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, 2010 and 2013. Share-based incentive awards that may be granted under the plan include performance shares, restricted shares, performance units, 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 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 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.

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 U.S.-domiciled participants the ability to invest their balances in several different investment options, including the Company’s or OneBeacon’s common shares.

OneBeacon’s KSOP is an employer-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 ($113,700 for 2013). 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 IRS annual covered compensation limits ($255,000 for 2013) and contingent upon 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’ 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, 2013, 2012 and 2011 for performance shares granted under the WTM Incentive Plan and the WTM Phantom Share Plan:



	Year Ended December 31,
	2013					2012					2011
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	119,357		$	29.4		150,064		$	66.1		163,184		$	29.4
Shares paid or expired⁽¹⁾	(47,310	)	(11.0		)	(68,357	)	(58.3		)	(51,131	)	—
New grants	47,170		—			38,432		—			37,675		—
Assumed forfeitures and cancellations⁽²⁾	3		(.6		)	(782	)	.6			336		(.9		)
Expense recognized	—		42.4			—		21.0			—		37.6
Ending December 31,	119,220		$	60.2		119,357		$	29.4		150,064		$	66.1

⁽¹⁾

WTM performance shares payments in 2013 for the 2010-2012 performance cycle ranged from 33% to 98% of target. WTM performance share payments in 2012 for the 2009-2011 performance cycle ranged from 147% to 155% of target. At December 31, 2012, White Mountains paid $9.9 as a partial payment for the 2010-2012 performance cycle. There were no payments made in 2011 for the 2008-2010 performance cycle; those performance shares did not meet the threshold performance goal and expired.


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

For the 2009-2011 performance cycle, the Company issued common shares for 9,577 performance shares earned and all other performance shares earned were settled in cash.

If all outstanding performance shares had vested on December 31, 2013, the total additional compensation cost to be recognized would have been $33.8 million, based on accrual factors at December 31, 2013 (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, 2013 for each performance cycle:



Millions, except share amounts	Target WTM Performance Shares Outstanding		Accrued Expense
Performance cycle:
2013 – 2015	47,170		$	12.1
2012 – 2014	37,977		21.4
2011 – 2013	37,130		28.2
Sub-total	122,277		61.7
Assumed forfeitures	(3,057	)	(1.5		)
Total at December 31, 2013	119,220		$	60.2

The targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel for the 2013-2015 performance cycles 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%.

The targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan to non-investment personnel for the 2012-2014 performance cycles 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%.

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%.

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 Barclays U.S. Intermediate Aggregate Index returns.

For Prospector Partners, the targeted performance goal for full payment of outstanding performance shares granted under the WTM Incentive Plan is based equally on growth in intrinsic business value per share (as described above) and achieving a total return on invested assets as measured against metrics based on U.S. Treasury Note 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, 2013, 2012 and 2011:



	Year Ended December 31,
	2013					2012					2011
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,
Beginning of period	69,910		$	16.8		72,000		$	13.3		46,250		$	14.1
Issued	25,720		14.4			32,160		15.7			27,250		9.9
Vested⁽¹⁾	(1,500	)	—			(32,945	)	—			(1,500	)	—
Forfeited	—		—			(1,305	)	(.2		)	—		—
Expense recognized	—		(14.2		)	—		(12.0		)	—		(10.7		)
Non-vested at December 31,	94,130		$	17.0		69,910		$	16.8		72,000		$	13.3


⁽¹⁾	During 2012, the Compensation Committee accelerated the vesting date for an installment of 5,000 restricted shares from January 20, 2013 to December 31, 2012.

During 2013, White Mountains issued 25,720 restricted shares that vest on January 1, 2016. During 2012, White Mountains issued 27,960 restricted shares that vest on January 1, 2015, 3,000 restricted shares that vest in two equal annual installments beginning on February 22, 2014 and 1,200 restricted shares that vest on July 16, 2015. During 2011, White Mountains issued 27,250 restricted shares that vest on January 1, 2014. The unrecognized compensation cost at December 31, 2013 is expected to be recognized ratably over the remaining vesting periods.

Stock Options

Non-Qualified Options

The Company’s Chairman and CEO holds 125,000 Non-Qualified Options, which are exercisable at $742 per common share and expire on January 20, 2017. The potential in-the-money value of the Non-Qualified Options in excess of $100 million is limited to 50% of the excess amount. The Non-Qualified Options were fully amortized as of the first quarter in 2011. For the year ended December 31, 2011, White Mountains recognized $0.1 million of amortization expense.

Share-Based Compensation Based on OneBeacon Ltd. Common Shares

OneBeacon Performance Shares

The following summarizes activity for the years ended December 31, 2013, 2012 and 2011 for OneBeacon performance shares granted under the OneBeacon Incentive Plan:



	Year Ended December 31,
	2013					2012					2011
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	563,190		$	1.2		642,667		$	9.7		1,464,295		$	18.5
Payments and deferrals⁽¹⁾	(238,658	)	—			(258,901	)	(7.7		)	(936,150	)	(10.5		)
New awards	179,000		—			181,290		—			194,900		—
Forfeitures and cancellations⁽²⁾	(10,111	)	(0.1		)	(1,866	)	—			(80,378	)	(0.5		)
Expense recognized	—		2.9			—		(0.8		)	—		2.2
End of period	493,421		$	4.0		563,190		$	1.2		642,667		$	9.7


⁽¹⁾	No payments were made in 2013 for the 2010-2012 OneBeacon performance cycle as the performance factor was zero. OneBeacon performance share payments in 2012 for the 2009-2011 performance cycle were at 138.6% of target. OneBeacon performance shares payments in 2011 for the 2008-2010 performance cycle were at 68.5% of target. Amounts include deposits into OneBeacon’s deferred compensation plan.


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

The following summarizes OneBeacon performance shares outstanding awarded under the OneBeacon Incentive Plan at December 31, 2013 for each performance cycle:



Millions, except share amounts	Target OneBeacon Performance Shares Outstanding		Accrued Expense
Performance cycle:
2013 – 2015	179,000		$	1.0
2012 – 2014	181,290		2.1
2011 – 2013	142,138		1.0
Sub-total	502,428		4.1
Assumed forfeitures	(9,007	)	(.1		)
Total at December 31, 2013	493,421		$	4.0

If the outstanding OneBeacon performance shares had been vested on December 31, 2013, the total additional compensation cost to be recognized would have been $2.9 million, based on December 31, 2013 accrual factors (common share price and payout assumptions).

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2013 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 2012 is growth in book value per share of 10%. At a growth in book value per share of 3% or less, no performance shares would be earned and at a growth in book value per share of 17% or more, 200% of performance shares would be earned.

The targeted performance goal for full payment of the outstanding OneBeacon performance shares granted during 2011 is growth in book value per share of 11%. At a growth in book value per share of 4% or less, no performance shares would be earned and at a growth in book value per share of 18% 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, 2013, 2012 and 2011.



	Year Ended December 31,
	2013					2012					2011
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,
Beginning of period	927,000		$	9.6		630,000		$	7.7		—	$	—
Issued	—		—			300,000		4.5			630,000	8.6
Vested	(9,000	)	—			(667	)	—			—	—
Forfeited	(3,000	)	—			(2,333	)	—			—	—
Expense recognized	—		(3.1		)	—		(2.6		)	—	(.9		)
End of period	915,000		$	6.5		927,000		$	9.6		630,000	$	7.7

On March 1, 2012, OneBeacon issued 300,000 restricted shares to key employees that vest in two equal installments on February 28, 2014 and 2015. 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 associated with outstanding restricted share awards at December 31, 2013 is expected to be recognized ratably over the remaining vesting periods.

Share-based Compensation Under Qualified Retirement Plans

Contributions to the KSOP with respect to the years ended 2013, 2012 and 2011 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 4%, 3% and 2% of salary for the years ended 2013, 2012 and 2011. White Mountains recorded $6.3 million, $4.8 million and $6.3 million in compensation expense to pay benefits and allocate common shares to participant’s accounts for the years ended 2013, 2012 and 2011. As of December 31, 2013 and 2012, 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.