums 422,073 295,451 359,972 251,980
Losses and loss adjustment expenses,
net of reinsurance recoverable on
unpaid losses 44,799 44,799 42,204 42,204
Notes payable 130,000 131,612 30,000 30,000
Payable for investments purchased 72,979 72,979 14,390 14,390

Off-balance-sheet instruments:
Installment premiums -- 116,888 -- 102,988
</TABLE>

21
<PAGE>

17. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company's liability for losses and loss adjustment expenses consists
of the case basis and general reserves. Activity in the liability for losses and
loss adjustment expenses is summarized as follows (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 72,079 $ 111,759 $ 91,130
Less reinsurance recoverable 29,875 61,532 55,491
--------- --------- ---------
Net balance at January 1 42,204 50,227 35,639
Incurred losses and loss adjustment expenses:
Current year 5,400 5,300 3,000
Prior years 3,756 1,574 3,258
Related to Merger -- -- 15,400
Paid losses and loss adjustment expenses:
Current year (2,850) -- --
Prior years (3,711) (14,897) (7,070)
--------- --------- ---------
Net balance December 31 44,799 42,204 50,227
Plus reinsurance recoverable 30,618 29,875 61,532
--------- --------- ---------
Balance at December 31 $ 75,417 $ 72,079 $ 111,759
========= ========= =========
</TABLE>

During 1995, the Company increased its general reserve by $6,258,000, of
which $3,000,000 was for originations of new business and $3,258,000 was to
reestablish the general reserve for transfers from general reserves to case
basis reserves. During 1995, the Company transferred $10,788,000 from its
general reserve to case basis reserves associated predominantly with certain
residential mortgage and timeshare receivables transactions. Also in December
1995, FSA recognized a one-time increase of $15,400,000 to the general reserve
to provide for the insured portfolio it had assumed in the Merger with CGC in a
manner consistent with the Company's reserving methodology. Prior to the Merger,
CGC did not maintain a general reserve. Giving effect to all the 1995 events,
the general reserve totaled $31,798,000 at December 31, 1995.

During 1996, the Company increased its general reserve by $6,874,000, of
which $5,300,000 was for originations of new business and $1,574,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1996, the Company transferred
$9,012,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage and timeshare receivables
transactions. Giving effect to these transfers, the general reserve totaled
$29,660,000 at December 31, 1996.

During 1997, the Company increased its general reserve by $9,156,000, of
which $5,400,000 was for originations of new business and $3,756,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1997, the Company transferred
$4,503,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage transactions. Giving effect to
these transfers, the general reserve totaled $34,313,000 at December 31, 1997.

Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $19,779,000,
$17,944,000 and $15,276,000 at December 31, 1997, 1996 and 1995, respectively.

22
<PAGE>

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except share data) First Second Third Fourth Full Year
----- ------ ----- ------ ---------
<S> <C> <C> <C> <C> <C>
1997
Gross premiums written $41,111 $90,995 $42,470 $61,815 $236,391
Net premiums written 27,184 67,495 28,911 49,288 172,878
Net premiums earned 24,774 27,561 27,204 29,972 109,511
Net investment income 16,361 17,121 17,920 20,683 72,085
Losses and loss adjustment expenses 2,285 2,156 2,426 2,289 9,156
Income before taxes 27,266 35,058 37,896 38,279 138,499
Net income 20,250 25,233 27,225 27,794 100,502
Basic earnings per common share 0.67 0.84 0.91 0.93 3.35
Diluted earnings per common share 0.66 0.82 0.88 0.90 3.25

1996
Gross premiums written $52,580 $44,762 $38,994 $40,630 $176,966
Net premiums written 34,139 30,726 28,449 27,686 121,000
Net premiums earned 22,734 19,750 21,637 26,327 90,448
Net investment income 15,682 15,986 16,467 16,929 65,064
Losses and loss adjustment expenses 1,625 1,530 1,482 2,237 6,874
Income before taxes 26,234 25,211 22,948 35,378 109,771
Net income 19,544 18,748 17,210 25,258 80,760
Basic earnings per common share 0.62 0.61 0.57 0.84 2.64
Diluted earnings per common share 0.62 0.60 0.57 0.83 2.61
</TABLE>

19. PRO FORMA RESULTS OF ACQUISITION (UNAUDITED)

The unaudited consolidated results of operations (in thousands, except per
share data) on a pro forma basis as though the Merger had been consummated on
January 1, 1995, excluding the effect of the one-time general reserve charge in
1995 of $15,400, were as follows:

December 31,
1995
----
<S> <C>
Total revenues $157,150
Total expenses 44,239
Earnings per common share 2.53
</TABLE>

The pro forma information is presented for informational purposes only and
is not necessarily indicative of the operating results that would have occurred
had the Merger been consummated as of January 1, 1995, nor is it necessarily
indicative of future operating results.

23
<PAGE>

20. EARNINGS PER SHARE

In 1997, the Company adopted SFAS No. 128 specifying the computation,
presentation and disclosure requirements for EPS. The new standard defines
"basic" and "diluted" earnings per share. Basic earnings per share are based on
average basic shares outstanding, which is calculated by adding shares earned
but not issued under the Company's equity bonus and performance share plans to
the average common shares outstanding. Diluted earnings per share are based on
average diluted shares outstanding, which is calculated by adding shares
contingently issuable under stock options, the performance share plan and the
Company's convertible preferred stock to the average basic shares outstanding.
The calculations of average basic and diluted common shares outstanding are as
follows (in thousands):

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average common shares outstanding 29,858 30,547 25,797
Shares earned but unissued under stock-based
compensation plans 170 80 59
------ ------ ------
Average basic common shares outstanding 30,028 30,627 25,856
Shares contingently issuable under:
Stock-based compensation plans 395 268 43
Convertible preferred stock 490 -- --
------ ------ ------
Average diluted common shares outstanding 30,913 30,895 25,899
</TABLE>

21. RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Securities and Exchange Commission (SEC) issued
Financial Reporting Release No. 48, Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments (FRR No. 48).

FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the footnotes to the financial statements.
Additionally, the amendments expand existing disclosure requirements to include
quantitative and qualitative discussions with respect to market risk inherent in
market-risk-sensitive instruments such as equity and fixed-maturity securities,
as well as derivative instruments.

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Comprehensive income is defined as the change in stockholders'
equity during a period from transactions and other events and circumstances from
non-owner sources and includes net income and all changes in stockholders'
equity except those resulting from investments by owners and distributions to
owners.

SFAS No. 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.

SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.

Also in June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosure about Segments of an Enterprise and Related Information.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual and interim financial
statements and requires presentation of a measure of profit or loss, certain
specific revenue and expense items and segment assets. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers, superseding most of SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise.

24
<PAGE>

SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The enterprise must report information about revenues
derived, major customers, and countries in which it earns revenues and holds
assets, regardless of whether that information is used in making operating
decisions. However, SFAS No. 131 does not require an enterprise to report
information that is not prepared for internal use if reporting would be
impracticable.

SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application is to be reported in
financial statements of the interim periods in the third year of application.

The Company is in the process of determining the effect of these standards
on its financial statements.