Discontinued Operations

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.

Runoff Transaction

On October 17, 2012, one of OneBeacon’s indirect wholly-owned subsidiaries, OneBeacon Insurance Group LLC, entered into a definitive agreement with Armour, to sell its runoff business (the “Runoff Business”). During three and nine months ended September 30, 2013 and 2012, the results of operations for the Runoff Business have been 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 September 30, 2013 and December 31, 2012 have been presented in the balance sheet as held for sale. The amounts classified as discontinued operations in the statements of operations and cash flows 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 on September 9, 2013; the summary report was filed with the PID on September 17, 2013; and the PID posted the summary report to its public web site on September 19, 2013, which OneBeacon referenced in a Form 8-K filed on the same date. 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. This compares to the OneBeacon’s recorded statutory net loss and LAE reserves of $166 million as of March 31, 2013.

Two items cause the majority of the difference between OneBeacon’s recorded net loss and LAE reserves and the low end of the range of estimates produced by the independent actuarial review. First, the independent actuaries did not assume that historically favorable loss experience would repeat in the future, causing the low end estimate to be approximately $46 million higher. Second, the provision for estimated costs to administer the runoff claims, as developed by the independent actuarial review, focused mainly on Armour’s estimated cost structure versus OneBeacon’s cost structure, which would have generated a $17 million lower cost estimate.

The high end of the range produced by the independent actuarial review results from the accumulation of conservative selections in many other key assumptions, such as medical inflation costs, mortality experience, lump sum settlement rates, tail factors, and other judgmental items, which are more fully described in Critical Accounting Estimates on pages 74-85 of White Mountains' 2012 Annual Report on Form 10-K.

As of September 30, 2013, the net loss and LAE reserves associated with the Runoff Business totaled $131 million, a reduction due to normal claim runoff. Management believes that the recorded net loss and LAE reserves continue to reflect a reasonable provision for expected future loss and LAE payments and represent management’s best estimate within a range of reasonable estimates.

During the fourth quarter of 2013, OneBeacon’s actuaries will complete additional analyses of the loss and LAE reserves associated with the Runoff Business. In addition to the internal actuaries taking into account the differing assumptions, methods, and analyses produced by the independent actuarial review and other factors, management will consider other sources of information, including runoff claims staffing models and related costs as well as perspectives provided by the PID during the ongoing regulatory approval process. Management will also consider that, for the two most recent quarters since the date of the independent actuarial review, actual loss emergence on the runoff reserves has continued to be consistent with or lower than the expected losses used to estimate its recorded net loss and LAE reserves. This recent claims experience was not considered in the results of the independent actuarial review described above.

While management believes that the recorded loss and LAE reserves make a reasonable provision for future loss and LAE payments related to the Runoff Business, once all factors are considered, including the information contained in the independent actuarial review and recent claims experience, it is possible that the fourth quarter or subsequent internal actuarial analyses may cause the actuarial indications to increase, which could result in an increase in management’s best estimate of loss and LAE reserves associated with the Runoff Business. In the event that OneBeacon records an increase in the loss and LAE reserves associated with the Runoff Business in the fourth quarter or at any time prior to the closing of the Runoff Transaction, the estimated loss on sale from the Runoff Transaction would be reduced by an equal and offsetting amount in the same period. The offset to the estimated loss on sale would reflect the terms of the stock purchase agreement (“SPA”) with Armour, under which Armour has assumed the risk that loss and LAE reserves develop unfavorably from September 30, 2012 onward.

Though the 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 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 SPA cover the full range of claim projections produced in the independent actuarial review. The Runoff Transaction is expected to close in the second quarter of 2014. Accordingly, OneBeacon and Armour have amended the SPA to extend the date on which the SPA may be terminated by the parties to July 31, 2014.

Results of Discontinued Operations

For the nine months ended September 30, 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. In light of the ongoing regulatory review of the Runoff Transaction, which includes a third party actuarial review, OneBeacon increased loss reserves by approximately the same amount of the benefit resulting from the class action settlement award.

For the three and nine months ended September 30, 2012, OneBeacon recorded $100.5 million in after-tax losses related to the Runoff Transaction. These losses are composed of a $91.5 million after-tax loss on sale and 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.

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 (the “OneBeacon Acquisition”): 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 (the “GRC Cover”) in addition to $170.0 million of reserves ceded as of the date of the OneBeacon Acquisition. 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 September 30, 2013 and December 31, 2012, the total reinsurance recoverables on paid and unpaid losses of $1,292.2 million and $1,401.9 million related to both the NICO cover and the GRC cover have 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 $21.8 million and $1,806.7 million as of September 30, 2013. The reinsurance recoverable on unpaid amount is gross of $140.2 million in purchase accounting adjustments that will become recoverable if claims are paid in accordance with current reserve estimates.

Net Assets Held for Sale

The following summarizes the assets and liabilities associated with the businesses classified as held for sale:



Millions	September 30, 2013		December 31, 2012
Assets held for sale
Fixed maturity investments, at fair value	$	239.7	$	338.1
Reinsurance recoverable on unpaid losses	1,666.5		1,840.8
Reinsurance recoverable on paid losses	21.8		15.6
Insurance premiums receivable	9.8		11.0
Deferred tax asset	3.2		5.1
Other assets	16.2		16.2
Total assets held for sale	$	1,957.2	$	2,226.8
Liabilities held for sale
Loss and loss adjustment expense reserves	$	1,797.1	$	2,052.6
Unearned insurance premiums	.2		.5
Ceded reinsurance payable	12.8		21.9
Other liabilities	147.1		151.8
Total liabilities held for sale	1,957.2		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:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Millions	2013			2012			2013			2012
Revenues
Earned insurance premiums	$	1.1		$	(.4	)	$	.7		$	10.0
Other revenue	.1			—			12.3			—
Total revenues	1.2			(.4		)	13.0			10.0
Expenses
Loss and loss adjustment expenses	.1			27.7			7.6			48.4
Insurance and reinsurance acquisition expenses	.1			(.8		)	.1			(1.3		)
Other underwriting expenses	.4			(1.1		)	.3			1.1
Total expenses	.6			25.8			8.0			48.2
Pre-tax income (loss)	.6			(26.2		)	5.0			(38.2		)
Income tax (expense) benefit	(.2		)	10.4			(.2		)	13.7
Income (loss) from discontinued operations	.4			(15.8		)	4.8			(24.5		)
Loss from sale of discontinued operations	—			(91.0		)	—			(91.0		)
Net income (loss) from discontinued operations	$	.4		$	(106.8	)	$	4.8		$	(115.5	)

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 three and nine months ended September 30, 2013 and 2012:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Basic and diluted earnings (loss) per share numerators (in millions):
Net income (loss) attributable to White Mountains’ common shareholders	$	.4		$	(106.8	)	$	4.8		$	(115.5	)
Allocation of income for participating unvested restricted common shares⁽¹⁾	—			1.5			—			1.5
Net income (loss) attributable to White Mountains’ common shareholders, net of restricted common share amounts⁽²⁾	$	.4		$	(105.3	)	$	4.8		$	(114.0	)
Basic earnings (loss) per share denominators (in thousands):
Total average common shares outstanding during the period	6,176.6			6,590.4			6,208.4			6,885.9
Average unvested restricted common shares⁽³⁾	(95.5		)	(96.5		)	(90.0		)	(89.5		)
Basic earnings (loss) per share denominator	6,081.1			6,493.9			6,118.4			6,796.4
Diluted earnings (loss) per share denominator (in thousands):
Total average common shares outstanding during the period	6,176.6			6,590.4			6,208.4			6,885.9
Average unvested restricted common shares⁽³⁾	(95.5		)	(96.5		)	(90.0		)	(89.5		)
Average outstanding dilutive options to acquire common shares⁽⁴⁾	—			—			—			—
Diluted earnings (loss) per share denominator	6,081.1			6,493.9			6,118.4			6,796.4
Basic and diluted earnings (loss) per share (in dollars):	$	.06		$	(16.21	)	$	.78		$	(16.77	)

⁽¹⁾Restricted shares issued by White Mountains contain dividend participation features, and therefore, are considered participating securities.

⁽²⁾Net earnings (loss) attributable to White Mountains’ common shareholders, net of restricted share amounts, is equal to undistributed earnings (loss) for the three and nine months ended September 30, 2013 and 2012.

⁽³⁾ Restricted common shares outstanding vest either in equal annual installments or upon a stated date (see Note 13).

⁽⁴⁾The diluted earnings (loss) per share denominator for the three and nine months ended September 30, 2013 and 2012 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.