Employee Share-Based Incentive Compensation Plans

White Mountains’s share-based incentive compensation plans are designed to incentivize key employees and service providers to maximize shareholder value over long periods of time. White Mountains believes that this is best pursued by utilizing a pay-for-performance program that closely aligns the financial interests of management with those of its shareholders. White Mountains accomplishes this by emphasizing highly variable long-term compensation that is contingent on performance over a number of years rather than entitlements. White Mountains expenses all its share-based compensation. As a result, White Mountains’s calculation of its owners’ returns includes the expense of all outstanding share-based compensation awards.

Incentive Compensation Plans

White Mountains’s Long-Term Incentive Plan (the “WTM Incentive Plan”) provides for grants of various types of share-based and non-share-based incentive awards to key employees and service providers of White Mountains. The WTM Incentive Plan was adopted by the Board, was approved by the Company’s sole shareholder in 1985 and was subsequently amended by its shareholders in 1995, 2001, 2003, 2005, 2010 and 2013. Share-based incentive awards that may be granted under the plan include performance shares, restricted shares, incentive stock options and non-qualified stock options (“Non-Qualified Options”). Performance shares are conditional grants of a specified maximum number of common shares or an equivalent amount of cash. Awards generally vest at the end of a three-year period, are subject to the attainment of pre-specified performance goals, and are valued based on the market value of common shares at the time awards are paid. Performance shares earned under the WTM Incentive Plan are typically paid in cash but may be paid in common shares. Compensation expense is recognized on a pro rata basis over the vesting period of the awards.

The OneBeacon Long-Term Incentive Plan (the “OneBeacon Incentive Plan”) provides for grants to key employees of OneBeacon various types of share-based incentive awards, including performance shares, restricted shares, restricted stock units and Non-Qualified Options.

White Mountains offers certain types of share-based compensation under qualified retirement plans. The defined contribution plan sponsored by OneBeacon, the OneBeacon 401(k) Savings and Employee Stock Ownership Plan (“KSOP”), offers U.S. domiciled participants the ability to invest their balances in several different investment options, including the common shares of the Company or OneBeacon.

The employee stock ownership component of the KSOP provides all participants with an annual base contribution in common shares of the Company or OneBeacon, depending on their employer, equal to 3% of their salary, up to the applicable Social Security wage base ($118,500 for 2016). Additionally, those participants not otherwise eligible to receive certain other benefits can earn a variable contribution of up to 6% of their salary, subject to the applicable IRS annual covered compensation limits ($265,000 for 2016) and contingent upon the Company’s or OneBeacon’s performance.

Performance Shares

Performance shares are designed to reward company-wide performance. The level of payout ranges from zero to two times the number of shares initially granted, depending on White Mountains’s financial performance. Performance shares become payable at the conclusion of a performance cycle (typically three years) if pre-defined financial targets are met.

The principal performance measure used for determining performance share payouts is after-tax growth in White Mountains’s intrinsic business value per share. The Compensation Committee historically has considered the growth in intrinsic business value per share to be based equally on the growth of economic value per share and growth in adjusted book value per share, both inclusive of dividends. Economic value is calculated by adjusting the GAAP book value per share for differences between the GAAP carrying values of certain assets and liabilities and White Mountains’s estimate of their underlying economic values (for example, the time value discount in loss reserves).

The following summarizes performance share activity for the years ended December 31, 2016, 2015 and 2014 for performance shares granted under the WTM Incentive Plan:



	Year Ended December 31,
	2016					2015					2014
$ in millions	Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense
Beginning of period	93,654		$	57.7		111,257		$	44.4		108,605		$	54.9
Shares paid or expired⁽¹⁾	(36,294	)	(41.0		)	(42,959	)	(30.8		)	(33,730	)	(24.5		)
New grants	22,615		—			29,195		—			39,590		—
Assumed forfeitures and cancellations⁽²⁾	378		.5			(3,839	)	(.3		)	(3,208	)	(.1		)
Expense recognized	—		25.2			—		44.4			—		14.1
End of period ⁽³⁾	80,353		$	42.4		93,654		$	57.7		111,257		$	44.4


⁽¹⁾	WTM performance share payments in 2016 for the 2013-2015 performance cycle ranged from 140% to 142% of target. WTM performance shares payments in 2015 for the 2012-2014 performance cycle ranged from 91% to 145.5% of target. WTM performance shares payments in 2014 for the 2011-2013 performance cycle ranged from 88% to 131.5% of target.


⁽²⁾	Amounts include changes in assumed forfeitures, as required under GAAP.


⁽³⁾	Outstanding performance share awards as of December 31, 2016, 2015 and 2014 exclude 7,315, 10,826 and 12,607 unvested performance shares awards for employees of Sirius Group.

For the 2013-2015 performance cycle, the Company issued common shares for 5,000 performance shares earned and all other performance shares earned were settled in cash. For the 2012-2014 performance cycle, all performance shares earned were settled in cash. For 2011-2013 performance cycle, the Company issued 3,570 performance shares earned and all performance shares earned were settled in cash.

If the outstanding WTM performance shares had vested on December 31, 2016, the total additional compensation cost to be recognized would have been $23.1 million, based on accrual factors as of December 31, 2016 (common share price and payout assumptions).

Performance shares granted under the WTM Incentive Plan

The following table summarizes performance shares outstanding and accrued expense for performance shares awarded under the WTM Incentive Plan as of December 31, 2016 for each performance cycle:



$ in millions	Target WTM Performance Shares Outstanding		Accrued Expense
Performance cycle:
2016 – 2018	19,615		$	5.4
2015 – 2017	31,795		19.1
2014 – 2016	30,167		18.6
Sub-total	81,577		43.1
Assumed forfeitures	(1,224	)	(.7		)
Total at December 31, 2016	80,353		$	42.4

For the 2016-2018 performance cycle, the Compensation Committee will use its judgment to evaluate management’s performance by taking into account all facts the Compensation Committee deems relevant including the Company’s growth in intrinsic business value per share to determine the payout of the performance shares on a 0%-200% scale.

For the 2015-2017 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel is an 8% growth in intrinsic business value per share. Growth of 2% or less would result in no payout and growth of 14% or more would result in a payout of 200%.

For the 2014-2016 performance cycle, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel is a 9% growth in intrinsic business value per share. Growth of 3% or less would result in no payout and growth of 15% or more would result in a payout of 200%.

For investment personnel, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan is based one-third on growth in intrinsic business value per share (as described above), one-third on achieving a total return on invested assets as measured against metrics based on U.S. Treasury Note returns and one-third on achieving a total return on invested assets as measured against metrics based on the Bloomberg Barclays U.S. Intermediate Aggregate Index returns.

Restricted Shares

The following outlines the unrecognized compensation cost associated with the outstanding restricted share awards under the WTM Incentive Plan for the years ended December 31, 2016, 2015 and 2014:



	Year Ended December 31,
	2016					2015					2014
$ in millions	Restricted Shares		Unamortized Issue Date Fair Value			Restricted Shares		Unamortized Issue Date Fair Value			Restricted Shares		Unamortized Issue Date Fair Value
Non-vested,
Beginning of period	70,675		$	15.7		83,314		$	14.3		94,130		$	17.0
Issued	25,365		20.2			23,640		15.7			23,440		13.1
Vested	(24,620	)	—			(36,279	)	—			(33,205	)	—
Forfeited	(800	)	(.3		)	—		—			(1,051	)	(.5		)
Expense recognized	—		(15.9		)	—		(14.3		)	—		(15.3		)
End of period ⁽¹⁾	70,620		$	19.7		70,675		$	15.7		83,314		$	14.3


⁽¹⁾	Outstanding restricted share awards as of December 31, 2016, 2015 and 2014 include 5,235, 9,205, and 12,477 unvested restricted shares for employees of Sirius Group.

During 2016, White Mountains issued 24,615 restricted shares that vest on January 1, 2019 and 750 restricted shares that vest on January 1, 2018. During 2015, White Mountains issued 23,640 restricted shares that vest on January 1, 2018. During 2014, White Mountains issued 23,440 restricted shares that vest on January 1, 2017. The unrecognized compensation cost as of December 31, 2016 is expected to be recognized ratably over the remaining vesting periods.

Stock Options

Non-Qualified Options

As of December 31, 2016 and 2015, the Company’s Chairman and CEO held 40,000 and 125,000 Non-Qualified Options, which are exercisable at a fixed price of $742 per common share and expire on January 20, 2017. During 2016, 5,000 Non-Qualified Options, with an intrinsic value of $0.4 million, were exercised at $742 per common share and 80,000 Non-Qualified Options, with an intrinsic value of $8.4 million, were exercised in exchange for 9,930 common shares with an equal total market value. Intrinsic value represents the difference between the market price of the Company’s common shares at the date of exercise less the strike price of $742 per common share. The Non-Qualified Options were fully amortized as of 2011.

Share-Based Compensation Based on OneBeacon Ltd. Common Shares

The OneBeacon Long-Term Incentive Plan (the “OneBeacon Incentive Plan”) provides for grants to key employees of OneBeacon various types of share-based and non share-based incentive awards. OneBeacon’s share-based incentive awards include OneBeacon performance shares and restricted shares.

OneBeacon Performance Shares

The following summarizes activity for the years ended December 31, 2016, 2015 and 2014 for OneBeacon performance shares granted under the OneBeacon Incentive Plan:



	Year Ended December 31,
	2016					2015					2014
$ in millions	Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense
Beginning of period	449,435		$	1.4		517,470		$	3.4		493,421		$	4.0
Payments and deferrals⁽¹⁾	(167,300	)	(.6		)	(181,290	)	(1.5		)	(142,138	)	(1.0		)
New awards	163,150		—			154,887		—			165,800		—
Forfeitures and cancellations⁽²⁾	7,234		—			(41,632	)	(.1		)	387		—
Expense recognized	—		.8			—		(.4		)	—		.4
End of period	452,519		$	1.6		449,435		$	1.4		517,470		$	3.4


⁽¹⁾	OneBeacon performance share payments in 2016 for the 2013-2015 performance cycle were at 24.3% of target. OneBeacon performance share payments in 2015 for the 2012-2014 performance cycle were at 45.7% of target. OneBeacon performance share payments in 2014 for the 2011-2013 performance cycle were at 37.1% of target.


⁽²⁾	Amounts include changes in assumed forfeitures, as required under GAAP.

The following summarizes OneBeacon performance shares outstanding awarded under the OneBeacon Incentive Plan as of December 31, 2016 for each performance cycle:



$ in millions	Target OneBeacon Performance Shares Outstanding	Accrued Expense
Performance cycle:
2016 – 2018	163,150	$	.9
2015 – 2017	146,659	.7
2014 – 2016	142,710	—
Total at December 31, 2016	452,519	$	1.6

If the outstanding OneBeacon performance shares had been vested on December 31, 2016, the total additional compensation cost to be recognized would have been $2.1 million, based on December 31, 2016 accrual factors (common share price, accumulated dividends and payout assumptions).

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2016 is growth in book value per share of 12%. At a growth in book value per share of 5% or less, no performance shares would be earned and at a growth in book value per share of 19% or more, 200% of performance shares would be earned.

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2015 is growth in book value per share of 13%. At a growth in book value per share of 6% or less, no performance shares would be earned and at a growth in book value per share of 20% or more, 200% of performance shares would be earned.

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2014 is growth in book value per share of 14%. At a growth in book value per share of 7% or less, no performance shares would be earned and at a growth in book value per share of 21% or more, 200% of performance shares would be earned.

OneBeacon Restricted Shares

The following table summarizes the unrecognized compensation cost associated with the outstanding OneBeacon restricted stock awards for the years ended December 31, 2016, 2015 and 2014.



	Year Ended December 31,
	2016					2015					2014
$ in millions	Restricted Shares		Unamortized Issue Date Fair Value			Restricted Shares		Unamortized Issue Date Fair Value			Restricted Shares		Unamortized Issue Date Fair Value
Beginning of period	382,722		$	2.5		612,500		$	3.5		915,000		$	6.5
Issued	170,650		2.3			75,950		1.1			—		—
Vested	(157,500	)	—			(296,000	)	—			(300,000	)	—
Forfeited	—		—			(9,728	)	(.1		)	(2,500	)	—
Expense recognized	—		(2.7		)	—		(2.0		)	—		(3.0		)
End of period	395,872		$	2.1		382,722		$	2.5		612,500		$	3.5

On February 24, 2016, OneBeacon issued 170,650 shares of restricted stock, of which 92,500 restricted shares vest on February 24, 2018 and 78,150 vest on January 1, 2019. On February 24, 2015, OneBeacon issued to certain employees 75,950 shares of restricted stock, which are scheduled to cliff vest on January 1, 2018.

On May 25, 2011, OneBeacon issued 630,000 restricted shares to its CEO that vest in four equal annual installments beginning on February 22, 2014, 2015, 2016 and 2017. Concurrently with the grant of the restricted shares, 35,000 OneBeacon performance shares issued to OneBeacon’s CEO for the 2011-2013 performance share cycle were forfeited and performance share awards to OneBeacon’s CEO for the subsequent 5 years have been or will also be reduced by 35,000 shares. The restricted shares contain dividend participation features, and therefore, are considered participating securities.

The unrecognized compensation cost as of December 31, 2016 is expected to be recognized ratably over the remaining vesting periods.

OneBeacon Restricted Stock Units

During the year ended December 31, 2016, 233,461 RSUs were issued, with 214,506 RSUs outstanding as of December 31, 2016 that are scheduled to cliff vest on December 31, 2018. During the year ended December 31, 2015, 226,778 RSUs were issued, with 173,042 RSUs outstanding as of December 31, 2016 that are scheduled to cliff vest on December 31, 2017. At vesting the RSUs will be paid out in cash or common shares at the discretion of the Compensation Committee. Compensation expense associated with the RSUs, which is recognized ratably over the three year vesting period, was $2.1 million and $0.8 million for the year ended December 31, 2016 and 2015.

If 100% of the outstanding RSUs had been vested on December 31, 2016, the total additional compensation cost to be recognized would have been $3.9 million, based on current accrual factors (common share price and accumulated dividends) as of December 31, 2016.

Share-based Compensation Under Qualified Retirement Plans

Contributions to the KSOP with respect to the years ended 2016, 2015 and 2014 were made with either the Company’s or OneBeacon Ltd.’s common shares, dependent on the employer. The variable contribution amounts for eligible participants of the KSOP constituted approximately 3%, 3% and 2% of salary for the years ended 2016, 2015 and 2014. White Mountains recorded $5.5 million, $5.7 million and $4.4 million in compensation expense to pay benefits and allocate common shares to participant’s accounts for the years ended 2016, 2015 and 2014. As of December 31, 2016 and 2015, the plans owned less than 3% or less of either of the Company’s or OneBeacon Ltd.’s total common shares outstanding. All White Mountains common shares held by the KSOP are considered outstanding for earnings (loss) per share computations.