Discontinued Operations

Esurance

On October 7, 2011, White Mountains completed the sale of Esurance Insurance and AFI to Allstate (see Note 2). As a result of the transaction, Esurance Insurance, AFI and the business Esurance Insurance cedes to Sirius Group (collectively, “the Esurance Disposal Group”) are reported as discontinued operations. White Mountains recognized a gain of $677.5 million on the Esurance Sale which is recorded net of tax in discontinued operations. Effective as of December 31, 2011, the results of operations for the Esurance Disposal Group have been classified as discontinued operations and are presented, net of related income taxes, in the statement of comprehensive income.

AutoOne

On February 22, 2012, OneBeacon completed the sale of the AutoOne business to Interboro. AutoOne operated as a division within OneBeacon that offered products and services to automobile assigned risk markets. The transaction included the sale of two insurance entities, AOIC and AOSIC, through which substantially all of the AutoOne business was written on a direct basis. The results of operations for the AutoOne business have been classified as discontinued operations and are presented, net of related income taxes, in the statement of comprehensive income.

During 2012, OneBeacon and Interboro finalized the post-closing adjustments to the closing balance sheet resulting in OneBeacon recording a net gain of $0.5 million after tax. This after-tax net gain is included in loss from sale of discontinued operations in the statements of comprehensive income (loss) for the year ended December 31, 2012. During 2011, OneBeacon recorded an after-tax loss of $19.2 million in loss from sale of discontinued operations for the estimated loss on sale of AutoOne.

Runoff Transaction

In October 2012, OneBeacon entered into an agreement to sell the Runoff Business to Armour. During 2012, the results of operations for the Runoff Business were classified as discontinued operations and are presented, net of related income taxes, in the statement of comprehensive income. Prior year results of operations have been reclassified to conform to the current period’s presentation. The assets and liabilities associated with the Runoff Business as of December 31, 2013 and 2012 have been presented in the balance sheet as held for sale. The amounts classified as discontinued operations exclude investing and financing activities that are conducted on an overall consolidated level and, accordingly, there were no separately identifiable investments associated with the Runoff Business.

The Pennsylvania Insurance Department (“PID”) is required to conduct an examination of the Runoff Business as part of its regulatory review of the Runoff Transaction. Pursuant to this examination, the PID required a third party actuarial review to provide an independent actuarial assessment of the loss reserves associated with the Runoff Business, which is a normal requirement associated with such examinations. The independent actuarial review was completed in September 2013, at which time the PID posted the summary review to its website. The independent actuarial review produced a range of total statutory net loss and LAE reserves of $215 million to $668 million as of March 31, 2013, compared to the OneBeacon’s recorded statutory net loss and LAE reserves of $166 million as of March 31, 2013. Since March 31, 2013, OneBeacon increased the Runoff Business loss and LAE reserves by $78.9 million.

During the fourth quarter of 2013, and as part of its annual actuarial certification process, OneBeacon completed a comprehensive actuarial analysis of the non-A&E loss and LAE reserves associated with the Runoff Business. In addition to OneBeacon’s internal actuaries taking into account the differing assumptions, methods, and analyses produced by the independent actuarial review and other factors, management considered other sources of information, including runoff claims staffing models and related costs. For A&E reserve estimates associated with the Runoff Business, OneBeacon primarily relies on the internal study of its legacy A&E exposures completed in 2011 and on subsequent monitoring of quarterly A&E activity, including the comparison of that activity against what was assumed in that most recent study.

As a result of the comprehensive actuarial analysis conducted by OneBeacon during the fourth quarter of 2013, OneBeacon recorded $71.5 million of unfavorable prior year non-A&E loss and LAE development related to the Runoff Business. The increase in loss reserves was concentrated in the workers compensation, personal auto liability and excess liability lines of business. In addition, OneBeacon increased its estimate of adjusting and other expenses, a component of LAE reserves. OneBeacon has not revised its estimate of net ultimate A&E payments.

Workers compensation unpaid loss reserves increased by $36.6 million due to changes in how OneBeacon evaluates various estimated settlement rates, mortality and medical inflation assumptions. These three key assumptions, which were previously evaluated implicitly as part of overall case incurred activity, were separately analyzed and then explicitly reviewed under varying assumptions and an array of resulting reserve estimates, to generate an actuarial indication which management selected for its best estimate. For personal auto liability, a $16.9 million loss provision was recorded based on a ground-up analysis of unlimited medical automobile no-fault claims from the 1970s and 1980s, which produced a range of estimates at varying medical inflation rates. The remaining $5.4 million loss reserve increase was driven by adverse prior year loss development recorded on a few large excess liability claims. Finally, OneBeacon recorded a provision to increase its LAE reserves by $12.6 million for adjusting and other expenses due to a change in assumptions of staff efficiency associated with handling and settling runoff claims.

For the full year 2013, the OneBeacon recorded $78.9 million loss and LAE provision for the Runoff Business, which includes a $7.4 million of increase in loss and LAE reserves recorded in the second quarter of 2013. The $78.9 million loss and LAE adverse development recorded in 2013 was partially offset by other revenue of $7.8 million 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.

As of December 31, 2013, the recorded net unpaid loss and LAE reserves associated with the Runoff Business totaled $188.4 million. Management believes that the recorded net loss and LAE reserves reflect a reasonable provision for expected future loss and LAE payments and represent management’s best estimate within a range of reasonable estimates.

The $71.5 million ($46.5 million after-tax) increase in Runoff Business loss and LAE reserves was recorded in the fourth quarter of 2013 as a component of discontinued operations and offset by an equal after-tax amount which decreased the estimated ultimate loss on sale of the Runoff Business. The terms of the Runoff SPA prescribe that the buyer has assumed the risk that loss and LAE reserves develop unfavorably from September 30, 2012 onward, resulting in the offset.

During the fourth quarter of 2013, OneBeacon also increased the estimated pre-tax transaction costs associated with the Runoff Transaction, which was partially offset by the accretion of interest on the original sales price and, coupled with the $46.5 million after tax provision for loss and LAE, resulted in a $46.6 million after-tax reduction in the ultimate loss from discontinued operations. This reduction in the ultimate loss on sale was essentially offset by a $46.6 million after-tax gain on sale that was also recorded in OneBeacon’s fourth quarter and full year results. The estimated ultimate loss on sale of the Runoff Business is $69.0 million, pre-tax ($44.9 million after-tax).

Although the Runoff SPA stipulates the amount of reserves and surplus to be transferred to Armour at closing, the PID may require additional reserves and/or surplus as a closing condition. In that event, and to respond to such a closing condition, the Runoff SPA provides that OneBeacon would invest in surplus notes issued by the transferring companies, subject to certain limits on the amount of surplus notes issued. OneBeacon believes that the transferred reserves and surplus plus the funding requirements/limitations agreed to in the Runoff SPA cover the full range of claim projections produced in the independent actuarial review. Currently, OneBeacon expects to provide financing by way of surplus notes in an amount that falls within the provisions of the Runoff SPA.

In October 2013, OneBeacon and Armour amended the Runoff SPA to extend the date by which either party may terminate the Runoff SPA to July 31, 2014. If the required regulatory approval to close the Runoff Transaction has not been obtained on or prior to July 31, 2014, either OneBeacon or Armour may unilaterally extend the termination date of the Runoff SPA by up to 90 days. OneBeacon expects the Runoff Transaction to close in mid-2014.

Results of Discontinued Operations

Loss from discontinued operations, net of tax, for the year ended December 31, 2013 was $42.1 million. During 2013, OneBeacon recognized a $71.5 million pre-tax ($46.5 million after tax) increase in Runoff Business loss and LAE reserves which was offset by an equal after tax amount which decreased the estimated ultimate loss on sale of the Runoff Transaction. The terms of the Runoff SPA prescribe that the buyer has assumed the risk that loss and LAE reserves develop unfavorably from September 30, 2012 onward, resulting in the offset. OneBeacon also increased the estimated pre-tax transaction costs associated with the Runoff Transaction which was partially offset by the accretion of interest on the original purchase price. The estimated ultimate loss on sale of the Runoff Business is $69.0 million pre-tax, ($44.9 million after-tax).

During 2013, the results of discontinued operations included other revenue that was primarily associated with a settlement award in the Safeco Insurance Company of America v. AIG class action related to AIG’s alleged underreporting of workers’ compensation premiums to the National Workers’ Compensation Reinsurance Pool. OneBeacon increased loss reserves by approximately the same amount of the benefit resulting from the class action settlement award.

For the year ended December 31, 2012, White Mountains recorded a $91.5 million after-tax loss on sale and a $24.0 million loss from operations which included a $9.0 million after-tax loss related to a reduction in the workers compensation loss reserve discount rate on reserves being transferred as part of the sale. OneBeacon also recognized $6.5 million of after-tax underwriting losses primarily related to unfavorable loss reserve development. The unfavorable development in 2012 was primarily driven by case incurred development on a small number of claims related to multiple peril liability lines and general liability lines and also the impact of an adverse court ruling in Mississippi regarding a disputed assessment from an involuntary pool for hurricane Katrina claims.

Loss and LAE reserve development. During 2013, OneBeacon experienced $78.9 million of net unfavorable loss reserve development from the Runoff Business, primarily related to workers compensation, personal auto liability and excess liability lines, as well as the estimate of adjusting and other expenses.

During 2012, OneBeacon experienced $40.0 million of net unfavorable loss reserve development from the Runoff Business. The net unfavorable loss reserve development was primarily related to case incurred development on multiple peril liability and general liability claims and the impact of an adverse court ruling in Mississippi regarding a disputed assessment from an involuntary pool for hurricane Katrina claims. In addition, there was a change in the workers' compensation tabular discount rate from 4.5% to 3.5% that resulted in a charge of $15.2 million.

During 2011, OneBeacon experienced $26.7 million of net unfavorable loss reserve development from the Runoff Business. The net unfavorable loss reserve development resulted from a detailed review of runoff expenses, principally unallocated loss adjustment expenses (“ULAE”), completed during the fourth quarter of 2011. Specifically, OneBeacon completed a detailed review of loss and defense and cost containment expenses (allocated LAE or “ALAE”) and other adjusting expenses (ULAE) during the fourth quarter of 2011. The analysis considered costs, based on current non-staff expenses and staffing projections for the Runoff Business, as OneBeacon continued efforts to segregate its claims operations between ongoing claims and runoff claims. The analysis also factored in the revised definition of runoff claims to include the non-specialty commercial lines business that was exited via the renewal rights agreement sale beginning with January 1, 2010 effective dates.

Reinsurance. Included in the assets held for sale are reinsurance recoverables from two reinsurance contracts with subsidiaries of Berkshire Hathaway Inc. that OneBeacon was required to purchase in connection with White Mountains’ acquisition of OneBeacon in 2001: a reinsurance contract with National Indemnity Company (“NICO”) for up to $2.5 billion in old asbestos and environmental (“A&E”) claims and certain other exposures (the “NICO Cover”) and an adverse loss reserve development cover from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse loss reserve development occurring in years 2000 and prior in addition to $170.0 million of reserves ceded as of the date of the OneBeacon Acquisition (the “GRC Cover”) . The NICO Cover and GRC Cover, which were contingent on and occurred contemporaneously with the OneBeacon Acquisition, were put in place in lieu of a seller guarantee of loss and LAE reserves and are therefore accounted for under GAAP as a seller guarantee. As of December 31, 2013, the total reinsurance recoverable on paid and unpaid losses of $1,243.7 million related to both the NICO cover and the GRC cover has been included in assets held for sale. Both NICO and GRC have an A.M Best rating of A++, Superior, which is the highest of sixteen ratings.

The total reinsurance recoverables on paid and unpaid losses in assets held for sale were $10.7 million and $1,741.6 million as of December 31, 2013. The reinsurance recoverable on unpaid amount is gross of $136.9 million in purchase accounting adjustments that will become recoverable if claims are paid in accordance with current reserve estimates.

Asbestos and environmental loss and LAE reserve activity. OneBeacon's reserves include provisions made for claims that assert damages from A&E related exposures. Substantially all of these reserves have been reclassified to liabilities held for sale as of December 31, 2013, as they relate to the Runoff Business. Asbestos claims relate primarily to injuries asserted by those who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up obligations, particularly as mandated by Federal and state environmental protection agencies. In addition to the factors regarding the reserving process, OneBeacon estimates its A&E reserves based upon, among other factors, facts surrounding reported cases and exposures to claims, such as policy limits and deductibles, current law, past and projected claim activity and past settlement values for similar claims, as well as analysis of industry studies and events, such as recent settlements and asbestos-related bankruptcies. The cost of administering A&E claims, which is an important factor in estimating loss reserves, tends to be higher than in the case of non-A&E claims due to the higher legal costs typically associated with A&E claims.

OneBeacon's reserves for A&E losses at December 31, 2013 represent management's best estimate of its ultimate liability based on information currently available. However, significant uncertainties, including but not limited to case law developments, medical and cleanup cost increases and industry settlement practices, limit OneBeacon's ability to accurately estimate ultimate liability and OneBeacon may be subject to A&E losses beyond currently estimated amounts. In addition, OneBeacon remains liable for risks reinsured in the event that a reinsurer does not honor its obligations under reinsurance contracts. OneBeacon cannot reasonably estimate at the present time loss reserve additions arising from any such future adverse loss reserve developments and cannot be sure that allocated loss reserves, plus the remaining capacity under the NICO Cover and other reinsurance contracts, will be sufficient to cover additional liability arising from any such adverse loss reserve developments.

The following tables summarize reported A&E loss and LAE reserve activities (gross and net of reinsurance) for OneBeacon for the years ended December 31, 2013, 2012 and 2011, respectively.



Net A&E Loss	Year Ended December 31,
Reserve Activity	2013									2012									2011
				Pre-NICO									Pre-NICO									Pre-NICO
Millions	Gross			Net⁽¹⁾			Net⁽²⁾			Gross			Net⁽¹⁾			Net⁽²⁾			Gross			Net⁽¹⁾			Net⁽²⁾
Asbestos:
Beginning balance	$	929.4		$	602.5		$	2.4		$	1,074.3		$	681.2		$	2.2		$	904.0		$	647.3		$	6.4
Incurred losses and LAE	—			—			—			(.3		)	(.5		)	(.5		)	256.8			32.2			(4.0		)
Paid losses and LAE	(84.3		)	(79.3		)	(.5		)	(144.6		)	(78.2		)	.7			(86.5		)	1.7			(.2		)
Ending balance	845.1			523.2			1.9			929.4			602.5			2.4			1,074.3			681.2			2.2
Environmental:
Beginning balance	233.0			125.4			6.4			279.8			151.6			9.0			119.0			93.8			9.2
Incurred losses and LAE	—			—			—			(.9		)	(.5		)	(.5		)	231.8			62.2			10.0
Paid losses and LAE	(64.3		)	(33.0		)	(2.6		)	(45.9		)	(25.7		)	(2.1		)	(71.0		)	(4.4		)	(10.2		)
Ending balance	168.7			92.4			3.8			233.0			125.4			6.4			279.8			151.6			9.0
Total asbestos and environmental:
Beginning balance	1,162.4			727.9			8.8			1,354.1			832.8			11.2			1,023.0			741.1			15.6
Incurred losses and LAE	—			—			—			(1.2		)	(1.0		)	(1.0		)	488.6			94.4			6.0
Paid losses and LAE	(148.6		)	(112.3		)	(3.1		)	(190.5		)	(103.9		)	(1.4		)	(157.5		)	(2.7		)	(10.4		)
Ending balance	$	1,013.8		$	615.6		$	5.7		$	1,162.4		$	727.9		$	8.8		$	1,354.1		$	832.8		$	11.2


⁽¹⁾	Represents A&E reserve activity, net of third-party reinsurance, but prior to the NICO Cover.


⁽²⁾	Includes NICO cover.

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		2012
Assets held for sale
Fixed maturity investments, at fair value	$	236.3	$	338.1
Cash	—		—
Reinsurance recoverable on unpaid losses	1,604.7		1,840.8
Reinsurance recoverable on paid losses	10.7		15.6
Insurance premiums receivable	9.1		11.0
Deferred acquisition costs	—		—
Deferred tax asset	3.3		5.1
Other assets	16.0		16.2
Total assets held for sale	$	1,880.1	$	2,226.8
Liabilities held for sale
Loss and loss adjustment expense reserves	$	1,793.1	$	2,052.6
Unearned insurance premiums	.2		.5
Ceded reinsurance payable	12.3		21.9
Other liabilities	74.5		151.8
Total liabilities held for sale	1,880.1		2,226.8
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, except per share amounts	2013			2012			2011
Revenues
Earned insurance premiums	$	.8		$	10.6		$	731.2
Net investment income	—			—			12.0
Net realized and unrealized investment gains	—			—			.7
Other revenue	10.8			—			55.1
Total revenues	11.6			10.6			799.0
Expenses
Loss and loss adjustment expenses	78.9			48.4			574.9
Insurance and reinsurance acquisition expenses	—			(2.1		)	157.0
Other underwriting expenses	(.2		)	1.7			91.4
General and administrative expenses	—			—			38.3
Total expenses	78.7			48.0			861.6
Pre-tax loss	(67.1		)	(37.4		)	(62.6		)
Income tax benefit	25.0			13.4			25.9
Loss from discontinued operations	(42.1		)	(24.0		)	(36.7		)
Gain (loss) on sale of discontinued operations, net of tax	46.6			(91.0		)	658.3
Net income (loss) from discontinued operations	$	4.5		$	(115.0	)	$	621.6

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, 2013, 2012 and 2011:



	Year Ended December 31,
	2013			2012			2011
Basic and diluted earnings (loss) per share numerators (in millions):
Net income (loss) attributable to White Mountains’ common shareholders	$	4.5		$	(115.0	)	$	621.6
Allocation of income for participating unvested restricted common shares ⁽¹⁾	—			1.5			(5.4		)
Net income (loss) attributable to White Mountains’ common shareholders, net of restricted common share amounts ⁽³⁾	$	4.5		$	(113.5	)	$	616.2
Basic earnings (loss) per share denominators (in thousands):
Total average common shares outstanding during the period	6,200.4			6,799.8			7,881.0
Average unvested restricted common shares ⁽¹⁾	(91.4		)	(91.1		)	(69.4		)
Basic earnings (loss) per share denominator	6,109.0			6,708.7			7,811.6
Diluted earnings (loss) per share denominator (in thousands):
Total average common shares outstanding during the period	6,200.4			6,799.8			7,881.0
Average unvested restricted common shares⁽¹⁾	(91.4		)	(91.1		)	(69.4		)
Average outstanding dilutive options to acquire common shares⁽²⁾	—			—			—
Diluted earnings (loss) per share denominator	6,109.0			6,708.7			7,811.6
Basic and diluted earnings (loss) per share (in dollars):	$	.74		$	(16.91	)	$	78.88


⁽¹⁾	Restricted common shares outstanding vest either in equal annual installments or upon a stated date (see Note 12).


⁽²⁾	The diluted earnings per share denominator for the years ended December 31, 2013, 2012 and 2011 do 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.


⁽³⁾	Net income (loss) attributable to White Mountains’ common shareholders, net of restricted share amounts, is equal to undistributed earnings (loss) for the years ended December 31, 2013, 2012 and 2011.