Employee Share-Based Incentive Compensation Plans

9 Months Ended

Sep. 30, 2011

Employee Share-Based Incentive Compensation Plans

Employee Share-Based Incentive Compensation Plans

Note 12. Employee Share-Based Incentive Compensation Plans

White Mountains’ 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 the Company and certain of its subsidiaries. White Mountains’ share-based compensation incentive awards consist of performance shares, restricted shares and stock options.

Share-Based Compensation Based on White Mountains Common Shares

WTM Performance Shares

Performance shares are conditional grants of a specified maximum number of common shares or an equivalent amount of cash. Performance share awards vest, subject to the attainment of performance goals, at the end of a three-year period and are valued based on the market value of common shares at the time awards are paid.  The following table summarizes performance share activity for the three and nine months ended September 30, 2011 and 2010 for WTM performance shares granted under the WTM Incentive Plan and phantom WTM performance shares granted under subsidiary plans (“WTM Phantom Share Plans”):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2011				2010				2011					2010
Millions, except share amounts	Target Performance Shares Outstanding	Accrued Expense			Target Performance Shares Outstanding		Accrued Expense		Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense
Beginning of period	150,064	$	56.5		163,220		$	20.2	163,184		$	29.4		172,454		$	12.2
Shares expired (1)	—	—			—		—		(51,131	)	—			(49,127	)	—
New grants	—	—			—		—		37,675		—			47,880		—
Assumed forfeitures and cancellations (2)	—	—			(36	)	—		336		(.6		)	(8,023	)	—
Expense recognized	—	(1.0		)	—		3.0		—		26.7			—		11.0
Ending September 30,	150,064	$	55.5		163,184		$	23.2	150,064		$	55.5		163,184		$	23.2

(1) There were no payments made in 2011 and 2010 for the 2008-2010 and 2007-2009 performance cycles; those performance shares did not meet the threshold performance goals and expired.

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

If 100% of the outstanding WTM performance shares had vested on September 30, 2011, the total additional compensation cost to be recognized would have been $23.5 million, based on accrual factors at September 30, 2011 (common share price and payout assumptions).

Performance Shares granted under the WTM Incentive Plan

The following table summarizes WTM performance shares outstanding and accrued expense for WTM performance shares awarded under the WTM Incentive Plan at September 30, 2011 for each performance cycle:

	Target WTM
	Performance
	Shares		Accrued
Millions, except share amounts	Outstanding		Expense
Performance cycle:
2009 – 2011	60,410		$	38.1
2010 – 2012	42,890		7.9
2011 – 2013	37,675		4.5
Sub-total	140,975		50.5
Assumed forfeitures	(3,524	)	(1.3		)
Total at September 30, 2011	137,451		$	49.2

Phantom Performance Shares granted under WTM Phantom Share Plans

The following table summarizes WTM phantom performance shares outstanding and accrued expense for grants made under WTM Phantom Share Plans at September 30, 2011 for each performance cycle:

	Target WTM
	Phantom
	Performance
	Shares		Accrued
Millions, except share amounts	Outstanding		Expense
Performance cycle:
2009 – 2011	7,947		$	5.2
2010 – 2012	4,990		1.2
2011 – 2013(1)	—		—
Sub-total	12,937		6.4
Assumed forfeitures	(324	)	(.1		)
Total at September 30, 2011	12,613		$	6.3

(1) All performance shares for the 2011-2013 performance cycle were granted from the WTM Incentive Plan

Restricted Shares

At September 30, 2011 and 2010, the Company had 73,500 and 98,750 unvested restricted shares outstanding. The following outlines the unrecognized compensation cost associated with the outstanding restricted share awards for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2011				2010				2011				2010
Millions, except share amounts	Restricted Shares	Unamortized Issue Date Fair Value			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	73,500	$	18.9		98,750	$	20.9		46,250	$	14.1		91,900		$	23.7
Issued	—	—			—	—			27,250	9.9			19,750		6.7
Vested	—	—			—	—			—	—			(12,650	)	—
Forfeited	—	—			—	—			—	—			(250	)	(.1		)
Modified(1)	—	—			—	—			—	—			—		(3.3		)
Expense recognized	—	(2.8		)	—	(3.3		)	—	(7.9		)	—		(9.4		)
Non-vested at September 30	73,500	$	16.1		98,750	$	17.6		73,500	$	16.1		98,750		$	17.6

(1) During the first quarter of 2007, White Mountains issued 15,000 restricted shares to the Company’s Chairman and CEO in connection with his hiring that would vest in the event of a change in control of the Company before January 20, 2012.  During 2010, the Compensation Committee modified the vesting terms so that the 15,000 restricted shares time vest in three equal annual installments beginning on January 20, 2013.

During the second quarter of 2011, White Mountains issued 250 restricted shares that vest on January 1, 2014.  During the first quarter of 2011, White Mountains issued 27,000 restricted shares that vest on January 1, 2014.  During the first quarter of 2010, White Mountains issued 19,750 restricted shares that vest on December 31, 2012.  As of September 30, 2011, $16.1 million is expected to be recognized ratably over the remaining vesting periods.

Non-Qualified Options

In January 2007, the Company issued 200,000 seven-year Non-Qualified Options to the Company’s Chairman and CEO (the “original grant”) that vest in equal annual installments over five years and that had an initial exercise price of $650 per common share that escalated at an annual rate of 5% less the annual regular dividend rate (the “Escalator”). The fair value of the Non-Qualified Options was $27.2 million at the grant date.  The fair value of the Non-Qualified Options at the grant date was estimated using a closed-form option model using an expected volatility assumption of 29.7%, a risk-free interest rate assumption of 1.1% (or 4.7% less the Escalator), a forfeiture assumption of 0%, an expected dividend rate assumption of 1.4% and a term assumption of seven years.

At the 2010 Annual General Meeting of Members held on May 26, 2010 (the “modification date”),  the Company’s shareholders approved the following amendments to the Non-Qualified Options (the “amended grant”): (1) extend the term of the Non-Qualified Options by three years to January 20, 2017; (2) freeze the exercise price at $742 per common share, the exercise price on February 24, 2010; (3) extinguish 75,000 of the 200,000 Non-Qualified Options; and (4) limit the potential in-the-money value of the Non-Qualified Options in excess of $100 million to 50% of the amount in excess of $100 million.  The fair value of the amended grant was $4.4 million at the modification date, while the fair value of the original grant as of the modification date was $3.5 million. The fair value of the amended grant was estimated using a closed-form option model using an expected volatility assumption of 34.0%, a risk-free interest rate assumption of 2.43%, a forfeiture assumption of 0%, an expected dividend rate assumption of 0.32% and a term assumption of 6.67 years. The fair value of the original grant as of the modification date was estimated using a closed-form option model using an expected volatility assumption of 41.0%, a risk-free interest rate assumption of 1.57%, a forfeiture assumption of 0%, an expected dividend rate assumption of 0.32% and a term assumption of 3.67 years.

Prior to the modification, $18.2 million of the original grant fair value had been amortized into income. In connection with the modification, White Mountains recognized $8.7 million of the remaining $9.0 million of unamortized option expense related to the original grant.  As of the first quarter in 2011, the Non-Qualified Options have been fully amortized.

For the nine months ended September 30, 2011, White Mountains recognized a total of $0.1 million of expense related to amortizing the Non-Qualified Options compared to $10.1 million and $11.5 million of expense in the three and nine months ended September 30, 2010.

Share-Based Compensation Based on OneBeacon Ltd. Common Shares

The OneBeacon Long-Term Incentive Plan (the “OneBeacon Incentive Plan”) provides for grants of various types of share-based and non share-based incentive awards to key employees of OneBeacon Ltd. and certain of its subsidiaries.  OneBeacon’s share-based incentive awards consist of OneBeacon performance shares, stock options granted in connection with OneBeacon’s initial public offering, restricted shares and restricted stock units (“RSUs”).

OneBeacon Performance Shares

OneBeacon performance shares are conditional grants of a specified maximum number of common shares or an equivalent amount of cash.  OneBeacon performance share awards vest, subject to the attainment of performance goals, at the end of a three-year period and are valued based on the market value of OneBeacon Ltd. common shares at the time awards are paid.  The following table summarizes performance share activity for the three and nine months ended September 30, 2011 and 2010 for OneBeacon performance shares granted under the OneBeacon Incentive Plan:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2011					2010					2011					2010
	Target					Target					Target					Target
	Performance					Performance					Performance					Performance
	Shares		Accrued			Shares		Accrued			Shares		Accrued			Shares		Accrued
Millions, except share amounts	Outstanding		Expense			Outstanding		Expense			Outstanding		Expense			Outstanding		Expense
Beginning of period	671,727		$	10.0		1,770,423		$	15.2		1,464,295		$	18.5		2,224,215		$	15.1
Payments and deferrals (1)(2)	—		—			(199,774	)	(2.2		)	(936,150	)	(10.5		)	(882,118	)	(4.5		)
New awards	—		—			14,618		—			194,900		—			293,478		—
Forfeitures and cancellations	(19,583	)	.1			(20,438	)	(.3		)	(70,901	)	(.2		)	(70,746	)	(.7		)
Expense recognized	—		(.5		)	—		1.7			—		1.8			—		4.5
Ending September 30,	652,144		$	9.6		1,564,829		$	14.4		652,144		$	9.6		1,564,829		$	14.4

(1) OneBeacon performance share payments in 2011 for the 2008-2010 performance cycle were at 68.5% of target. OneBeacon performance shares payments in 2010 for the 2007-2009 performance cycle were at 14.2% of target. Amounts include deposits into OneBeacon’s deferred compensation plan.

(2) OneBeacon performance share payments also include accelerated payments resulting from the OneBeacon Personal Lines and Commercial Lines Transactions. The accelerated OneBeacon performance shares payments for the 2009-2011 and 2010-2012 performance cycles were on a pro rata basis and at a performance factor of 100%.

If 100% of the outstanding OneBeacon performance shares had been vested on September 30, 2011, the total additional compensation cost to be recognized would have been $3.7 million, based on accrual factors at September 30, 2011 (common share price and payout assumptions).

The following table summarizes OneBeacon performance shares outstanding awarded under the OneBeacon Incentive Plan at September 30, 2011 for each performance cycle:

	Target  OneBeacon
	Performance
	Shares		Accrued
Millions, except share amounts	Outstanding		Expense
Performance cycle:
2008 – 2010	259,102		$	7.2
2009 – 2011	251,557		1.9
2010 – 2012	151,563		.6
Sub-total	662,222		9.7
Assumed forfeitures	(10,078	)	(.1		)
Total at September 30, 2011	652,144		$	9.6

OneBeacon Non-Qualified Options

In November 2006, in connection with its initial public offering, OneBeacon Ltd. issued to its key employees 1,420,000 OneBeacon Non-Qualified Options to acquire OneBeacon Ltd. common shares at an above-market fixed exercise price. The following table summarizes option activity for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2011				2010				2011				2010
Millions, except share amounts	Target Options Outstanding		Expense Amortized		Target Options Outstanding		Expense Amortized		Target Options Outstanding		Expense Amortized		Target Options Outstanding		Expense Amortized
Beginning of period	750,130		$	4.8	879,783		$	4.1	768,652		$	4.5	1,015,610		$	3.6
New awards	—		—		—		—		—		—		—		—
Forfeitures and cancellations	(9,260	)	—		—		—		(27,782	)	—		(37,044	)	—
Vested and expired (1)	—		—		(43,218	)	—		—		—		(142,001	)	—
Exercised	—		—		—		—		—		—		—		—
Expense recognized	—		.1		—		.2		—		.4		—		.7
Ending September 30,	740,870		$	4.9	836,565		$	4.3	740,870		$	4.9	836,565		$	4.3

(1) During the three and nine months ended September 30, 2010, as a result of the Commercial Lines Transaction and the Personal Lines Transaction, 43,218 and 142,001 options vested that were unexercised and expired.

The options vest in equal installments on each of the third, fourth and fifth anniversaries of their issuance and expire 5.5 years from the date of issuance. The fair value of each option award at grant was estimated using a Black-Scholes option pricing model using an expected volatility assumption of 30%, a risk-free interest rate assumption of 4.6%, a forfeiture assumption of 5%, an expected dividend rate assumption of 3.4% and an expected term assumption of 5.5 years. The options originally had a per share exercise price of $30.00. On May 27, 2008, the OneBeacon Compensation Committee of the Board of Directors (the “OB Compensation Committee”) amended the exercise price to $27.97 as a result of the $2.03 per share special dividend paid in the first quarter of 2008.  On November 16, 2010, the OB Compensation Committee adjusted the exercise price to $25.47 as a result of the $2.50 per share special dividend paid in the third quarter of 2010. The compensation expense associated with the options and the incremental fair value of the award modification is being recognized ratably over the remaining period.

OneBeacon Restricted Shares

On May 25, 2011, OneBeacon issued 630,000 restricted shares to its CEO that vest one-fourth on each of 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 next 5 years will be reduced by a similar number of shares.  The restricted shares contain dividend participation features, and therefore, are considered participating securities. As of September 30, 2011, there were 630,000 unvested restricted shares outstanding.  For the three and nine months ended September 30, 2011, OneBeacon recognized $0.4 million and $0.5 million, respectively of expense.  As of September 30, 2011, $8.1 million is expected to be recognized ratably over the remaining vesting period.

Restricted Stock Units

The Non-Qualified Options granted by OneBeacon Ltd., in connection with its initial public offering, did not include a mechanism in the options to reflect the contribution to total return from the regular quarterly dividend. As a result, during the first quarter of 2008, OneBeacon granted 116,270 RSUs to actively employed option holders. The RSUs vest one-third on each of November 9, 2009, 2010 and 2011 subject to, for each vesting tranche of units, the attainment of 4% growth in OneBeacon’s book value per share from January 1, 2008 through the end of the calendar year immediately following the applicable vesting date. Upon vesting, the RSUs are mandatorily deferred into one of OneBeacon’s non-qualified deferred compensation plans and will be paid out in 2012 in cash or shares at the discretion of the OB Compensation Committee. The performance goal for the first and second tranches was attained.  The performance goal for the third tranche will be assessed at December 31, 2011.  The expense associated with the RSUs is being recognized over the vesting period.  OneBeacon recognized no expense for the three months and nine months ended September 30, 2011. For the three and nine months ended September 30, 2010, OneBeacon recognized no expense for the three months ended September 30, 2010 and $0.2 million of expense for the nine months ended September 30, 2010.  As of September 30, 2011, there were 22,773 RSUs outstanding.