Employee Share-Based Incentive Compensation Plans

12 Months Ended

Dec. 31, 2011

Employee Share-Based Incentive Compensation Plans

Employee Share-Based Incentive Compensation Plans

NOTE 11. Employee Share-Based Incentive Compensation Plans

White Mountains’ 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’ calculation of its owners’ returns includes the expense of all outstanding share-based compensation awards.

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 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 and 2010. Share-based incentive awards that may be granted under the plan include performance shares, restricted shares, Incentive 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 could be paid in common shares or by deferral into certain non-qualified compensation plans of White Mountains. 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 granting to key employees of OneBeacon Ltd., and certain of its subsidiaries, various types of share-based incentive awards, including performance shares, restricted shares, restricted stock units and Non-Qualified Options.

The Sirius Group Performance Plan provides for granting phantom White Mountains performance shares (the “WTM Phantom Share Plan”) to certain key employees of Sirius Group. Beginning with the 2011-2013 performance cycle, employees of Sirius Group were granted performance shares from the WTM Incentive Plan.  The performance goals for full payment of performance shares issued under these plans are identical to those of the WTM Incentive Plan. Performance shares earned under the WTM Phantom Share Plan are typically paid in cash but could be paid in common shares or by deferral into certain non-qualified compensation plans of White Mountains.  Compensation expense is recognized on a pro rata basis over the vesting period of the awards.

White Mountains offers certain types of share-based compensation under qualified retirement plans. The defined contribution plans of OneBeacon and Sirius Group (the “401(k) Plans”) offer its participants the ability to invest their balances in several different investment options, including the Company’s or OneBeacon’s common shares. OneBeacon’s employee stock ownership plan (“ESOP”) is a OneBeacon-funded benefit plan that provides all of its participants with an annual base contribution in common shares equal to 3% of their salary, up to the applicable Social Security wage base ($106,800 for 2011). Additionally, those participants not otherwise eligible to receive certain other OneBeacon benefits can earn a variable contribution of up to 6% of their salary, subject to the applicable Social Security wage base and contingent upon OneBeacon’s performance.  In April 2007, the ESOP was merged into the 401(k) Plan to form the OneBeacon 401(k) Savings and ESOP Plan (“KSOP”).  Sirius Group’s profit sharing plan is a Sirius Group-funded benefit plan that provides all of its participants with a variable contribution up to 7% of their salary, contingent upon Sirius Group’s performance.

Performance Shares

White Mountains’ share-based compensation expense consists primarily of performance share expense. 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’ 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’ 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’ 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, 2011, 2010 and 2009 for performance shares granted under the WTM Incentive Plan and the WTM Phantom Share Plan:

	Year Ended December 31,
	2011					2010					2009
Millions, except share amounts	Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense
Beginning of period	163,184		$	29.4		172,454		$	12.2		156,373		$	4.2
Shares expired (1)	(51,131	)	—			(49,127	)	—			(48,573	)	—
New grants	37,675		—			47,880		—			69,092		—
Assumed forfeitures and cancellations (2)	336		(.9		)	(8,023	)	(.7		)	(4,438	)	(.3		)
Expense recognized	—		37.6			—		17.9			—		8.3
Ending December 31,	150,064		$	66.1		163,184		$	29.4		172,454		$	12.2

(1)  There were no payments made in 2011, 2010 and 2009 for the 2008-2010, 2007-2009 and 2006-2008 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 performance shares had vested on December 31, 2011, the total additional compensation cost to be recognized would have been $19.3 million, based on accrual factors at December 31, 2011 (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 at December 31, 2011 for each performance cycle:

Millions, except share amounts	Target WTM Performance Shares Outstanding		Accrued Expense
Performance cycle:
2009-2011	60,410		$	42.6
2010-2012	42,890		10.9
2011-2013	37,675		6.8
Sub-total	140,975		60.3
Assumed forfeitures	(3,524	)	(1.6		)
Total at December 31, 2011	137,451		$	58.7

The targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel for the 2011-2013 performance cycles is a 10% growth in intrinsic business value per share. Growth of 3% or less would result in no payout and growth of 17% or more would result in a payout of 200%. The targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel for the 2010-2012 performance cycles is an 11% growth in intrinsic business value per share. Growth of 4% or less would result in no payout and growth of 18% or more would result in a payout of 200%. The targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel for the 2009-2011 performance cycles is a 10% growth in intrinsic business value per share. Growth of 3% or less would result in no payout and growth of 17% 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 in part on growth in intrinsic business value per share (as described above) and in part on achieving a total return on invested assets as measured against metrics based on U.S. Treasury Note and/or industry benchmark returns.

Phantom Performance Shares granted under the WTM Phantom Share Plan

The following summarizes phantom performance shares outstanding and accrued expense for awards made under the WTM Phantom Share Plan at December 31, 2011 for each performance cycle:

Millions, except share amounts	Target WTM Phantom Performance Shares Outstanding		Accrued Expense
Performance cycle:
2009-2011	7,947		$	6.0
2010-2012	4,990		1.5
2011-2013(1)	—		—
Sub-total	12,937		7.5
Assumed forfeitures	(324	)	(.1		)
Total at December 31, 2011	12,613		$	7.4

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

The performance goals for full payment of performance shares issued under the WTM Phantom Share Plan are identical to those of the WTM Incentive Plan.

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, 2011, 2010 and 2009:

	Year Ended December 31,
	2011					2010					2009
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
Non-vested at beginning of year	46,250		$	14.1		91,900		$	23.7		53,200		$	24.2
Issued	27,250		9.9			19,750		6.7			47,100		9.6
Vested	(1,500	)	—			(65,150	)	—			(8,400	)	—
Forfeited	—		—			(250	)	(.1		)	—		—
Modified(1)	—		—			—		(3.3		)	—		—
Expense recognized	—		(10.7		)	—		(12.9		)	—		(10.1		)
Non-vested at end of year	72,000		$	13.3		46,250		$	14.1		91,900		$	23.7

(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. During 2009, White Mountains issued 2,500 restricted shares that cliff vested in November 2010, 40,100 restricted shares that cliff vested on December 31, 2010 and 4,500 restricted shares that vest in equal installments at December 31, 2011, 2012 and 2013.

The unrecognized compensation cost at December 31, 2011 is expected to be recognized ratably over the remaining vesting periods.

Stock Options

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 years ended December 31, 2011, 2010, and 2009 White Mountains recognized a total of $0.1 million, $11.9 million, and $5.4 million of expense related to amortizing the Non-Qualified Options.

Incentive Options

The Company had 2,400 Incentive Options outstanding at December 31, 2009, which were granted to certain key employees on February 28, 2000 (the grant date) under the WTM Incentive Plan. The 81,000 Incentive Options originally granted were issued at an exercise price equal to the market price of the Company’s underlying common shares on February 27, 2000. The exercise price escalated by 6% per annum over the life of the Incentive Options. The Incentive Options vested ratably over a ten-year service period. The grant date fair value of the awards as originally disclosed, adjusted for estimated future forfeitures, became the basis for recognition of compensation expense for the Incentive Options. The fair value of each Incentive Option award at the grant date was estimated using a closed-form option model using an expected volatility assumption of 18.5%, a risk-free interest rate assumption of 6.4% and an expected term of ten years.

The following table summarizes the Company’s Incentive Options activity for the years ended December 31, 2010 and 2009.  There were no Incentive Options issued and outstanding in 2011.

	Year ended December 31,
Millions, except share and per share amounts	2010			2009
Opening balance—outstanding Incentive Options	2,400			6,000
Forfeited	—			—
Exercised	(2,400		)	(3,600		)
Ending balance—outstanding Incentive Options	—			2,400
Opening balance—exercisable Incentive Options	2,400			3,000
Vested	—			3,000
Exercised	(2,400		)	(3,600		)
Ending balance—exercisable Incentive Options	—			2,400
Intrinsic value of Incentive Options exercised (1)	$	.3		$	.5
Exercise price—beginning of year	$	188.43		$	177.76
Exercise price—end of year	$	—		$	188.43
Compensation expense (income)	$	—		$	—

(1)Amount is equal to the number of options exercised multiplied by amount the ending market value exceeds the strike price on the date of exercise.

Share-Based Compensation Based on OneBeacon Ltd. Common Shares

OneBeacon Performance Shares

The following summarizes activity for the years ended December 31, 2011, 2010, and 2009 for OneBeacon performance shares granted under the OneBeacon Incentive Plan:

	Year Ended December 31,
	2011					2010					2009
Millions, except share amounts	Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		Accrued Expense			Target Performance Shares Outstanding		AccruedExpense
Beginning of period	1,464,295		$	18.5		2,224,215		$	15.1		2,212,313		$	4.6
Payments and deferrals (1)(2)	(936,150	)	(10.5		)	(889,594	)	(4.6		)	(137,400	)	—
New awards	194,900		—			270,691		—			379,085		—
Forfeitures and cancellations	(80,378	)	(.5		)	(141,017	)	(2.2		)	(229,783	)	(.5		)
Expense recognized	—		2.2			—		10.2			—		11.0
End of period	642,667		$	9.7		1,464,295		$	18.5		2,224,215		$	15.1

(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. OneBeacon performance share payments in 2009 for the 2007-2008 performance cycle were at 1.4% of target.

(2)As a result of the Commercial Lines Transaction and the Personal Lines Transaction, payments were made to certain former employees of OneBeacon prior to the end of the performance cycle (2008-2010, 2009-2011, and 2010-2012 performance cycles) on a pro rata basis based upon a performance factor of 100%.

The following summarizes OneBeacon performance shares outstanding awarded under the OneBeacon Incentive Plan at December 31, 2011 for each performance cycle:

Millions, except share amounts	Target OneBeacon Performance Shares Outstanding		Accrued Expense
Performance cycle:
2009-2011	256,751		$	7.7
2010-2012	244,248		1.2
2011-2013	151,563		.9
Sub-total	652,562		9.8
Assumed forfeitures	(9,895	)	(.1		)
Total at December 31, 2011	642,667		$	9.7

If 100% of the outstanding OneBeacon performance shares had been vested on December 31, 2011, the total additional compensation cost to be recognized would have been $2.3 million, based on December 31, 2011 accrual factors (common share price and payout assumptions).

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2011 is growth in intrinsic business value per share of 11%. At a growth in intrinsic business value per share of 4% or less, no performance shares would be earned and at a growth in intrinsic business value per share of 18% or more, 200% of performance shares would be earned.  The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2010 is growth in intrinsic business value per share of 12%. At a growth in intrinsic business value per share of 5% or less, no performance shares would be earned and at a growth in intrinsic business value per share of 19% or more, 200% of performance shares would be earned.

Non-Qualified Options

In November 2006, in connection with its initial public offering, OneBeacon Ltd. issued to its key employees 1,420,000 fixed price OneBeacon Non-Qualified Options to acquire OneBeacon Ltd. common shares at an above-market fixed exercise price.  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 modifications is being recognized ratably over the remaining period.

The following table summarizes option activity for the years ended December 31, 2011, 2010 and 2009:

	Year ended December 31,
	2011				2010				2009
Millions	Target OutstandingOptions		Expense Amortized		Target OutstandingOptions		Expense Amortized		Target OutstandingOptions		Expense Amortized
Beginning of period	768,652		$	4.5	1,015,610		$	3.6	1,237,872		$	2.5
New awards	—		—		—		—		—		—
Forfeitures	(27,782	)	—		(37,044	)	—		(222,262	)	—
Vested and expired(1)	—		—		(209,914	)	—		—		—
Exercised	—		—		—		—		—		—
Expense recognized	—		.5		—		.9		—		1.1
End of period	740,870		$	5.0	768,652		$	4.5	1,015,610		$	3.6

(1)During the year ended December 31, 2010, as a result of the Commercial Lines Transaction and Personal Lines Transaction, 209,914 options vested that were unexercised and expired.

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 each of the next 5 years will also be reduced by 35,000 shares.  The restricted shares contain dividend participation features, and therefore, are considered participating securities.  As of December 31, 2011, there were 630,000 unvested restricted shares.  For the year ended December 31, 2011, OneBeacon recognized $0.9 million of expense.  As of December 31, 2011, $7.7 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 Restricted Stock Units (“RSUs”) to actively employed option holders.  The RSUs were scheduled to 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.

Consistent with the terms of the RSU plan, all three tranches of RSUs vested and were deferred into a OneBeacon non-qualified deferred compensation plan that will be paid out in May 2012 in cash or shares at the discretion of the OB Compensation Committee.

The expense associated with the RSUs was recognized ratably over the vesting period.  For the years ended December 31, 2011, 2010 and 2009, OneBeacon recognized expense of $0.1 million, $0.5 million and $0.6 million.

Share-based Compensation Under Qualified Retirement Plans

The variable contribution amounts earned by eligible participants of the KSOP constituted approximately 2%, 0% and 4% of salary for the years ended 2011, 2010 and 2009. White Mountains recorded $6.3 million, $3.0 million and $11.0 million in compensation expense to pay benefits and allocate common shares to participant’s accounts for the years ended 2011, 2010 and 2009. The contributions made to the KSOP with respect to the years ended 2011, 2010 and 2009 were made with either the Company’s or OneBeacon Ltd.’s common shares, dependent on the employer.  As of December 31, 2011 and 2010, the plans owned 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.