Discontinued Operations

During 2014, White Mountains recorded a net loss on sale of discontinued operations of $1.6 million and a net loss from discontinued operations of $1.8 million. The net loss on sale of discontinued operations included a $18.8 million loss at OneBeacon on the Runoff Transaction, which included a $23.5 million after-tax loss from the change in the estimated value of the surplus notes issued with the Runoff Transaction, partially offset by a $4.8 million after-tax reduction in the loss on sale from the Runoff Transaction related to the change in the treatment of the $7.4 million pre-tax reserve charge recorded during the second quarter of 2013 (as described below). Previously, OneBeacon expected that the Runoff SPA would be amended to provide for the transfer of $7.4 million of additional assets to support the reserve charge. The Runoff SPA was instead revised to increase the cap on seller financing. The $18.8 million net loss on sale recorded in 2014 from the Runoff Transaction was partially offset by a $13.9 million gain from a payment received from Allianz, the purchaser of White Mountains’s former subsidiary Fireman’s Fund Insurance Company (“FFIC”), related to the utilization of alternative minimum tax credits associated with the tax loss on the sale of FFIC in 1991 and a $3.2 million gain from an interim payment from Allstate that primarily related to the favorable development on loss reserves transferred in the sale of Esurance and Answer Financial. The $1.8 million net loss from discontinued operations in 2014 related entirely to the Runoff Business.

During 2013, White Mountains recorded a net gain on sale of discontinued operations of $46.6 million and a net loss from discontinued operations of $42.1 million. During 2013, OneBeacon recorded a $78.9 million pre-tax loss and LAE provision for the Runoff Business. This reserve charge included a $7.4 million increase in loss and LAE reserves recorded in the second quarter of 2013, which partially offset $7.8 million of other revenue associated with a settlement award in the second quarter of 2013 in the Safeco v. American International Group, Inc. (“AIG”) class action related to AIG's alleged underreporting of workers' compensation premiums to the National Workers’ Compensation Reinsurance Pool. The net $71.5 million pre-tax ($46.5 million after-tax) of net losses from discontinued operations were fully offset by a $46.6 million after-tax reduction in the loss on sale of discontinued operations, as prescribed by the terms of the Runoff SPA, which stated that the buyer assumed the risk that loss and LAE reserves develop unfavorably from September 30, 2012 onward.

During 2012, White Mountains recorded a net loss from discontinued operations of $24.0 million and a net loss on sale of discontinued operations of $91.5 million, substantially all of which related to the Runoff Transaction and the results of the Runoff Business.

Runoff Transaction

As part of closing the Runoff Transaction on December 23, 2014, OneBeacon provided financing in the form of surplus notes with a par value of $101.0 million issued by OneBeacon Insurance Company (“OBIC”), one of the entities that were transferred from OneBeacon to Armour as part of the transaction (the “OBIC Surplus Notes”). At closing, the OBIC Surplus Notes had a fair value of $64.9 million, based on a discounted cash flow model, resulting in a total valuation adjustment of $36.1 million pre-tax ($23.5 million after-tax) included in loss from sale of discontinued operations. Subsequent to closing, the OBIC Surplus Notes are included in OneBeacon’s investment portfolio, categorized within other long-term investments, and subsequent changes in value thereon will be reflected in continuing operations. The fair value of the OBIC Surplus Notes did not materially change as of December 31, 2014.

AutoOne

On February 22, 2012, OneBeacon completed the sale of the AutoOne business to Interboro, which included the execution of a reinsurance agreement with certain subsidiaries of the Company pursuant to which OneBeacon cedes, on a 100% quota share basis, legacy AutoOne business not directly written by transferred entities.

During the year ended December 31, 2012, OneBeacon and Interboro reached conclusion on post-closing adjustments to the closing balance sheet resulting in OneBeacon recording a net gain of $0.5 million after tax, reflecting a true up of the estimated loss on sale of AutoOne.

Surplus Notes

In the fourth quarter of 2014, in conjunction with the Runoff Transaction, OneBeacon provided financing in the form of surplus notes with a par value of $101.0 million, which had a fair value of $64.9 million at the date of closing and as of December 31, 2014. The OBIC Surplus Notes, issued by one of the transferred entities, OBIC (“Issuer”), were in the form of both seller priority and pari passu notes.

Under the contractual terms of both the seller priority and pari passu notes, scheduled interest payments accrue at 6.0% until the scheduled maturity date of March 15, 2020 and at a floating interest rate thereafter, should any principal remain outstanding. All interest and principal due on the seller priority note must first be paid before any interest or principal can be paid on the pari passu note. As required by the PID, interest on the notes does not compound. The notes restrict the Issuer’s ability to make distributions to holders of its equity interest. All such distributions are prohibited while the seller priority note is outstanding, and while the pari passu note is outstanding, distributions are permitted only if the Issuer concurrently repays a pro rata amount of any outstanding principal on the pari passu note.

Pursuant to the notes, the Issuer shall seek to redeem the notes annually each March 15 at a requested redemption amount such that the Issuer’s total adjusted capital following the proposed redemption payment would equal 200% of the Issuer’s “authorized control level RBC”, as such term is defined by the insurance laws of the Commonwealth of Pennsylvania and as prescribed by the PID. All redemptions or repayments of principal and payments of interest on the notes are subject to approval by the PID.

Below is a table illustrating the valuation adjustments taken to arrive at the estimated fair value of the OBIC Surplus Notes as of December 31, 2014:



	Type of Surplus Note
Millions	Seller Priority			Pari Passu			Total
Par Value	$	57.9		$	43.1		$	101.0
Fair value adjustments to reflect:
Current market rates on public debt and contract-based repayments⁽¹⁾	1.6			(8.2		)	(6.6		)
Regulatory approval ⁽²⁾	(4.6		)	(8.0		)	(12.6		)
Liquidity adjustment ⁽³⁾	(11.0		)	(5.7		)	(16.7		)
Total adjustments	(14.0		)	(21.9		)	(35.9		)
Fair value	$	43.9		$	21.2		$	65.1


⁽¹⁾	Represents the value of the OBIC Surplus Notes, at current market yields on publicly traded debt, and assuming issuer is allowed to make principal and interest payments when its financial capacity is available, as measured by statutory capital in excess of a 250% RBC score.


⁽²⁾	Represents anticipated delay in securing regulatory approvals of interest and principal payments to reflect graduated changes in Issuer’s statutory surplus.


⁽³⁾	Represents impact of liquidity spread to account for OneBeacon’s sole ownership of the surplus notes, lack of a trading market and ongoing regulatory approval risk.

The internal valuation model used to estimate the fair value is based on discounted expected cash flows. The estimated fair value of the OBIC Surplus Notes is sensitive to changes in treasury rates and public debt credit spreads, as well as changes in estimates with respect to other variables including a discount to reflect the private nature of the notes (and the related lack of liquidity), the credit quality of the notes - based on the financial performance of the Issuer relative to expectations, and the timing, amount, and likelihood of interest and principal payments on the notes, which are subject to regulatory approval and therefore may vary from the contractual terms. OneBeacon has assumed for estimating the fair value that interest payouts begin in year five and principal repayments begin on a graduating basis in year ten. Although these variables involve considerable judgment, the Company does not currently expect any resulting changes in the estimated value of the surplus notes to be material to its financial position.

Summary of Reclassified Balances and Related Items

As of December 31, 2013, the Runoff Transaction met the criteria for held for sale accounting. As a result, the assets and liabilities associated with the Runoff Transaction are presented separately as single line items in the asset and liability sections of the December 31, 2013 consolidated balance sheet, the major categories of which are summarized below.

Net Assets Held for Sale

The following summarizes the assets and liabilities associated with the businesses classified as held for sale:



	December 31,
Millions	2013
Assets held for sale
Fixed maturity investments, at fair value	$	236.3
Reinsurance recoverable on unpaid losses	1,604.7
Reinsurance recoverable on paid losses	10.7
Insurance premiums receivable	9.1
Deferred tax asset	3.3
Other assets	16.0
Total assets held for sale	$	1,880.1
Liabilities held for sale
Loss and loss adjustment expense reserves	$	1,793.1
Unearned insurance premiums	.2
Ceded reinsurance payable	12.3
Other liabilities	74.5
Total liabilities held for sale	1,880.1
Net assets held for sale	$	—

Net Income (Loss) from Discontinued Operations

The following summarizes the results of operations, including related income taxes associated with the businesses classified as discontinued operations:



	Year Ended December 31,
Millions	2014			2013			2012
Revenues
Earned insurance premiums	$	.1		$	.8		$	10.6
Other revenue	—			10.8			—
Total revenues	.1			11.6			10.6
Expenses
Loss and loss adjustment expenses	(.7		)	78.9			48.4
Insurance and reinsurance acquisition expenses	.1			—			(2.1		)
Other underwriting expenses	3.5			(.2		)	1.7
Total expenses	2.9			78.7			48.0
Pre-tax loss	(2.8		)	(67.1		)	(37.4		)
Income tax benefit	1.0			25.0			13.4
Loss from discontinued operations	(1.8		)	(42.1		)	(24.0		)
Net (loss) gain from sales of discontinued operations	(1.6		)	46.6			(91.0		)
Net (loss) income from discontinued operations	$	(3.4	)	$	4.5		$	(115.0	)

The loss from sale of discontinued operations is subject to customary post-closing adjustments related to the true-up of the closing balance sheet.

Earnings (Loss) Per Share

Basic earnings (loss) per share amounts are based on the weighted average number of common shares outstanding including unvested restricted shares that are considered participating securities. Diluted earnings (loss) per share amounts are based on the weighted average number of common shares including unvested restricted shares and the net effect of potentially dilutive common shares outstanding. The following table outlines the computation of earnings (loss) per share for discontinued operations for the years ended December 31, 2014, 2013 and 2012:



	Year Ended December 31,
	2014			2013			2012
Basic and diluted earnings (loss) per share numerators (in millions):
Net (loss) income attributable to White Mountains’s common shareholders	$	(3.4	)	$	4.5		$	(115.0	)
Allocation of income for participating unvested restricted common shares ⁽¹⁾	—			—			1.5
Net (loss) income attributable to White Mountains’s common shareholders, net of restricted common share amounts ⁽²⁾	$	(3.4	)	$	4.5		$	(113.5	)
Basic earnings (loss) per share denominators (in thousands):
Total average common shares outstanding during the period	6,104.9			6,200.4			6,799.8
Average unvested restricted common shares ⁽³⁾	(78.9		)	(91.4		)	(91.1		)
Basic earnings (loss) per share denominator	6,026.0			6,109.0			6,708.7
Diluted earnings (loss) per share denominator (in thousands):
Total average common shares outstanding during the period	6,104.9			6,200.4			6,799.8
Average unvested restricted common shares⁽³⁾	(78.9		)	(91.4		)	(91.1		)
Average outstanding dilutive options to acquire common shares⁽⁴⁾	—			—			—
Diluted earnings (loss) per share denominator	6,026.0			6,109.0			6,708.7
Basic and diluted earnings (loss) per share (in dollars):	$	(.56	)	$	0.74		$	(16.91	)


⁽¹⁾	Restricted shares issued by White Mountains contain dividend participation features, and therefore, are considered participating securities.


⁽²⁾	Net income (loss) attributable to White Mountains’s common shareholders, net of restricted share amounts, is equal to undistributed earnings for the years ended December 31, 2014, 2013 and 2012.


⁽³⁾	Restricted common shares outstanding vest either in equal annual installments or upon a stated date (see Note 13).


⁽⁴⁾	The diluted earnings (loss) per share denominator for the years ended December 31, 2014, 2013 and 2012 does not include the impact of 125,000 common shares issuable upon exercise of the non-qualified options outstanding as they are anti-dilutive to the calculation.