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TABLE OF CONTENTS
Index to Consolidated Financial Statements and Financial Statement Schedules



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20022004

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                               from                                    to                                

Commission file number 1-8993


WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)

Bermuda
(State or other jurisdiction of
incorporation or organization)
 94-2708455
(I.R.S. Employer
Identification No.)

80 South Main Street, Hanover, New Hampshire

(Address of principal executive offices)

 

03755-2053
(Zip Code)

Registrant's telephone number, including area code:(603) 640-2200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class


Common Shares, par value
$1.00 per share
Name of each exchange on which registered


Common Shares, par value $1.00 per shareNew York Stock Exchange
Bermuda Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

None


        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of voting shares (based on the closing price of those shares listed on the New York Stock Exchange and the consideration received for those shares not listed on a national or regional exchange) held by non-affiliates of the Registrant as of March 24, 2003,June 30, 2004, was $2,816,338,319.$2,938,462,920.

        As of March 24, 2003, 8,357,0871, 2005, 10,774,589 common shares, par value of $1.00 per share ("Common Shares"), were outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to the Registrant's Annual General Meeting of ShareholdersMembers scheduled to be held May 19, 20032005 are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K.





TABLE OF CONTENTS

PART I

ITEM 1.

 

Business

 

13
  a.    General 13
  b.    OneBeacon 24
  c.    Reinsurance    White Mountains Re 2216
  d.    Esurance24
    Other Operations28
    Investments29
    Regulation 31
  e.    Investments    Ratings 3234
  f.    Regulation    Employees 3334
  g.    Ratings    Available Information34
ITEM 2.Properties34
ITEM 3.Legal Proceedings 35
ITEM 4. h.    Employees36
i.    Available Information36

ITEM 2.


Properties


36

ITEM 3.


Legal Proceedings


36

ITEM 4.


Submission of Matters to a Vote of Security Holders
36



Executive Officers of the Registrant and its Subsidiaries

 

3736

PART II



ITEM 5.

 

Market for the Company's Common Equity, and Related Shareholder Matters and Issuer Purchase of Equity Securities

 

38

ITEM 6.

 

Selected Financial Data

 

39

ITEM 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

4140
  Liquidity and Capital Resources    Non-GAAP Financial Measures 6055
  Critical Accounting Policies    Liquidity and EstimatesCapital Resources 6855
  Forward-Looking Statements    Related Party Transactions 7364

    Critical Accounting Estimates64
    Forward-Looking Statements79
ITEM 7A.
 

Quantitative and Qualitative Disclosures About Market Risk

 

7480

ITEM 8.

 

Financial Statements and Supplementary Data

 

7681

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

7681
ITEM 9A.Controls and Procedures81
ITEM 9B.Other Information82

PART III



ITEM 10.

 

Directors and Executive Officers

 

7782

ITEM 11.

 

Executive Compensation

 

7882

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management

 

7882

ITEM 13.

 

Certain Relationships and Related Transactions

 

7883

ITEM 14.

 

ControlsPrincipal Accountant Fees and ProceduresServices

 

7883

PART IV



ITEM 15.

 

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

7983

CERTIFICATIONS

 

C-1



PART I

Item 1. Business

GENERAL

        White Mountains Insurance Group, Ltd. (the "Company" or the "Registrant") was originally formed as a Delaware corporation in 1980. In October 1999, the Company completed a corporate reorganization that changed its domicile from Delaware to Bermuda (the "Redomestication").Bermuda. The Company's principal businesses are conducted through its subsidiaries and affiliates in the businesses of property and casualty insurance and reinsurance. Within this report, the consolidated organization is referred to as "White Mountains". The Company's headquarters are located at Crawford House, 23 ChurchBank of Butterfield Building, 42 Reid Street, Hamilton, Bermuda HM 11,12, its principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11.

        The Company's White Mountains' reportable segments are OneBeacon, ReinsuranceWhite Mountains Re, Esurance and Other Operations.

        The OneBeacon segment consists of the OneBeacon Insurance Group LLC family of companies (collectively "OneBeacon"), which are U.S.-based property and casualty insurance writers, including, among several others,substantially all of which operate in a multi-company pool. OneBeacon Insurance Company, Pennsylvania General Insurance Companyoffers a wide range of specialty, personal and Camden Fire Insurance Association (collectively "OneBeacon").commercial products and services sold primarily through select independent agents. OneBeacon was acquired by White Mountains from Aviva plc ("Aviva", formerly CGNU plc)CGU) on June 1, 2001 (the "Acquisition""OneBeacon Acquisition").

        The White Mountains'Mountains Re segment consists of White Mountains Re Group, Ltd. and its subsidiaries. White Mountains Re offers lead capacity for reinsurance operations are conducted primarilyon most liability, property and accident & health exposures through its reinsurance subsidiaries, Folksamerica Reinsurance Company (together with its parent, Folksamerica Holding Company, Inc. (together with"Folksamerica", which has been a wholly-owned subsidiary of White Mountains since 1998) and Sirius International Insurance Corporation ("Sirius International"). On April 16, 2004, White Mountains acquired Sirius Insurance Holdings Sweden AB and its reinsurance subsidiary, Folksamerica Reinsurancesubsidiaries ("Sirius") from ABB Ltd. (the "Sirius Acquisition"). The principal companies acquired were Sirius International, Sirius America Insurance Company "Folksamerica"("Sirius America"). In connection with, which provides primary insurance programs in the Acquisition, Folksamerica was contributed by the Company to OneBeacon. OneBeaconUnited States, and Folksamerica are run as separate entities, with distinct operations, management and business strategies. White Mountains' reinsurance operations also include its wholly owned subsidiaries, Fund AmericanScandinavian Reinsurance Company Ltd. ("Fund AmericanScandinavian Re"), a reinsurance company that has been in run-off since 2002. White Mountains Re also provides reinsurance advisory services, specializing in international property and marine excess reinsurance, through White Mountains Underwriting Limited (domiciled in Ireland and formed in 2001) and White Mountains Underwriting (Bermuda) Limited, ("WMU"formed in 2003 (collectively, "WMU"), as well as.

        The Esurance segment consists of Esurance Holdings, Inc. and its investment in Montpelier Re Holdings Ltd. ("Montpelier"subsidiaries (collectively, "Esurance"),. Esurance, which has been a Bermuda-domiciled reinsurance holding company. Fund American Re is commercially domiciled in Bermuda but maintains its executive officeunit of White Mountains since October 2000, markets personal auto insurance directly to customers and an operating branch in Stockholm, Sweden, and operates through an additional branch in Singapore. WMU is an Ireland-domiciled consulting services provider specializing in international property excess reinsurance.select online agents.

        White Mountains' other operations consistOther Operations segment consists of the Company and its intermediate holding companies, as well as the International American Group, Esurance Inc. ("Esurance"(the "International American Group"), the Company and the Company's intermediate holding companies.. The International American Group, which was acquired by White Mountains in 1999, consists of Peninsula Insurance Company ("Peninsula"), American Centennial Insurance Company ("American Centennial") and British Insurance Company of Cayman ("British Insurance Company"), both of which were purchased byare in run-off.

        On November 30, 2004, White Mountains completed a significant corporate reorganization. As part of the Company in 1999. In connectionreorganization, ownership of Folksamerica was transferred to White Mountains Re from Fund American Companies, Inc. ("Fund American"), which remains OneBeacon's parent. As a result, the legal organization of White Mountains' subsidiaries is consistent with its main operating businesses (i.e., OneBeacon, White Mountains Re and Esurance), and White Mountains Re is now a cohesive,



global reinsurance organization. The reorganization also allows White Mountains to independently manage the Acquisition, Peninsula, American Centennial and British Insurance Company were contributed by the Company to Folksamerica.financial structures of its main operating segments.


White Mountains' Operating Principles

        White Mountains strives to operate within the spirit of four operating principles. These are:

        Underwriting Comes First.    WeAn insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written, and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.

        Maintain Aa Disciplined Balance Sheet.    InsuranceThe first concern here is that insurance liabilities must always be fully recognized. Loss reserves and expense reserves must be solid before any other aspect of the business can be solid. Pricing, marketing and

1



underwriting all depend on informed judgment of ultimate loss costs and that can be managed effectively only with a disciplined balance sheet.

        Invest for Total Return.    Historical insurance accounting has tended to hide unrealized gains and losses in the investment portfolio and over reward reported investment income (interest and dividends). Regardless of the accounting, White Mountains investsmust invest for the best growth in after-tax value over time whether reported as income or not and without regard to any need to report a smooth earnings stream.time. In addition to investing our bond portfolios for total after-tax return, that will also mean prudent investment in equitiesa balanced portfolio consistent with leverage and insurance risk considerations.

        Think Like Owners.    By taking accountability for one's actionsThinking like owners has a value all its own. There are stakeholders in a business enterprise and behaving with a sense of urgency, all employees demonstrate their stake in the business by working smarter and understanding that actions influence results. Thinkingdoing good work requires more than this quarter's profit. But thinking like an owner embraces all that without losing the touchstone of a capitalist enterprise.


ONEBEACON

        On June 1, 2001, White Mountains purchased CGU Corporation from Aviva and renamed the company OneBeacon. Headquartered in Boston, Massachusetts, OneBeacon is one of the oldest property and casualty insurers in the United States, tracing its roots to 1831 and the Potomac Fire Insurance Company. OneBeacon's legacy includes being among the first to issue automobile policies, honoring claims arising from the great San Francisco earthquake and the sinking of the Titanic, andas well as insuring several U.S. presidents. During 1998, Commercial Union plc

        At December 31, 2004 and General Accident plc, both U.K. corporations, were merged to form CGU plc. The U.S. operations2003, OneBeacon had $10.0 billion and $11.3 billion of these companies, General Accident Corporationtotal assets, respectively, and shareholder's equity of America ("General Accident")$2.3 billion and Commercial Union Corporation ("Commercial Union"), were merged to form CGU Corporation (the "Merger"). White Mountains agreed to purchase CGU Corporation in September of 2000, with the transaction closing on June 1, 2001. The name OneBeacon was introduced at the time of the Acquisition.$2.2 billion, respectively. OneBeacon's principal operating insurance subsidiaries are rated "A" (Excellent)(Excellent, the third highest of fifteen ratings) by A.M. Best, a rating agency which specializes in the insurance and reinsurance industry.

        In connection with the Acquisition, Aviva caused OneBeacon to purchase reinsurance contracts with two reinsurance companies rated "AAA" (Extremely Strong) by Standard & Poor's
Property and "A++" (Superior) by A.M. Best: a full risk-transfer cover from National Indemnity Company ("NICO") for up to $2.5 billion in old asbestos and environmental claims (the "NICO Cover") and an adverse development cover from General Reinsurance Corporation ("GRC") for up to $400.0 million on additional losses occurring in accident years 2000 and prior (the "GRC Cover").Casualty Insurance Overview

        On November 1, 2001, OneBeacon transferred its regional agency business, agents and operations in 42 states and the District of Columbia to Liberty Mutual Insurance Group ("Liberty Mutual") pursuant to a renewal rights agreement (the "Renewal Rights Agreement"). This transfer amounted to approximately 45% of OneBeacon's total business. The operating results and cash flows of policies renewed from November 1, 2001 through October 31, 2003 pursuant to the Renewal Rights Agreement are shared between Liberty Mutual and OneBeacon. A reinsurance agreement pro-rates results so that OneBeacon assumed approximately two-thirds of the operating results from renewals through October 31, 2002 and assumes approximately one-third of the operating results from renewals from November 1, 2002 to October 31, 2003. Additionally, OneBeacon has the option of assuming 10% of Liberty Mutual's regional agency markets business for the years 2004 to 2006 on a pari passu basis with Liberty Mutual. Since entering the Renewal Rights Agreement, OneBeacon has been focused on becoming a profitable independent agencyGenerally, property and casualty insurance company in the Northeast and for select specialty business on a national basis.

        OneBeacon conducts its primary personal and commercial business through independent agents in two regional operations (New England and the New York/New Jersey area), a New York limited assigned distribution servicing carrier (AutoOne Insurance) and one reciprocal exchange (New Jersey Skylands Management Corporation). Agents provide value to their customers through personal attention, coverage expertise and an understanding of local market conditions. The regional operations

2



target personal and commercial customers, focusing on the family account and small to mid-sized businesses. OneBeacon's objective is to underwrite only profitable business without regard to market share, premium volume or growth. In addition to these regional operations, OneBeacon is also committed to nurturing its select specialty businesses that focus on providing custom coverages to certain niche markets, including ocean marine, agricultural, professional liability and tuition reimbursement. Each specialty business has its own operations and appointed agents that target specific customer groups.

        At December 31, 2002 and 2001, OneBeacon had $15.8 billion and $16.5 billion of total assets, respectively, and shareholder's equity of $3.1 billion and $3.0 billion, respectively. OneBeacon's total assets and shareholder's equity include Folksamerica and its subsidiaries and OneBeacon's investment in Montpelier, which are covered elsewhere in this report.

Property and Casualty Insurance Overview

        As a property and casualty insurance company, OneBeacon writescompanies write insurance policies in exchange for premiums paid by its customers (the insured). An insurance policy is a contract between OneBeaconthe insurance company and the insured where OneBeaconthe insurance company agrees to pay for losses suffered by the insured that are covered under the contract. Such contracts often are subject to subsequent legal interpretation by courts, legislative action and arbitration. Property insurance generally covers the financial consequences of accidental losses to the insured's property, such as a home and the personal property in it, or a business' building, inventory and equipment. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences of a legal liability of an individual or an organization resulting from negligent acts and omissions causing bodily injury and/or property damage to a third party. Claims on property coverage generally are reported and settled in a relatively short period of time, whereas those on casualty coverage can take years, even decades, to settle.



        OneBeacon provides a variety of property and casualty insurance products to individuals (personal lines) and to businesses (commercial lines), including the following:

3


        OneBeacon also provides various specialty insurance products, including the following:

        OneBeacon derivesInsurance companies derive substantially all of itstheir revenues from earned premiums, investment income and net gains and losses from sales of investment securities. Earned premiums represent premiums received from insureds, which are recognized as revenue over the period of time during which insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time normally elapses between the receipt of insurance premiums and the payment of insurance claims. During this time, investment income is generated, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities. Net realized investment gains and losses result from sales of securities from OneBeacon'sthe insurance companies' investment portfolio.portfolios.

        OneBeacon incursInsurance companies incur a significant amount of itstheir total expenses from policyholder losses, which are commonly referred to as "claims". In settling policyholder losses, various loss adjustment expenses ("LAE") are incurred, such as insurance adjusters' fees and litigation expenses. In addition, OneBeacon incursinsurance companies incur policy acquisition expenses such as commissions paid to agents and premium taxes, and other expenses related to the underwriting process, including compensation and benefits for professional and clerical staff.

        Underwriting profit or loss is determined by subtracting loss and LAE, policy acquisition expenses and other underwriting expenses from earned premiums. AThe key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company's combined ratio under accounting principles generally accepted in the United States ("GAAP") is calculated by adding the ratio of incurred loss and LAE to earned premiums (the "loss ratio") and the ratio of commissions, premium taxes and other underwriting expenses including general and administrative expenses, to earned premiums (the "expense ratio"). WhenA combined ratio under 100% indicates that an insurance company is generating an underwriting profit. However, when considering investment income and investment gains or losses, insurance companies operating at a combined ratio of greater than 100% can be profitable despite incurring an underwriting loss.profitable.


Lines of Business

        OneBeacon writes three "core"provides specialty lines insurance products and a variety of segmented personal lines insurance products (for individuals) and commercial lines insurance products (for businesses).

        OneBeacon has built specialty businesses by providing customized coverages to certain niche markets. These specialty businesses are not subject to extreme competitive market conditions and are distinct in their product design. Each specialty business consistinghas its own operations and distribution channels that target specific customer groups. OneBeacon's specialty lines insurance products include the following:


        OneBeacon's personal lines coverages include homeowners insurance, segmented private passenger automobile and package policies sold through select independent agents. In addition, OneBeacon provides management services for a fee to reciprocal exchanges. OneBeacon's focus on commercial lines is to write property, liability, automobile and other related lines for small and mid-sized businesses for specific industry segments. While its personal and commercial businesses are subject to more competitive pressures, OneBeacon believes that through proper segmentation in product design and rating, OneBeacon has created certain specialty niches in these segments. OneBeacon's objective is to underwrite only profitable business without regard to market share or premium growth. OneBeacon's personal and commercial lines insurance products include the following:



assumed from Liberty Mutual in connection with the Renewal Rights Agreement and certain other non-core and run-off operations.

        For the twelve months ended December 31, 20022004, 2003 and 2001,2002, OneBeacon's net written premiums by line of business were as follows:


 Year Ended December 31,
  Year Ended December 31,
Net written premiums by line of business ($ in millions)

 
2002
 2001
 
Net written premiums by line of business

 Year Ended December 31,

 ($ in millions)

Specialty $848.5 $733.7 $696.6
Personal $1,092.1 43%$856.9 25% 724.7 676.8 845.2
Commercial 454.6 18 678.4 20  807.1 426.7 454.6
Specialty 284.1 11 221.6 6 
Non-core lines 692.0 28 1,710.0 49 
Other lines(1) 78.8 135.3 526.4
 
 
 
 
  
 
 
Total $2,522.8 100%$3,466.9 100% $2,459.1 $1,972.5 $2,522.8
 
 
 
 
  
 
 

(1)
Other lines of business for 2004 are primarily from premiums written by reciprocal insurance exchanges administered by OneBeacon, while Other lines of business for 2003 and 2002 are primarily from business assumed from Liberty Mutual Insurance Group ("Liberty Mutual").

        OneBeacon's specialty businesses include a LAD service provider (AutoOne Insurance), rural and farm related products (offered through National Farmers Union Property and Casualty Company, "NFU"), ocean marine (offered through International Marine Underwriters, "IMU"), medical errors and omissions (offered through OneBeacon Professional Partners, "OBPP"), agricultural ("Agri"), and other specialty products, such as tuition reimbursement. Additionally, in 2004, OneBeacon entered into the excess and surplus lines property business with the introduction of OneBeacon Specialty Property ("OBSP"). For the twelve months ended December 31, 2004, 2003 and 2002, and seven months ended December 31, 2001, OneBeacon's underwriting gain (loss) by line of businessspecialty lines net written premiums were as follows:

 
 Periods Ended December 31,
 
Underwriting gain (loss) by line of business ($ in millions)

 
 2002
 2001
 
Personal $37.3 $(63.8)
Commercial  28.1  (200.5)
Specialty  14.3  4.8 
Non-core lines  (293.1) (417.8)
  
 
 
Total $(213.4)$(677.3)
  
 
 
 
 Year Ended December 31,
Specialty lines net written premiums

 2004
 2003
 2002
 
 ($ in millions)

AutoOne Insurance $263.1 $233.8 $246.9
National Farmers Union Property & Casualty  178.5  169.0  165.5
International Marine Underwriters  136.5  125.7  109.0
OneBeacon Professional Partners  119.5  68.7  28.7
Agricultural  83.6  84.0  103.0
OneBeacon Specialty Property  19.2    
Other  48.1  52.5  43.5
  
 
 
Total specialty lines $848.5 $733.7 $696.6
  
 
 

        As a condition to its license to write automobile business within New York, an insurance carrier is obligated by statute to accept future assignments from the NYAIP, a residual insurance market that obtains personal automobile insurance for those individuals who cannot otherwise obtain it in the voluntary insurance market. Alternatively, an insurance carrier can contractually satisfy its NYAIP obligation by (1) transferring its NYAIP assignments to another insurance company, or (2) through utilization of various credits offered by New York to those insurers who voluntarily write policies for individuals in the NYAIP. The process of transferring NYAIP obligations is called Limited Assigned Distribution, and the companies that assume this obligation are called LAD servicing carriers. New Jersey and certain other states have similar programs for personal and commercial automobile.

        In 2001, OneBeacon created AutoOne Insurance to provide LAD services and takeout credits to insurance companies required to accept future assignments from the NYAIP. In January 2004, AutoOne



Insurance also began to handle NJ PAIP business as a LAD servicing carrier. New Jersey is now the second largest market in the United States for LAD servicing carriers, with nearly $300 million in NJ PAIP written premium over the last 12 months. Combined, the New York and New Jersey markets account for nearly 85 percent of personal automobile written premium serviced in the country through LAD servicing carriers. Additionally, AutoOne Insurance expects to begin writing LAD and commercial LAD business in several new states in 2005, including Pennsylvania, Texas, California, Connecticut, Vermont, Maine and Delaware.

        In late 2004, AutoOne Insurance introduced a multi-tiered private passenger auto product in New York. This sophisticated product utilizes underwriting tiers to move the price point higher or lower based on risk characteristics. The tiered structure is a key element in the design, as it provides the flexibility needed to adjust to changing market and competitor conditions.

        During 2004, OneBeacon entered the excess and surplus lines property business through its new OBSP division, which is focused on providing solutions for the excess property market. This new business is developing a portfolio with attachment points and policy limits tailored to specific business-class and market conditions. Target classes include schools and universities, municipalities, habitational risks (apartment/condos.), real estate and related classes (offices buildings, shopping centers), retail, wholesale (warehousing), builders risks and other inland marine classes.

        Since 2001, OneBeacon has expanded its specialty businesses to seven companies which represent 35% of OneBeacon's total net written premiums in 2004.

        OneBeacon's personal lines principally include among others, automobile, homeowners and Custom-Pac products (Custom-Pac products are combination policies offering home and automobile coverage with optional umbrella, boatowners and other coverages). OneBeacon's mix of personal lines products between automobile and homeowners, including Custom-Pac products, was 67% and 25%, which represented 62%, 18% and 15%respectively, of personal lines net written premium forduring 2004, compared to 63% and 30%, respectively, during 2003 and 69% and 24%, respectively, during 2002. OneBeacon writes the twelve months ended December 31, 2002. Personal lines automobile includes AutoOne Insurancemajority of its personal business in New York, Massachusetts and New Jersey Skylands Management Corporation.Maine.

        During 2004, OneBeacon launched a new multi-tiered product, OneChoice, in the Northeast. OneChoice enables OneBeacon to offer a broader range of coverages by allowing it to develop more sophisticated pricing models that have a greater statistical correlation between historical loss experience and price than traditional pricing models have shown. OneBeacon believes this product will enable it to profitably expand in selected markets throughout the United States.

        OneBeacon's commercial lines products principally include among others, multiple peril,multi-peril, commercial automobile and workers compensation, which represented 52%54%, 29%23% and 14%, respectively, of commercial lines net written premium during 2004, compared to 55%, 23% and 8%, respectively, during 2003 and 52%, 29% and 14%, respectively, during 2002.

        On March 31, 2004, OneBeacon acquired Atlantic Specialty Insurance Company ("Atlantic Specialty"), a subsidiary of Atlantic Mutual Insurance Company ("Atlantic Mutual"), and the renewal rights to Atlantic Mutual's segmented commercial insurance business, including the unearned premiums on the acquired book (the "Atlantic Specialty Transaction"). The overall gross written premium for this book of business totals approximately $400 million. This transaction has allowed OneBeacon to sell a highly segmented product to small and mid-sized companies on an industry basis. These industries include but are not limited to technology, professional services, printers and wholesalers.



        During the twelve months endedthird quarter of 2004, OneBeacon entered into an agreement to sell the renewal rights to most of its pre-Atlantic Mutual New York commercial business to Tower Insurance Group. The transaction, effective with December 31, 2002. Nearly 90%1, 2004 renewals, will impact approximately $110 million of OneBeacon'spremiums. OneBeacon will retain the commercial accounts are comprised of policies with an annual premium of less than $50,000 and consist primarily of small, non-manufacturing accounts.business acquired from Atlantic Mutual.

        OneBeacon's specialty business focuses on providing custom coverages to certain niche markets, including ocean marine (offered through International Marine Underwriters, "IMU"), agricultural ("Agri"), professional liability (offered through OneBeacon Professional Partners, "OBPP")other lines include the results of reciprocal insurance exchanges that are included in OneBeacon's GAAP results and other specialty products, such as tuition reimbursement. Each specialty business has its own operations and distribution channel that target specific customer groups. For the twelve months ended December 31,

5


2002, IMU, Agri, OBPP and other specialty products represented 38%, 36%, 10% and 16%, respectively, of specialty lines net written premium.

        OneBeacon's IMU unit offers insurance products which specialize in the ocean marine marketplace. IMU's products include coverage for cargo, hull, yacht, marina and primary and excess liability.

        OneBeacon's Agri unit offers insurance products which focus on the farm and ranch marketplace. Agri's products include coverage for property and liability related claims, excluding crop damage claims, on dairy farms, equine farms, farm equipment dealers, orchard and garden farms. Additionally, since most farm and ranch businesses are proprietor-owned, Agri also offers personal and umbrella coverages for the farm or ranch owner as a package with its farm and ranch property and liability coverage.

        OneBeacon offers D&O and professional liability insurance under the name OneBeacon Professional Partners. OneBeacon entered the D&O and professional liability market in order to capitalize on a lack of available capacity within the marketplace. Due to the potential volatility of D&O and professional liability insurance, OneBeacon selectively underwrites each policy and does not write Fortune 1000 accounts, foreign businesses or large hospitals or groups. Further, OneBeacon does not write primary coverage.Most policies attach coverage in excess of $20 million of existing insurance and/or a deductible and have small limits of coverage, usually less than $5 million. OBPP's liability coverages are issued on a "claims made" basis, which means insurance that covers losses reported to OBPP during the time period when a liability policy is in effect, regardless of when the event causing the claim actually occurred. As a result, the ability of an insured to report claims outside of the policy term is limited, thereby limiting the claims tail.

        OneBeacon offers tuition reimbursement insurance through its subsidiary, A.W.G. Dewar, Inc. ("Dewar"). Dewar has offered tuition reimbursement insurance since 1930.

        Non-core operations are primarily from business assumed from Liberty Mutual.

        Reciprocal insurance exchanges are policyholder-owned insurance associations. As part of a restructuring of its New Jersey personal lines, in 2002, OneBeacon formed New Jersey Skylands Management LLC to provide management services for a fee to the New Jersey Skylands Insurance Association, a reciprocal exchange, and its wholly owned subsidiary New Jersey Skylands Insurance Company (together, the "Association"). The Association began writing personal automobile coverage for new customers in August 2002. Additionally, during 2004, OneBeacon formed Houston General Management Company to provide management services for a fee to another reciprocal exchange, Houston General Insurance Exchange (the "Exchange"). OneBeacon has no ownership interest in the Association or the Exchange. As a result of accounting literature changes, OneBeacon began consolidating the results of reciprocal insurance exchanges on March 31, 2004 (SeeNote 15—Variable Interest Entities in the accompanying Consolidated Financial Statements). Net written premiums written by the Association and the Exchange that were included in OneBeacon's 2004 results totaled $75.0 million.

        On November 1, 2001, OneBeacon transferred its regional agency business, agents and operations in 42 states and the District of Columbia to Liberty Mutual pursuant to a renewal rights agreement (the "Liberty Agreement"). This transfer amounted to approximately 45% of OneBeacon's total business at the time of transfer. The Liberty Agreement expired on October 31, 2003. As a result, OneBeacon earned premium in connection with2004 on policies written prior to the Renewal Rightsexpiration, but did not write any new premiums in 2004 under the Liberty Agreement. Net written premiums assumed under the Liberty Agreement ($496.7were $130.4 million in net written premiums for 2002). Premiums from non-core operations decreased from 49% of total premiums2003 and $496.7 million in 2001 to 28% of total premiums in 2002. Premiums from non-core lines will continue to diminish over the next year as OneBeacon's obligations under the Renewal Rights Agreement decrease and policies in run-off expire.


Geographic Concentration

        OneBeacon's grossnet written premiums are derived solely from business produced in the United States. The variousBusiness from specialty, businesses within core operations generate premiums from risks written in

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markets across the country. Personalpersonal and commercial lines business from core operations was produced in the following states:



 Year Ended December 31,
  Year Ended December 31,
 
Personal and commercial written premiums by state

 
2002
 2001
 
Specialty, personal and commercial net written premiums by state

 Year Ended December 31,
 
 
New York (1)New York (1) 48%39%New York (1) 30%36%38%
MassachusettsMassachusetts 24 24  17 20 19 
New JerseyNew Jersey 10 13  9 3 8 
California 8 2 2 
MaineMaine 9 10  6 2 7 
ConnecticutConnecticut 5 5  5 5 4 
Other (2) 4 9 
Other(1) 25 32 22 
 
 
  
 
 
 
Total 100%100%100%
Total 100%100% 
 
 
 
 
 
 

(1)
Growth inNo individual state is greater than 3% of specialty, personal and commercial net written premiums in New York State from 2001 to 2002 is primarily from AutoOne Insurance. See separate discussion of AutoOne Insurance below.

(2)
Vermont, New Hampshirefor the years ended December 31, 2004, 2003 and Rhode Island.2002.


Marketing

        OneBeacon sellsoffers its products though a combination of independent agents, regional and national brokers, wholesalers and captive agents (through NFU). In total, OneBeacon has approximately 2,000 agency and distribution relationships.

        OneBeacon's specialty businesses are located in separate locations, logistically appropriate to their target markets. AutoOne Insurance issues its LAD business through independent agents, generating takeout credits (in New York only) through this business to sell to other insurance carriers subject to NYAIP assignments. IMU distributes its products through a network of select agents that specialize in the ocean marine business. Agri distributes its products through independent agencies. NFU distributes its products primarily through a network of exclusive agents. Substantially all of these exclusive agents are under contract with NFU and the National Farmers Union, a non-profit organization founded in 1902 to advance the interests of family farmers. OBPP distributes its products nationally through excess and surplus lines brokers. OBSP's excess property solutions are provided primarily through surplus lines wholesalers. Through these distribution channels, OneBeacon leverages its knowledge about specialty markets to provide products and services that are tailored to meet customer needs.

        OneBeacon distributes its personal and commercial lines products through select independent insurance agents. OneBeacon believes that independent agents provide complete assessments of their clients' needs, which results in appropriate coverages and prudent risk management. OneBeacon believes that independent agents will continue to be a significant force in overall industry premium production.

        OneBeacon conducts its business through 11 branch offices and approximately 1,000 appointed agencies. OneBeacon's operations are located close to its agent partners and customers throughout New England, New York and New Jersey.

        OneBeacon's specialty businesses are located in separate locations, logistically appropriate to their target markets. IMU is headquartered in New York City and has nine branch locations located throughout the United States. Its products are distributed through a network of select agents that specialize in the ocean marine business. Agri has centralized operations in Lenexa, Kansas and distributes its products through independent agencies. OBPP, which is located in Avon, Connecticut, distributes its products nationally through excess and surplus lines brokers. Through these specialty businesses, OneBeacon leverages its knowledge about these markets to provide products and services that are tailored to meet customer needs.


Underwriting and Pricing

        OneBeacon believes that there must be a realistic expectation of attaining an underwriting profit on all the business written andit writes as well as a demonstrated fulfillment of that expectation over time. Pricing pressuresAdequate pricing is a critical component to the achievement of an underwriting profit and requires a disciplined approach towards pricing insurance products. Inadequate pricing can be caused by many factors such as:pressures from: (1) insurance companies selling their products at rates less than adequate rates,those acceptable to OneBeacon because they either underestimate ultimate claim costs or overestimate the amount of investment income and investment gains they will earn on premiums collected before the claims are paid;paid, (2) lower distribution costs for insurance companies utilizing direct-response marketing methods versus marketingwilling to accept a lower return on investment for their products through independent agents;stakeholders than OneBeacon, (3) insurance companies seeking to increase revenues and market share by reducing the price of their products beneath levels acceptable to OneBeacon;OneBeacon, (4) the emergence and (4) mutualcontinued growth of insurance companiescompany competitors that have lower cost structures, and other insurance companies who are willing to accept a lower return on equity on their insurance operations than White Mountains' management and its shareholders. Pricing levels can also be influenced by(5) state regulation, legislation and judicial decisions.mandates.

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        Following the Merger, the integration of        Beginning in 2003 and continuing through 2004, OneBeacon introduced tiered rating plans in both its personal and commercial lines which permit OneBeacon to offer more price points to its customers based on underwriting and claims adjudication, settlement, administration, reporting and processing functions, which focused on expense savings, brought about numerous changes in business practices and philosophy, as well as in processes and systems. The operational integration of General Accident and Commercial Union (collectively, the "legacy companies") presented a challengecriteria applicable to OneBeacon in managing its business. It was necessary to combine the underwriting, pricing and claims recording practices of many organizations that had over time adopted differing operational methods, systems and means of coding and processing information. The integration of key data needed for financial reporting and regulatory compliance was given top priority; however, compromises were made in the integration of some additional information which limited the usefulness of certain analyses and tools used to manage and operate the business. This additional information, which included certain information relating to claim counts, insured values, exposure descriptors, risk classifications and pricing data, was often not captured fully or at all into the combined records of the legacy companies.each tier. As a result, it was difficult for OneBeacon's underwriters, claims managers and actuariesOneBeacon now has the flexibility to localize sources of and causes for changes in price adequacy, underwriting quality and claims experience. As a consequence, in hindsight, prior management was slowrenew expiring policies into the appropriate tier rather than being forced to respondchoose to external factors caused by market conditions and emerging claims trends in managingeither renew the business. However,policy at the operational challenges described above did not affect in any material respect OneBeacon's ability to estimate reserves for losses and LAE in accordance with GAAP.

        Subsequent tosame base rate or cancel the Acquisition, White Mountains brought a new management team to OneBeacon to improve operating resultspolicy. Management believes that this significant improvement in the short-termaccuracy and establish practices for sustaining acceptableprecision of OneBeacon's rate plans moves it toward the pricing sophistication of the best insurance underwriters in the market.

        These tiers are just one example of OneBeacon's segmented underwriting results going forward. White Mountains has taken significant actionsand pricing strategy. Segmentation is a key driver of OneBeacon's success in specialty lines and is being carried over into personal and commercial lines. OneBeacon develops proprietary knowledge about a given industry/class/risk type which provides it with respect to OneBeacon since it completed the Acquisition including (1) shedding non-core businesses through the Liberty Mutual transaction (as described herein), (2) increasing prices, (3) reevaluating the risks,a competitive edge when offering terms and conditions associatedon individual accounts. OneBeacon believes this will deliver superior returns versus a more "generalist" underwriting approach.



        OneBeacon also monitors pricing activity on a weekly basis and regularly measures usage of tiers, credits, debits and limits; this includes monthly review calls with renewing certain policies (and in appropriate cases decliningall field offices. In addition, it regularly updates base rates to issue a renewal policy), (4) eliminating unprofitable products, accountsachieve targeted returns on surplus and agents, such as National Accountsattempts to shift writings away from price inadequate lines/classes. Lastly, OneBeacon expends considerable effort to measure and National Programs business, (5) improving the claims adjudication, settlement, administrationverify exposure bases and processing functions and (6) improving management information systems and deploying new technology to contribute to process improvement and overall results.values.

        Further, as a result of the Renewal Rights Agreement, OneBeacon has focused its efforts on improving the ongoing operations in the Northeast, where it believes its agency relationships are the strongest and its historical results have been closer to profit targets. Under the terms of the Renewal Rights Agreement, Liberty Mutual assumed control over the underwriting and pricing of business subject to this agreement. The operating results and cash flows of policies renewed from November 1, 2001 through October 31, 2003 pursuant to the Renewal Rights Agreement are shared between Liberty Mutual and OneBeacon. A reinsurance agreement pro-rates results so that OneBeacon assumed approximately two-thirds of the operating results from renewals through October 31, 2002 and assumes approximately one-third of the operating results from renewals from November 1, 2002 to October 31, 2003. Liberty Mutual has control over a variety of factors which could impact the underwriting performance of Renewal Rights Agreement business, such as pricing adequacy, actual renewal premium volume, claims management, catastrophe exposures and other considerations. Management believes Liberty Mutual has done an acceptable job in each of these areas except for the handling of pre-November 1, 2001 claims. See "
Claims" below for a further discussion.

Competition

        Property and casualty insurance is highly competitive and extensively regulated by state insurance departments. In specialty lines, OneBeacon competes in the United States with numerous regional and national insurance companies, most notably The Robert Plan Corporation, The Chubb Corporation, American International Group, The St. Paul Travelers Insurance Group, Liberty Mutual, Selective Insurance Group,Companies and the regional Farm Bureaus. In personal and commercial lines, OneBeacon competes with numerous regional and national insurance companies, most notably The St. Paul Travelers Companies, Zurich Insurance Group, Hanover Insurance Company andCNA Financial, the Hartford Financial Services Group. It is often difficult for insurance companies to differentiate their products to consumers.Group, Allmerica Financial Corporation, W.R. Berkley Corporation, The Chubb Corporation, Progressive Insurance, Allstate Insurance and Liberty Mutual. The more significant

8



competitive factors for most insurance products offered by OneBeacon are price, product terms and claims service.service, which OneBeacon believes is the most important product differentiation that it brings to its agents and insureds. OneBeacon's underwriting principles and dedication to agency distribution are unlikely to make OneBeaconthem the "low cost"low-cost provider in most markets. However, as a property and casualty insurer that writes predominantly through independent agents,while it is often difficult for insurance companies to differentiate their products to consumers, OneBeacon believes that most propertyits dedication to providing superior product offerings, claims service, and casualty insurance customers value the counsel of a professional independent agent and that OneBeacon's use of independent agents islocalized underwriting experience gives it a competitive advantage over direct-response writers.typical low-cost providers.


Claims Management

        Effective claims management is a critical factor in achieving satisfactory underwriting results. Claims service is the most important product differentiation that OneBeacon brings to its agents and insureds. OneBeacon's near-term staffing and systems plans have caused and will continue to cause it to spend more on administrative claims costs in order to improve the efficiency of OneBeacon's claims function and ultimately to reduce overall loss costs. Additionally, in 2002, OneBeacon implemented a new claims workstation which is expected to provide management and claims adjusters with substantially more analysis and information to facilitate decision making and reduce overall claims costs in the future.

        Claims handling is located in various regional and local branch offices under the supervision of the Chief Claims Officer. OneBeacon maintains an experienced staff of appraisers, medical specialists, managers, attorneys and field adjusters strategically located throughout its operating territories. OneBeacon also maintains a special investigative unit designed to detect insurance fraud and abuse, and supportssupport efforts by regulatory bodies and trade associations to curtail the cost of fraud.

        PursuantOneBeacon's claims department's commitment to improvement is producing positive results. In 2004, OneBeacon made several operational changes in the Renewal Rights Agreement,claims department. Claims are now separately organized by specialty and commercial lines, personal lines and run-off operations. This segmentation has allowed OneBeacon to increase loss cost management specialization and better identify claims handling costs. OneBeacon introduced a total claims cost management practice which gives equal importance to controlling claims handling costs, legal expenses and claims payments, enabling OneBeacon to lower its overall claims handling costs. At the same time, over 97% of OneBeacon's insureds that responded to surveys were satisfied by the service provided by OneBeacon.

        OneBeacon's claims department utilizes a modern claims workstation, implemented in 2002, that in addition to recording reserves, payments and adjuster activity, assists each claims handler in evaluating bodily injury claims, determining liability and identifying fraud. OneBeacon's commitment and performance in fighting insurance fraud not only reduces claim costs but has aided law enforcement. Under OneBeacon's Staff Counsel Program, in-house attorneys defended 55% of its newly arising suits at a cost of $8.0 million less than it would have cost to use outside counsel. OneBeacon's internal legal bill audit team saved an additional $6.2 million by reducing legal invoices submitted by outside counsel.

        Calender year reported claims in OneBeacon's ongoing businesses were down 19% in 2004 compared to 2003. This allowed the claims department personnel to increase their focus on older open claims. At December 31, 2004, total open claims were down 22% from December 31, 2003.



        Calendar year reported claims in OneBeacon's operations in run-off were 5,900 in 2004 compared to 10,300 in 2003. Total open claims in run-off at December 31, 2004 were 14,600 compared to 28,500 at December 31, 2003, a 49% reduction. This number includes all of the claims that were previously handled by Liberty Mutual assumed controlas a Third Party Administrator ("TPA"). The majority of OneBeacon's claims officesare handled by in-house adjusters with the exception of certain claims of certain businesses in run-off. Additionally, National Indemnity Company ("NICO") is used as a TPA for asbestos and environmental reinsurance claims relating to the regionsNICO Cover (see "Asbestos and Environmental Reserves" discussion included inCRITICAL ACCOUNTING ESTIMATES inManagement's Discussion and Analysis of Financial Condition and Results of Operations below). OneBeacon claims department personnel are consulted by NICO on major claims. As with all TPAs, claims department personnel perform claim audits on NICO to ensure their controls, processes and settlements are appropriate.

        During the year, OneBeacon identified additional areas in claims processing which will be continuously improved in 2005, including litigation management, expense management and staff productivity.


Terrorism

        Since the terrorist attacks of September 11, 2001 (the "Attacks"), OneBeacon has sought to mitigate the risk associated with any future terrorist attacks by reducing the insured value of policies written in geographic areas with a high concentration of exposure to losses from terrorist attacks or by seeking to exclude coverage for such losses from their policies.

        On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act (the "Terrorism Act") establishing a federal "backstop" for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. The Terrorism Act requires primary commercial insurers to make terrorism coverage available immediately and provides Federal protection above individual company retention and aggregate industry retention levels. OneBeacon estimates its individual retention level for commercial policies subject to the Renewal Rights Agreement andTerrorism Act to be approximately $160.0 million in 2005. Aggregate industry retention levels are $15.0 billion for 2005. The Federal government will pay 90% of covered terrorism losses that exceed either OneBeacon's or the industry's retention levels up to $100.0 billion. The fate of the Terrorism Act beyond 2005 remains uncertain. It is responsible for servicing claims from the OneBeacon policies written prior to November 1, 2001, as well as policies which have renewed in those regions sinceanticipated that date. Service agreements were put in place in connection with the Renewal Rights Agreement, through which Liberty Mutual becameCongress will likely rule on a third party administrator ("TPA") for those claims. Upon review of claims informationpossible extension during the thirdsummer of 2005; however, there is a chance that the Terrorism Act could expire on December 31, 2005. To prepare for that possibility, OneBeacon is notifying customers (in states where permitted) with policies that expire in 2006 of the potential implications to their coverage. OneBeacon's current property and fourth quarterscasualty catastrophe reinsurance programs provide coverage for "non-certified" events as defined under the Terrorism Act, provided such losses are not the result of a nuclear, biological or chemical attack. See the discussion in the"Reinsurance Protection" section below for a further description of OneBeacon's catastrophe program.

        OneBeacon closely monitors and manages its concentration of risk by geographic area. Beginning in 2002 OneBeacon's management determinedand continuing through 2004, OneBeacon aggressively reduced its terrorism exposure in the largest metropolitan areas in which OneBeacon writes insurance by implementing a strategy that average paid claimslimits total probable maximum loss ("PML") from a terrorism event in offices where Liberty was actingany half mile radius. (PML is a statistical modeling technique that measures a company's catastrophic exposure as the maximum probable loss in a TPA were higher than expected. As a result, management has begun a processgiven time period.) The addition of the Atlantic Mutual book in 2004 resulted in some areas exceeding corporate PML thresholds. In these areas, specific account exposure reduction plans have been established to directly handle more of those claims related to policies written prior to the Renewal Rights Agreement and expects that substantially all such claims will be handled directly by OneBeaconbring exposures within tolerance levels by the end of 2003.2005. The financial exposure of potential new business is evaluated when it is located in an area of existing concentration or individually presents significant terrorism exposure. Additionally, formal reports are generated quarterly to validate that action adheres to corporate standards. As a result, OneBeacon believes that it has taken appropriate actions to mitigate its exposure to losses from future terrorist attacks and will



continue to monitor its terrorism exposure in the future. Nonetheless, risks insured by OneBeacon, and those contemplated by the enacted Terrorism Act, remain exposed to future terrorist attacks and the possibility remains that any future terrorist losses could prove to be material to the Company's financial position and/or its cash flows.


Reinsurance Protection

        In the ordinary course of its business, OneBeacon purchases reinsurance from high-quality, highly rated third party reinsurers in order to provide diversification of its business and minimize loss from large risks or catastrophic events. OneBeacon uses PML forecasting to quantify its exposure to catastrophic losses.

        The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OneBeacon's operating results and financial position. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and terrorist acts. The extent of losses caused by catastrophes is both a function of the amount and type of insured exposure in an area affected by the event and the severity of the event. OneBeacon continually assesses and implements programs to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas, such as coastal regions. In addition, OneBeacon imposes wind deductibles on existing coastal windstorm exposures. OneBeacon's largest single natural catastrophe risk is Northeast windstorm.

        OneBeacon seeks to further reduce its exposure to catastrophe losses through the purchase of catastrophe reinsurance. Effective July 1, 2004, OneBeacon renewed its normal property catastrophe reinsurance program to cover its full estimated PML (one-in-250 year) through June 30, 2005. Under that cover, the first $200.0 million of losses resulting from any single catastrophe are retained by OneBeacon and losses from a single event in excess of $200.0 million and up to $850.0 million are reinsured for 100% of the loss. In the event of a catastrophe, OneBeacon can reinstate its property catastrophe reinsurance program for the remainder of the original contract term by paying a reinstatement premium which is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

        OneBeacon's property catastrophe reinsurance program does not cover personal or commercial property losses resulting from nuclear, biological or chemical terrorist attacks. The program covers personal property losses resulting from other types of terrorist attacks, and commercial property losses resulting from other types of domestic terrorist attacks or events not "certified" as defined under the Terrorism Act. The Terrorism Act provides protection for commercial property losses for certified events including those arising from nuclear, biological, or chemical attacks.

        OneBeacon also uses TPAspurchases individual property reinsurance coverage for certain otherrisks to reduce large loss volatility. The Property per Risk reinsurance program reinsures losses in excess of $5.0 million up to $75.0 million. Individual risk facultative reinsurance may be purchased above $75.0 million where OneBeacon deems it appropriate. The Property per Risk treaty also reinsures losses in excess of $10.0 million up to $75.0 million on an individual risk basis for terrorism losses. However nuclear, biological, and chemical events are not covered.

        OneBeacon also maintains a casualty reinsurance program which provides protection for catastrophe losses involving workers compensation, general liability or automobile liability in excess of $5.0 million up to $60.0 million. This program provides one full $55.0 million limit for either "certified" or "non-certified" terrorism losses but does not provide coverage for losses resulting from nuclear, biological or chemical attacks.

        In connection with the OneBeacon Acquisition, Aviva caused OneBeacon to purchase reinsurance contracts with two reinsurance companies rated "AAA" (Extremely Strong) by Standard & Poor's and


"A++" (Superior) by A.M. Best: a full risk-transfer cover from NICO for up to $2.5 billion in old asbestos and environmental claims especially(the "NICO Cover") and an adverse development cover from General Reinsurance Corporation ("GRC") for National Accountsup to $400.0 million on additional losses occurring in accident years 2000 and National Programs business which is in run-off. Additionally, NICO is handling the claims processing for claims ceded under the NICO Cover under a TPA agreement. OneBeacon's claims staff performs on-site claim auditsprior (the "GRC Cover").

        Reinsurance contracts do not relieve OneBeacon of its TPA'sobligation to ensureits ceding companies. Therefore, collectibility of balances due from its reinsurers is critical to OneBeacon's financial strength. SeeNote 4, "Third Party Reinsurance" in the proprietyaccompanying Consolidated Financial Statements for a discussion of the controls and processes over claims serviced by the TPA on behalf of OneBeacon.OneBeacon's top reinsurers.

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Loss and Loss Adjustment Expense Reserves

        OneBeacon establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

        Reserve estimates at OneBeacon are subject to additional uncertainty as See "CRITICAL ACCOUNTING ESTIMATES" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a consequence of a number of factors that occurred prior to and since the Acquisition. As previously discussed, OneBeacon is the result of the merger of the U.S. operations of General Accident and Commercial Union. While relatively the same size, the legacy companies had different underwriting and claims management practices, which produced different business and underwriting results. The operational integration of the two companies was complex and included changes in underwriting and claims operations. Beginning in the mid-1990s, and continuing through the Merger, the subsequent operational integration of the legacy companies and the Acquisition, OneBeacon experienced an environment of significant change, both in its business and operations. Generally accepted actuarial techniques used to estimate reserves rely in large degree on projecting historical trends, such as patterns of claim development (i.e., reported claims and paid losses), into the future. Accordingly, estimating reserves becomes more uncertain if business mix, coverage limits, case reserve adequacy, claims payment rates and other factors change over time. The breadth and depth of the business and operational changes that occurred at OneBeacon (1) led to a wider range in the reserve estimates produced by a variety of actuarialfull discussion regarding OneBeacon's loss reserving techniques, especially those that rely upon consistent claim development patterns, and (2) introduced greater complexity to the judgments required to be made by management in determining the impact of the business and operational changes on the development patterns used to estimate reserves.

        Reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported ("IBNR") reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are regarded as the most uncertain reserve segment and are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

        Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. OneBeacon's own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, is the most important information for estimating its reserves. External data, available from organizations such as statistical bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate OneBeacon's own experience, and can be especially useful for estimating costs of new business. For some lines of business, such as "long-tail" coverages discussed below, claims data reported in the most recent accident year is often too limited to provide a meaningful basis for analysis due to the typical delay in reporting of claims. For this type of business, OneBeacon uses a selected loss ratio method for the initial accident year or years. This is a standard and accepted actuarial reserve estimation method in these circumstances in which the loss ratio is selected based upon information used in pricing

10



policies for that line of business, as well as any publicly available industry data, such as industry pricing, experience and trends, for that line of business.

        In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. Often the factors influencing changes in claim costs are difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from past. A key objective of actuaries in developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment.

        Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the "claim-tail". The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for liability/casualty coverages, such as automobile liability, general liability, products liability, D&O, multiple peril coverage, and workers compensation, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known and, as a result, OneBeacon may adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with GAAP. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.

        Management believes that OneBeacon's loss and LAE reserves as of December 31, 2002 are reasonably stated; however, ultimate loss and LAE may deviate, perhaps materially, from the amounts currently reflected in the reserve balance. Adverse development, if any, would impact the Company's future results of operations. For a further description of the historical factors affecting OneBeacon's loss and LAE reserves prior to the Acquisition, see "Non-Asbestos and Environmental Reserves" under the caption "Loss and Loss Adjustment Expense Reserves" in the "OneBeacon" section of the business description contained within the Company's Amendment No. 3 to Form S-3 dated March 14, 2003 (the "Form S-3"). Such portion of the Form S-3 is incorporated by reference into this Form 10-K.

        OneBeacon's reserves include provisions made for claims that assert damages from A&E related exposures. 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 costs obligations, particularly as mandated by federal and state environmental protection agencies. In addition to the factors described above under "Non-Asbestos and Environmental Reserves" 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.

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        OneBeacon's A&E losses resulted primarily from the operations of the Employers Group, an entity acquired by one of the legacy companies in 1971. These operations, including business of Employers Surplus Lines Insurance Company and Employers Liability Assurance Corporation, provided primary and excess liability insurance for commercial insureds, including Fortune 500-sized accounts, some of whom subsequently experienced claims for A&E losses.Employers Group stopped writing such coverage in 1984.

        OneBeacon's liabilities for A&E losses from business underwritten in the recent past are substantially limited by the application of exclusionary clauses in the policy language that eliminated coverage of such claims. After 1987 for pollution and 1992 for asbestos, most liability policies contained industry- standard absolute exclusions of such claims. In earlier years, various exclusions were also applied, but the wording of those exclusions was less strict and subsequent court rulings have reduced their effectiveness.

        OneBeacon also incurred A&E losses via its participation in industry pools and associations. The most significant of these pools was the Excess Casualty Reinsurance Association ("ECRA"), which provided excess liability reinsurance to U.S. insurers from 1950 until the early 1980s. ECRA incurred significant liabilities for A&E, of which OneBeacon bears approximately a 4.7% share, or $68 million at year end 2002.

        More recently, since the 1990s, OneBeacon has experienced an influx of claims from commercial insureds, including many non-Fortune 500-sized accounts written during the 1970s and 1980s, who are named as defendants in asbestos lawsuits. As a number of large well-known manufacturers of asbestos and asbestos-containing products have gone into bankruptcy, plaintiffs have sought recoveries from peripheral defendants, such as installers, transporters or sellers of such products, or from owners of premises on which exposure to asbestos allegedly occurred. At December 31, 2002, 602 policyholders had asbestos related claims against OneBeacon. In 2002, 38 new insureds with such peripheral involvement presented asbestos claims under prior OneBeacon policies.

        Historically, most asbestos claims have been asserted as product liability claims. Recently, insureds who have exhausted the available products liability limits of their insurance policies have sought payment for asbestos claims under the premises and operations coverage of their liability policies. It is more difficult for plaintiffs to establish losses as stemming from premises and operations exposures, which requires proof of the defendant's negligence, rather than products liability under which strict legal liability applies. Hence, there are fewer of such claims and settlements are generally for smaller amounts. There are currently 79 active claims against OneBeacon without product liability coverage asserting operations or premises coverage.

        Immediately prior to the Acquisition, Aviva caused OneBeacon to purchase a reinsurance contract with NICO for a premium of $1.3 billion under which OneBeacon is entitled to recover from NICO up to $2.5 billion in the future for asbestos claims arising from business written by OneBeacon in 1992 and prior, environmental claims arising from business written by OneBeacon in 1987and prior, and certain other exposures. Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OneBeacon's third party reinsurers in existence at the time the NICO Cover was executed ("Third Party Recoverables"). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. Third Party Recoverables are typically for the amount of loss in excess of a stated level each year. Of claim payments in the past 11 years, approximately 58% of asbestos losses and 40% of environmental losses have been recovered under the historical third party reinsurance.

        For purposes of determining available reinsurance, product liability asbestos claims are aggregated as a single loss within each policy period. As a result, losses often exceed the threshold level under the reinsurance agreement and reinsurance recoveries are obtained. However, for claims being asserted under premises and operations coverage, the losses are generally not aggregated for purposes of

12



determining reinsurance recoveries, so OneBeacon expects that in the future a smaller percentage of these losses will be covered as Third Party Recoverables than has been true historically of products liability asbestos losses.

        The large majority of OneBeacon's third party reinsurance has been obtained from top-rated, financially strong companies. Of the Third Party Recoverables presented for recovery to date, approximately 3% has been determined to be unrecoverable due either to inability of a reinsurer to pay or to disputes with the reinsurer over the amounts due. For asbestos losses, this unrecoverable percentage has been 3.8% and for environmental losses 2.0%. Amounts uncollectible from third party reinsurers due to dispute or the reinsurers' financial inability to pay are covered by NICO under its agreement with OneBeacon.

        OneBeacon estimates that on an incurred basis it has exhausted approximately $1,771 million of the coverage provided by NICO at December 31, 2002. Approximately $419 million of the estimated $1,771 million of incurred losses have been paid by NICO through December 31, 2002, with $106.3 million paid in 2002. To the extent that actual experience differs from OneBeacon's estimate of ultimate A&E losses and Third Party Recoverables, the remaining protection under the NICO Cover may be more or less than the approximate $729 million that OneBeacon estimates remained at December 31, 2002.

        OneBeacon's reserves for A&E losses, net of Third Party Recoverables but prior to NICO recoveries, are $1.2 billion at December 31, 2002. An industry benchmark of reserve adequacy is the "survival ratio", computed as a company's reserves divided by its historical average yearly loss payments. This ratio indicates approximately how many more years of payments the reserves can support, assuming future yearly payments are equal to historical levels. OneBeacon's survival ratio was approximately 15.7 at December 31, 2002, which was computed as the ratio of A&E reserves, net of Third Party Recoverables, of $1.2 billion plus the remaining unused portion of the NICO Cover of $729 million, to the average loss payments in the past three years. White Mountains believes that as a result of the NICO Cover and its historical third party reinsurance programs, OneBeacon should not experience material financial loss from old A&E exposures under current coverage interpretations and that its survival ratio compares favorably to industry survival ratios. See Note 3 to the financial statements for more information regarding White Mountains' A&E reserves.

        OneBeacon's reserves for A&E losses at December 31, 2002 represent management's best estimate of its ultimate liability based on information currently available. OneBeacon believes the NICO Cover will be adequate to cover all of its A&E obligations. However, as case law expands, medical and clean-up costs increase and industry settlement practices change, OneBeacon may be subject to asbestos and environmental losses beyond currently estimated amounts. Therefore, OneBeacon cannot guarantee that its A&E loss reserves, plus the remaining coverage under the NICO Cover, will be sufficient to cover additional liability arising from any such unfavorable developments.

Construction Defect Claims

        OneBeacon's general liability and multiple peril lines of business have been significantly impacted by an increasing number of construction defect claims. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as apartments, condominiums, single family dwellings or other housing. Such claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. Much of the increase in claims activity has been generated by plaintiffs' lawyers who approach disgruntled homeowners, and in many cases homeowner associations with large numbers of homeowners in multi-residential complexes, about defects or other flaws in their homes. The increasing number of claims for construction defects has been experienced industry-wide beginning with increased claims relating to exposures in California. Then, as plaintiffs' lawyers organized suits in other states with high levels of multi-residential

13



construction, construction defect claims were reported in nearby western states, such as Colorado and Nevada, and eventually throughout the country. The reporting of such claims can be quite delayed as the statute of limitations can be up to ten years. Court decisions have expanded insurers' exposure to construction defect claims as well. For example, in 1995, California courts adopted a "continuous trigger" theory in which all insurers during the period in which the damage occurs (i.e., the entire construction period through remediation of the damage) must respond. As a result, claims may be reported more than ten years after a project has been completed as litigation can proceed for several years before an insurance company is identified as a potential contributor. Recently, claims have also emerged from parties claiming additional insured status on policies issued to other parties (e.g., such as contractors seeking coverage on a sub-contractor's policy).

        A large number of construction defect claims were identified relating to coverages that OneBeacon had written in the past through Commercial Union and General Accident and their subsidiaries in California, Colorado, Nevada, Washington and Oregon. Management has sought to mitigate future construction defect risks in all states by no longer providing insurance to certain residential general contractors and sub-contractors involved in multi-habitational projects. Mitigating actions also included initiating the withdrawal from problematic sub-segments within OneBeacon's construction book of business, such as street and road construction, water, sewer and pipeline construction, and dam, waterway, railroad and subway construction. Although management has undertaken actions to mitigate future risks related to construction defect claims, management believes that the number of reported construction defect claims relating to coverages written in the past will continue to increase. In addition, in reserving for these claims, there is additional uncertainty due to the potential for further unfavorable judicial rulings and regulatory actions.

Additional Loss and Loss Adjustment Expense Informationprocess.

        The following information presents (1) OneBeacon's reserve development over the preceding ten years and (2) a reconciliation of reserves in accordance with accounting principles and practices prescribed or permitted by insurance statutory authorities ("Statutory" basis) to such reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.

        Section I of the ten year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid losses and LAE. The liability represents the estimated amount of losses and LAE for claims that were unpaid at the balance sheet date, including incurred but not reported ("IBNR") reserves. In accordance with GAAP, the liability for unpaid losses and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid losses and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

        Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid losses and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section III shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2004. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004. Section V shows the cumulative


amount of net losses and LAE paid relating to recorded liabilities as of the end of each succeeding year.

 
 OneBeacon Loss and LAE(1),(3)
Years Ended December 31,

 
($ in millions)

 
 1994
 1995
 1996
 1997
 1998(2)
 1999
 2000
 2001
 2002
 2003
 2004
 
I. Liability for unpaid losses and LAE: $5,535.4 $5,844.4 $5,804.4 $5,655.9 $6,944.0 $6,368.8 $6,982.7 $8,425.2 $7,630.5 $6,241.2 $5,475.5 
Less: reins. recoverables on unpaid losses and LAE  (1,069.8) (1,307.4) (1,260.4) (1,159.2) (1,651.9) (1,285.6) (1,276.4) (3,609.7) (3,560.6) (2,984.0) (2,714.7)
  
 
 
 
 
 
 
 
 
 
 
 
Net balance $4,465.6 $4,537.0 $4,544.0 $4,496.7 $5,292.1 $5,083.2 $5,706.3 $4,815.5 $4,069.9 $3,257.2 $2,760.8 
  
 
 
 
 
 
 
 
 
 
 
 
II. Net liability re-estimated as of:                                  
 1 year later  4,494.1  4,584.7  4,627.8  5,370.1  5,305.3  5,901.2  4,815.8  4,872.9  4,216.7  3,357.4   
 2 years later  4,552.1  4,667.1  5,476.0  5,424.7  5,985.4  5,013.5  4,913.7  5,155.0  4,337.0       
 3 years later  4,642.8  5,460.6  5,549.0  5,965.0  5,002.8  5,001.5  5,384.7  5,244.0          
 4 years later  5,406.5  5,510.6  5,924.8  4,980.5  4,932.1  5,297.5  5,429.3             
 5 years later  5,431.8  5,779.5  4,948.0  4,911.8  5,117.6  5,243.4                
 6 years later  5,632.0  4,794.7  4,900.4  5,069.3  5,006.1                   
 7 years later  4,658.7  4,749.4  5,028.9  4,902.3                      
 8 years later  4,625.6  4,871.8  4,867.4                         
 9 years later  4,744.2  4,714.2                            
 10 years later  4,593.1                               
  
 
 
 
 
 
 
 
 
 
 
 
III. Cumulative net (deficiency)/redundancy $(127.5)$(177.2)$(323.4)$(405.6)$286.0 $(160.2)$277.0 $(428.5)$(267.2)$(100.3)$ 
Percent (deficient)/redundant  (2.9)% (3.9)% (7.1)% (9.0)% 5.4% (3.2)% 4.9% (8.9)% (6.6)% (3.1)% %
  
 
 
 
 
 
 
 
 
 
 
 
IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above):                                  
Gross re-estimated liability  5,559.2  5,893.0  5,996.2  5,898.5  6,574.0  6,545.8  6,730.0  8,830.6  7,878.1  6,331.6   
Less: gross re-estimated reinsurance recoverable  (966.0) (1,178.8) (1,128.8) (996.2) (1,567.9) (1,302.4) (1,300.7) (3,586.6) (3,541.1) (2,974.2)  
  
 
 
 
 
 
 
 
 
 
 
 
Net re-estimated liability $4,593.1 $4,714.2 $4,867.4 $4,902.3 $5,006.1 $5,243.4 $5,429.3 $5,244.0 $4,337.0 $3,357.4 $ 
  
 
 
 
 
 
 
 
 
 
 
 
V. Cumulative net amount of liability paid through:                                  
 1 year later  1,390.1  1,476.6  1,591.9  1,687.3  1,815.2  1,966.5  2,007.9  1,892.0  1,656.7  1,463.7   
 2 years later  2,240.8  2,372.6  2,621.3  2,735.4  2,954.8  3,136.2  3,213.8  3,101.3  2,834.7       
 3 years later  2,821.9  3,083.3  3,331.1  3,518.0  3,709.2  3,882.3  4,057.3  4,040.5          
 4 years later  3,328.3  3,571.3  3,872.2  4,044.0  4,125.9  4,394.5  4,677.2             
 5 years later  3,672.7  3,961.5  4,233.4  4,282.8  4,421.0  4,736.0                
 6 years later  3,978.3  4,225.4  4,398.1  4,464.4  4,627.2                   
 7 years later  4,186.9  4,329.4  4,516.6  4,584.6                      
 8 years later  4,265.6  4,416.0  4,609.4                         
 9 years later  4,335.6  4,485.7                            
 10 years later  4,392.9                               
  
 
 
 
 
 
 
 
 
 
 
 

(1)
In 1998, OneBeacon was formed as a result of a pooling of interests between Commercial Union and General Accident. All historical balances have been restated as though the companies had been merged throughout the periods presented.

(2)
In 1998, OneBeacon acquired Houston General Insurance Company and NFU. All liabilities related to these entities have been shown from the acquisition date forward in this table.

(3)
This table reflects the effects of the NICO Cover and the GRC Cover as if they had been in effect for all periods presented.

        The cumulative net (deficiency)/redundancy in the table above reflects reinsurance recoverables recorded in connection with the OneBeacon Acquisition under the NICO Cover and the GRC Cover. SeeNote 4, "Third Party Reinsurance" in the accompanying Consolidated Financial Statements for a description of the NICO Cover and the GRC Cover. These covers apply to losses incurred in 2000 and prior years. As a result, they have the effect of significantly increasing OneBeacon's reinsurance recoverables in 2001 and 2002 and reducing its reserve deficiency for each of the years presented prior to the OneBeacon Acquisition by the amount of the reserves ceded at the time these covers were purchased. See "Asbestos and Environmental Reserves" under "CRITICAL ACCOUNTING ESTIMATES" in"Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the impact of the NICO Cover on OneBeacon's net loss and LAE reserve position. The table presented below represents OneBeacon's cumulative net deficiency without regard to the NICO Cover and the GRC Cover.

 
 Years Ended December 31,
 
($ in millions)

 
 1994
 1995
 1996
 1997
 1998
 1999
 2000
 2001
 2002
 2003
 2004
 
Cumulative net deficiency adjusted for the NICO Cover and the GRC Cover $(1,831.1)$(1,906.6)$(2,076.5)$(2,194.9)$(1,560.9)$(2,092.3)$(1,788.0)$(428.5)$(267.2)$(100.3)$ 

Percent deficient

 

 

(41.0

)%

 

(42.0

)%

 

(45.7

)%

 

(48.8

)%

 

(29.5

)%

 

(41.2

)%

 

(31.3

)%

 

(8.9

)%

 

(6.6

)%

 

(3.1

)%

 


%
  
 
 
 
 
 
 
 
 
 
 
 

        The following table reconciles loss and LAE reserves determined on a Statutory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:

 
 December 31,
 
($ in millions)

 
 2004
 2003
 2002
 
Statutory reserves $4,413.4 $5,085.5 $6,029.0 
Reinsurance recoverable on unpaid losses and LAE(1)  1,046.8  1,197.5  1,650.9 
Reserves allocated from other segments  44.5     
Other(2)  (29.2) (41.8) (49.4)
  
 
 
 
GAAP reserves $5,475.5 $6,241.2 $7,630.5 
  
 
 
 

(1)
Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under Statutory accounting.

(2)
Primarily represents long-term workers compensation loss and LAE reserve discount recorded of $36.1 million, $38.0 million and $42.2 million in 2004, 2003 and 2002 in excess of statutorily defined discount.


WHITE MOUNTAINS RE

        During 2004, White Mountains formed White Mountains Re, which combined Folksamerica, Fund American Reinsurance Company, Ltd. ("Fund American Re") and WMU with the newly acquired Sirius to form a cohesive, global reinsurance organization.

        White Mountains Re offers lead capacity for reinsurance on most property, accident & health and liability exposures and writes direct program insurance business through Sirius America. White Mountains Re also provides reinsurance advisory services through WMU, specializing in international property and marine excess reinsurance. White Mountains Re has offices in Belgium, Bermuda, Chicago, Connecticut, Dublin, Hamburg, London, Miami, New York, Singapore, Stockholm, Toronto and Zurich. At December 31, 2004 and 2003, White Mountains Re had $8.2 billion and $3.7 billion of total assets and $1.7 billion and $1.0 billion of shareholder's equity, respectively.


        Folksamerica, which became a wholly-owned subsidiary of White Mountains in 1998, is a multi-line property and casualty reinsurer that provides reinsurance to insurers primarily in the United States, Canada, Continental Europe, Latin America, the Caribbean and Japan. Folksamerica Re is rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best.

        On April 16, 2004, White Mountains completed the Sirius Acquisition, through which the principal operating companies acquired were Sirius International and Sirius America. Stockholm-based Sirius International is a multi-line property and casualty reinsurer that provides reinsurance primarily in Europe, North America and Asia and is the largest reinsurance company domiciled in Scandinavia (based on gross written premiums). Sirius America is a U.S.-based insurer that specializes in primary insurance programs. Sirius International and Sirius America are both rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best.

        Effective October 1, 2003, White Mountains Re acquired renewal rights to the property and casualty treaty reinsurance business of CNA Reinsurance ("CNA Re"), a division of CNA Financial Corporation (the "CNA Re Agreement"). Under the terms of the CNA Re Agreement, White Mountains Re pays CNA Re a renewal commission on the premiums renewed over the two contract renewal periods subsequent to October 1, 2003. The renewal commission is 3% for the initial renewal and 2% for the second renewal.

        In December 2001, White Mountains formed WMU, a reinsurance advisory company domiciled in Ireland. As part of a corporate reorganization, WMU established a sister company in Bermuda in June 2003. WMU provides reinsurance underwriting advice and reinsurance portfolio analysis services to both Folksamerica and Olympus Reinsurance Company Ltd. ("Olympus"). Prior to the Sirius Acquisition, WMU's Irish company, a specialist in handling non-marine property treaty excess of loss classes, expanded White Mountains Re's international profile, particularly in the United Kingdom, Continental Europe, Japan and Australia. WMU's Bermuda company specializes in excess reinsurance coverages for the marine and energy sector.

        Since 1999, in addition to the transactions discussed above, White Mountains Re has made the following acquisitions:



Reinsurance Overview

        Reinsurance is an arrangement in which a reinsurance company (the "reinsurer") agrees to indemnify an insurance company (the "ceding company") for all or a portion of the insurance risks underwritten by the ceding company under one or more insurance policies. Reinsurance can benefit a ceding company in a number of ways, including reducing exposure on individual risks, providing catastrophe protections from large or multiple losses, and assisting in maintaining acceptable capital levels as well as financial and operating leverage ratios. Reinsurance can also provide a ceding company with additional underwriting capacity by permitting it to accept larger risks and underwrite a greater number of risks without a corresponding increase in its capital or surplus. Reinsurers may also purchase reinsurance, known as retrocessional reinsurance, to cover their own risks assumed from primary ceding companies. Reinsurance companies often enter into retrocessional agreements for many of the same reasons that ceding companies enter into reinsurance agreements.

        Reinsurance is generally written on a treaty or facultative basis. Treaty reinsurance is an agreement whereby the reinsurer assumes a specified portion or category of risk under all qualifying policies issued by the ceding company during the term of the agreement, usually one year. In the underwriting of treaty reinsurance, the reinsurer does not evaluate each individual risk and generally accepts the original underwriting decisions made by the ceding insurer. Treaty reinsurance is typically written on either a quota share or excess of loss basis. A quota share reinsurance treaty is an arrangement whereby a reinsurer assumes a predetermined proportional share of the premiums and losses generated on specified business. An excess of loss treaty is an arrangement whereby a reinsurer assumes losses that exceed an agreed retention of loss by the ceding company. Facultative reinsurance, on the other hand, is underwritten on a risk-by-risk basis, which allows the reinsurer to determine pricing for each exposure.

        A significant period of time normally elapses between the receipt of reinsurance premiums and the payment of reinsurance claims. While premiums are generally paid to the reinsurer upon inception of coverage, the claims process is delayed and generally begins upon the occurrence of an event causing an insured loss followed by: (1) the reporting of the loss by the insured to the ceding company; (2) the reporting of the loss by the ceding company to the reinsurer; (3) the ceding company's adjustment and payment of the loss; and (4) the payment to the ceding company by the reinsurer. During this time, reinsurance companies generate investment income on premium receipts, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities. The period of time between the receipt of premiums and the payment of claims is typically longer for a reinsurer than for a primary insurer.


Classes of Business

        White Mountains Re writes three main classes of reinsurance: liability, property and accident and health. White Mountains Re's net written premiums by class of business for the years ended December 31, 2004, 2003 and 2002 were as follows:

 
 Year Ended December 31,
Business class
(Millions)

 2004
 2003
 2002
Liability $524.5 $450.7 $344.2
Property  432.1  314.6  252.2
Accident and Health  151.6  88.4  68.1
Other  138.1  32.0  23.7
  
 
 
 Total $1,246.3 $885.7 $688.2
  
 
 

        White Mountains Re writes both treaty and facultative reinsurance, as well as direct business. The majority of White Mountains Re's premiums are derived from treaty reinsurance contracts both on a quota share and an excess of loss basis, which in 2004 amounted to 55% and 34%, respectively, of its total net written premiums, while direct business represented 11% of total net written premium.

        During the years ended December 31, 2004, 2003 and 2002, White Mountains Re received no more than 10% of its gross reinsurance premiums from any individual ceding company. During the years ended December 31, 2004, 2003 and 2002, White Mountains Re received approximately 51%, 58% and 57%, respectively, of its gross reinsurance written premiums from three major, third-party reinsurance brokers as follows: (1) AON Re—22%, 25% and 28%, respectively; (2) Benfield—16%, 19% and 14%, respectively; and (3) Guy Carpenter—13%, 14% and 15%, respectively.


Geographic Concentration

        White Mountains Re's net written premiums by geographic region for the years ended December 31, 2004, 2003 and 2002 were as follows:

 
 Year Ended December 31,
Geographic region
(Millions)

 2004
 2003
 2002
United States $846.7 $702.5 $529.8
Europe  303.5  114.0  88.0
Canada, the Caribbean and Latin America  42.4  53.6  58.8
Asia and Other  53.7  15.6  11.6
  
 
 
 Total $1,246.3 $885.7 $688.2
  
 
 


Marketing

        White Mountains Re, which conducts its reinsurance business through Folksamerica and Sirius International, obtains most of its reinsurance business from reinsurance brokers. Business submissions come from intermediaries that represent the ceding company or through submissions recommended by WMU. White Mountains Re considers both the intermediary and the ceding company to be its clients in any placement. White Mountains Re has developed strong business relationships over a long period of time with the management of many of its ceding companies. The process of placing an intermediary reinsurance program typically begins when a ceding company enlists the aid of a reinsurance intermediary in structuring a reinsurance program. Often the ceding company and the broker will consult with one or more lead reinsurers as to the pricing and contract terms for the reinsurance protection being sought. Once the ceding company has approved the terms quoted by the lead reinsurer, the broker will offer participation to qualified reinsurers until the program is fully subscribed.

        White Mountains Re pays ceding companies a ceding commission under most quota share reinsurance treaties and some excess of loss reinsurance treaties. The ceding commission is generally based on the ceding company's cost of acquiring and administering the business being reinsured (commissions, premium taxes and certain miscellaneous expenses). Additionally, White Mountains Re pays reinsurance intermediaries commissions based on negotiated percentages of the premium they produce. The reinsurance intermediary's commissions constitute a significant portion of White Mountains Re's total acquisition costs.

        As mentioned above, White Mountains Re also writes direct program business through Sirius America, which began its program insurance operations in 1999. Sirius America works with managing general agents to produce U.S. based liability, property and accident & health insurance programs for small and mid-sized commercial accounts. Sirius America establishes strict underwriting guidelines,



closely monitors all exposures and performs periodic on-site audits of the managing general agents to confirm compliance with established guidelines and procedures.


Underwriting and Pricing

        White Mountains Re derives its business from a broad spectrum of ceding insurers including national, regional, specialty and excess and surplus lines writers, both in the United States and internationally. White Mountains Re determines which risks it accepts based on the anticipated underwriting results of the transaction, which are evaluated on a variety of factors including types of risk, the quality of the reinsured, the attractiveness of the reinsured's insurance rates and policy conditions and the adequacy of the proposed reinsurance terms.

        White Mountains Re's underwriters and pricing actuaries perform reviews of the underwriting, pricing, and general underwriting controls of potential clients before quoting contract terms for its reinsurance products. White Mountains Re prices its products by assessing the desired return on the expected capital needed to write a given contract and by estimating future loss and LAE costs. White Mountains Re accepts contracts that are anticipated to generate expected returns on capital and an underwriting profit. White Mountains Re's pricing indications are based on a number of underwriting factors including historical results, analysis of exposure and estimates of future loss costs, a review of other programs displaying similar exposure characteristics, the primary insurer's underwriting and claims experience and the primary insurer's financial condition. Folksamerica's underwriters and claims personnel perform regular audits on certain classes of business to monitor the ceding company's pricing and claim handling discipline. Sirius International's underwriters frequently communicate with ceding companies to discuss current terms and conditions. Additionally, White Mountains Re's finance staff reviews the financial stability and creditworthiness of certain ceding companies. Such reviews provide important input to support underwriting decisions.

        White Mountains Re and other reinsurance companies have sought to mitigate the risk associated with future terrorist attacks in a similar manner as primary insurers. Since the Attacks, reinsurers have attained significant price increases across all lines of reinsurance in response to greater perceived policy exposures. Reinsurers do not have the stringent regulations with respect to contract terms and policy exclusions which are generally imposed on primary writers. For example, the Terrorism Act is not applicable to reinsurers. As a result, exclusions are more often dictated by the marketplace than by regulation. White Mountains Re evaluates terrorism exposure to its ceding company clients and applies exclusions as appropriate. For example, reinsurance written on commercial risks subsequent to the Attacks generally contain clauses that exclude certified acts of terrorism. Reinsurance on personal risks written subsequent to the Attacks generally contain exclusions related to nuclear, biological and chemical attacks.


Claims Management

        White Mountains Re maintains a staff of experienced reinsurance claim specialists that work closely with reinsurance intermediaries to obtain specific claims information from its customers. Folksamerica's claims staff also regularly perform on site claim reviews to assess and suggest improvements regarding the reinsured's claim handling ability and reserving techniques. In addition, all of White Mountains Re's claims specialists review loss information provided by the reinsured for adequacy. The results of these claim reviews are shared with the actuaries and underwriters to ensure that they are making the correct assumptions in pricing products and that all relevant information is used in establishing loss reserves.

        White Mountains Re also uses TPAs for certain other claims, including the direct program business written by Sirius America and run-off claims related to the Sierra and PCA acquisitions. White


Mountains Re's claims staff performs on-site claim audits of certain TPAs to ensure the propriety of the controls and processes over claims serviced by the TPA.


Competition

        In general, White Mountains Re competes for reinsurance business with other major global reinsurers, local reinsurers in certain markets and reinsurance divisions of direct insurance companies. Competition in the worldwide reinsurance market is influenced by a variety of factors, including financial strength ratings, prior history and relationships, as well as expertise and the speed at which the company has historically paid claims.

        Through Folksamerica, White Mountains Re competes with all of the larger U.S. reinsurance companies. As reported by the Reinsurance Association of America ("RAA") for the nine month period ending September 30, 2004, (the most recent data available), Folksamerica wrote approximately 6% of gross written premiums of all reinsurance companies that are viewed as direct competition. The reinsurance companies writing the largest portion of gross premiums in this period were: XL Reinsurance America (18%), Transatlantic Reinsurance Company (16%) and Everest Reinsurance Company (15%).

        Through Sirius International, the largest reinsurance company domiciled in Scandinavia (based upon gross written premiums), White Mountains Re competes with many of the larger European and international reinsurance companies, including Munich Re, Swiss Re, Hannover Re, Lloyds, Partner Re and Everest Re.

        White Mountains Re, through its operating subsidiaries, has a long history of close relationships with ceding companies and maintains a disciplined underwriting strategy which, among other things, focuses on writing more business when market terms and conditions are favorable and reducing business volume during soft markets when terms and conditions become less favorable. White Mountains Re also employs a multi-line approach, offering clients a wide range of reinsurance products to satisfy their risk management needs. Additionally, White Mountains Re's acquisition strategy has contributed to its growth. Since 1995, White Mountains Re has completed ten acquisitions of other insurance and reinsurance organizations. In virtually all cases the acquired entities were fundamentally sound, but were owned by organizations that no longer considered them core businesses.


Reinsurance Protection

        White Mountains Re has exposure to losses caused by hurricanes, earthquakes, winter storms, windstorms, terrorist acts and other catastrophic events. In the normal course of business, White Mountains Re seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance and reinsurance enterprises and by closely monitoring aggregate property exposures and related PMLs. To manage and analyze aggregate exposures and PML, White Mountains Re utilizes a variety of tools and analyses, including catastrophe modeling software packages. White Mountains Re regularly assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure, primarily through limiting accumulation of exposure to acceptable levels and, if deemed necessary, the purchase of catastrophe reinsurance.

        Folksamerica's primary reinsurance protection is through quota share arrangements with Olympus. These arrangements are designed to increase Folksamerica's capacity to capitalize on the improved pricing trends that accelerated after the Attacks and to reduce its potential loss exposure to any large, or series of smaller, property catastrophe events. Under its quota share agreements with Olympus, Folksamerica cedes up to 75% of substantially all of its short-tailed excess of loss business, mainly property and marine, and 50% of its proportional property business to Olympus and receives an override commission on the premiums ceded to Olympus.



        Under its prior ownership, Sirius' threshold for risk exposure and earnings volatility was extremely low. As a consequence, Sirius purchased many reinsurance protections at significant costs. These protections were purchased primarily to reduce the company's property catastrophe exposure on both a treaty and facultative basis. Under White Mountains Re's ownership, Sirius' reinsurance purchasing is coordinated with that of Folksamerica on a group-wide basis. Selective purchases are made primarily for property catastrophe protection. Effective April 1, 2004, Sirius International entered into a quota share reinsurance agreement with Olympus. Under this agreement, Sirius International cedes 25% of its short-tailed proportional and excess of loss business to Olympus. White Mountains Re receives an override commission on the premiums ceded to Olympus.

        Reinsurance contracts do not relieve White Mountains Re of its obligation to its ceding companies. Therefore, collectibility of balances due from its retrocessional reinsurers is critical to White Mountains Re's financial strength. SeeNote 4—"Third Party Reinsurance" to the accompanying Consolidated Financial Statements for a discussion of White Mountains Re's top reinsurers.


Loss and Loss Adjustment Expense Reserves

        White Mountains Re establishes reserves that are estimates of future amounts needed to pay claims and related expenses for insured events that have already occurred. See "CRITICAL ACCOUNTING ESTIMATES" in"Management's Discussion and Analysis of Financial Condition and Results of Operations" for a full discussion regarding White Mountains Re's loss reserving process.

        The following information presents (1) White Mountains Re's reserve development over the preceding ten years and (2) a reconciliation of reserves on a regulatory basis to reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.

        Section I of the ten year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid losses and LAE. The liability represents the estimated amount of losses and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid losses and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid losses and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

        Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid losses and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section III shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2002.2004. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2002.2004. Section V shows the cumulative amount of net losses and LAE paid relating to recorded liabilities as of the end of each succeeding year.

14


 
 0neBeacon Loss and LAE(1),(3),
Years Ended December 31,

 
 
 1992
 1993
 1994
 1995
 1996
 1997
 1998(2)
 1999
 2000
 2001
 2002
 
 
 Dollars in Millions

 
I. Liability for unpaid losses and LAE: $5,652.8 $5,562.5 $5,535.4 $5,844.4 $5,804.4 $5,655.9 $6,944.0 $6,368.8 $6,982.7 $8,425.2 $7,630.5 
Less: reins. recoverables on unpaid losses and LAE  (1,392.6) (1,191.6) (1,069.8) (1,307.4) (1,260.4) (1,159.2) (1,651.9) (1,285.6) (1,276.4) (3,609.7) (3,560.6)
  
 
 
 
 
 
 
 
 
 
 
 
Net balance $4,260.2 $4,370.9 $4,465.6 $4,537.0 $4,544.0 $4,496.7 $5,292.1 $5,083.2 $5,706.3 $4,815.5 $4,069.9 
  
 
 
 
 
 
 
 
 
 
 
 
II. Net liability re-estimated as of:                                  
 1 year later  4,365.9  4,411.5  4,494.1  4,584.7  4,627.8  5,370.1  5,305.3  5,901.2  4,815.8  4,872.9    
 2 years later  4,413.4  4,450.3  4,552.1  4,667.1  5,476.0  5,424.7  5,985.4  5,013.5  4,913.7       
 3 years later  4,510.5  4,501.0  4,642.8  5,460.6  5,549.0  5,965.0  5,002.8  5,025.5          
 4 years later  4,610.3  4,602.8  5,406.5  5,510.6  5,924.8  4,980.5  5,073.5             
 5 years later  4,705.8  5,353.2  5,431.8  5,779.5  4,948.0  5,049.2                
 6 years later  5,446.4  5,353.5  5,632.0  4,794.7  4,995.6                   
 7 years later  5,439.2  5,523.8  4,658.7  4,840.0                      
 8 years later  5,587.1  4,569.2  4,691.8                         
 9 years later  4,638.5  4,595.6                            
10 years later  4,660.5                               
  
 
 
 
 
 
 
 
 
 
 
 
III. Cumulative net (deficiency)/ redundancy $(400.3)$(224.7)$(226.2)$(303.0)$(451.6)$(552.5)$218.6 $57.7 $792.6 $(57.4)$ 
Percent (deficient)/ redundant  (9.4)% (5.1)% (5.1)% (6.7)% (9.9)% (12.3)% 4.1%  1.1%  13.9%  (1.2)% —% 
  
 
 
 
 
 
 
 
 
 
 
 
IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period(see II. above):                                  
Gross re-estimated liability  11,334.1  11,024.5  10,981.8  10,861.1  10,871.8  10,807.3  10,849.8  10,632.6  10,538.9  10,057.4    
Less: gross re-estimated reinsurance recoverable  (6,673.6) (6,428.9) (6,290.0) (6,021.1) (5,876.2) (5,758.1) (5,776.3) (5,607.1) (5,625.2) (5,184.5)   
  
 
 
 
 
 
 
 
 
 
 
 
Net re-estimated liability $4,660.5 $4,595.6 $4,691.8 $4,840.0 $4,995.6 $5,049.2 $5,073.5 $5,025.5 $4,913.7 $4,872.9    
  
 
 
 
 
 
 
 
 
 
 
 

15


 
 0neBeacon Loss and LAE(1),(3),
Years Ended December 31,

 
 1992
 1993
 1994
 1995
 1996
 1997
 1998(2)
 1999
 2000
 2001
 2002
 
 Dollars in Millions

V. Cumulative net amount of liability paid through:                      
 1 year later 1,461.0 1,367.3 1,390.1 1,476.6 1,591.9 1,687.3 1,815.2 1,966.5 2,007.9 1,819.7  
 2 years later 2,254.8 2,152.5 2,240.8 2,372.6 2,621.3 2,735.4 2,954.8 3,136.2 3,133.3    
 3 years later 2,761.5 2,711.5 2,821.9 3,083.3 3,331.1 3,518.0 3,709.2 3,794.0      
 4 years later 3,135.8 3,089.5 3,328.3 3,571.3 3,872.2 4,044.0 4,029.0        
 5 years later 3,394.6 3,464.3 3,672.7 3,961.5 4,233.4 4,234.7          
 6 years later 3,693.0 3,720.2 3,978.3 4,225.4 4,363.0            
 7 years later 3,882.1 3,979.3 4,186.9 4,312.6              
 8 years later 4,122.9 4,159.7 4,265.6                
 9 years later 4,283.2 4,218.9                  
10 years later 4,330.0                    

(1)
In 1998, OneBeacon was formed  ��     The following table includes the complete loss development history for all periods presented for all companies acquired by White Mountains Re as a result of a pooling of interests between Commercial Union and General Accident. All historical balances have been restated as thoughif the companies had been merged throughoutcombined from their inception.


This table includes development on reserves reported by acquired companies before those companies were acquired by White Mountains Re

 
 White Mountains Re Loss and LAE(1),(2),(3)(4)
Years Ended December 31,

 
($ in millions)

 
 1994
 1995
 1996
 1997
 1998
 1999
 2000
 2001
 2002
 2003
 2004
 
I.    Liability for unpaid losses and LAE:                                  
 Gross balance $1,642.7 $1,895.7 $2,448.2 $2,386.1 $2,524.2 $2,299.6 $3,175.1 $3,917.3 $3,925.1 $3,910.4 $4,170.3 
 Less: reins. recoverables on unpaid losses and LAE  (299.2) (336.6) (524.7) (513.3) (592.9) (651.0) (1,148.5) (1,353.7) (1,277.6) (1,214.6) (1,346.6)
  
 
 
 
 
 
 
 
 
 
 
 
Net balance $1,343.5 $1,559.1 $1,923.5 $1,872.8  1,931.3 $1,648.6 $2,026.6 $2,563.6 $2,647.5 $2,695.8 $2,823.7 
  
 
 
 
 
 
 
 
 
 
 
 
II.    Net liability re-estimated as of:                                  
 1 year later  1,411.7  1,470.8  1,937.9  1,855.4  2,001.3  1,908.2  2,491.9  2,617.0  2,844.0  2,718.4   
 2 years later  1,372.1  1,482.1  1,871.0  1,889.2  2,036.4  2,169.0  2,500.7  2,844.8  2,881.9       
 3 years later  1,382.3  1,423.4  1,909.2  1,862.8  2,011.9  2,175.0  2,744.5  2,907.7          
 4 years later  1,326.0  1,499.0  1,903.8  1,834.3  2,012.5  2,369.9  2,793.7             
 5 years later  1,408.0  1,483.4  1,870.1  1,817.6  2,065.9  2,388.3                
 6 years later  1,395.6  1,445.3  1,842.7  1,837.0  2,079.0                   
 7 years later  1,364.0  1,416.8  1,854.5  1,842.1                      
 8 years later  1,345.3  1,426.7  1,857.4                         
 9 years later  1,360.6  1,426.5                            
 10 years later  1,365.3                               
  
 
 
 
 
 
 
 
 
 
 
 
III.    Cumulative net (deficiency)/redundancy $(21.8)$132.6 $66.1 $30.7 $(147.7)$(739.7)$(767.1)$(344.1)$(234.4)$(22.6)  
 Percent (deficient)/ redundant  (1.6)% 8.5% 3.4% 1.6% (7.6)% (44.9)% (37.9)% (13.4)% (8.9)% (.8)% %
  
 
 
 
 
 
 
 
 
 
 
 
IV.    Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above):                                  
 Gross re-estimated liability  1,691.6  1,753.4  2,402.0  2,402.8  2,738.2  3,052.2  4,135.2  4,412.4  4,256.3  4,005.6   
 Less: gross re-estimated reinsurance recoverable  (326.3) (326.9) (544.6) (560.7) (659.2) (663.9) (1,341.5) (1,504.7) (1,374.4) (1,287.2)  
  
 
 
 
 
 
 
 
 
 
 
 
Net re-estimated liability $1,365.3 $1,426.5 $1,857.4 $1,842.1 $2,079.0 $2,388.3 $2,793.7 $2,907.7 $2,881.9 $2,718.4   
  
 
 
 
 
 
 
 
 
 
 
 
V.    Cumulative net amount of liability paid through:                                  
 1 year later  479.7  463.5  504.5  498.7  542.9  420.5  689.2  729.8  994.0  720.9   
 2 years later  710.1  665.3  771.2  830.9  741.1  860.2  1,167.4  1,429.6  1,394.5       
 3 years later  836.0  788.4  1,007.0  975.3  1,008.0  1,142.4  1,731.1  1,720.3          
 4 years later  905.3  940.9  1,147.4  1,129.5  1,181.6  1,516.1  1,936.7             
 5 years later  1,012.8  1,018.6  1,258.2  1,242.9  1,382.7  1,658.7                
 6 years later  1,062.6  1,088.7  1,351.0  1,317.4  1,487.3                   
 7 years later  1,111.0  1,158.8  1,405.6  1,384.2                      
 8 years later  1,162.4  1,200.7  1,457.7                         
 9 years later  1,195.1  1,246.1                            
 10 years later  1,235.2                               
  
 
 
 
 
 
 
 
 
 
 
 

(1)
The table includes the complete loss development history for all periods presented.presented for all companies acquired by Folksamerica through an instrument of transfer and assumption approved by the appropriate insurance regulators. Under the instrument, insurance regulators require that Folksamerica report reserve development as if the companies had been combined from their inception.

(2)
In 1998, OneBeacon acquired HG and NFU. All liabilities related to these entities have been shown fromFolksamerica became a wholly owned subsidiary of White Mountains during 1998. Reserve development for the acquisition date forward in this table.years ended 1994 through 1997 reflects development on reserves established before White Mountains consolidated Folksamerica's results.

(3)
ThisSirius, including Scandinavian Re, became a wholly owned subsidiary of White Mountains during 2004. Reserve development for the years ended 1994 through 2003 reflects development on reserves established before White Mountains consolidated Sirius' results. See table, reflects the effectsbelow.

(4)
Loss and LAE reserves for Tryg Baltica (acquired in November, 2004) are only included as of the NICO CoverDecember 31, 2004, due to lack of availability of loss development history on a comparable basis. Net loss and the GRC CoverLAE reserves for Tryg Baltica are $134.5 million as if they had been in effect for all periods presented.of December 31, 2004.

16


        The cumulative net (deficiency)/redundancy in the table above reflects reinsurance recoverablesadverse development recorded by Scandinavian Re, which was acquired by White Mountains Re in connection with the Acquisition under the NICO Cover.2004 and has been in run-off since 2002. This cover applies to losses incurred in 2000 and prior years. As a result, it has the effect of significantly increasing OneBeacon's reinsurance recoverables in 2001 and 2002 and reducing its reserve White Mountains Re's cumulative



deficiency for each of the years presented in the table, including the years prior to the Acquisition, by the amountWhite Mountains Re's acquisition of the reserves ceded at the time their cover was purchased. See "Asbestos and Environmental Reserves" for a discussion of the impact of this reinsurance contract on OneBeacon's net loss and LAE reserve position.Sirius. The table presented below represents OneBeacon'sWhite Mountains Re's cumulative net deficiency without regard to the NICO Cover.(deficiency)/redundancy excluding Scandinavian Re:

 
 Years Ended December 31,
 
 
 1992
 1993
 1994
 1995
 1996
 1997
 
 
 Dollars in Millions

 
Cumulative net deficiency adjusted for the NICO Cover (1,355.4)(1,179.8)(1,181.3)(1,258.1)(1,406.7)(1,507.6)
Percent deficient (31.8%)(27.0%)(26.5%)(27.7%)(31.0%)(33.5%)
 
 Years Ended December 31,
 
 1998
 1999
 2000
 2001
 2002
 
 Dollars in Millions

Cumulative net deficiency adjusted for the NICO Cover (736.5)(897.4)(162.4)(57.4)
Percent deficient (13.9%)(17.7%)(2.8%)(1.2%)
 
 Years Ended December 31,
 
($ in millions)

 
 1994
 1995
 1996
 1997
 1998
 1999
 2000
 2001
 2002
 2003
 2004
 
Cumulative net (deficiency) /redundancy, excluding Scandinavian Re $(6.3)$159.2 $90.6 $42.1 $(64.6)$(244.8)$(74.0)$(20.8)$(30.6)$13.7 $ 
  
 
 
 
 
 
 
 
 
 
 
 
Percent (deficient) / redundant  (0.5)% 10.4% 4.8% 2.3% (3.6)% (17.8)% (5.5)% (1.5)% (1.9)% 0.7% %
  
 
 
 
 
 
 
 
 
 
 
 

        The following table reconciles loss and LAE reserves determined on a Statutoryregulatory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:

 
 Year Ended December 31,
 
($ in millions)

 
 2002
 2001
 2000
 
Statutory reserves $6,029.0 $6,795.8 $5,730.1 
Reinsurance recoverable on unpaid losses and LAE (1)   1,650.9  1,606.5  1,276.4 
Purchase accounting adjustments (2)   (481.0) (567.8)  
Other  (49.4)(3)  22.9(4)  (23.8)(3)
  
 
 
 
GAAP reserves $7,149.5 $7,857.4 $6,982.7 
  
 
 
 
 
 December 31,
(Millions)

 2004
 2003
 2002
Regulatory reserves $3,092.0 $1,325.9 $1,148.8
Reinsurance recoverable on unpaid losses and LAE(1)  948.2  480.5  513.2
Discount on loss reserves  245.2    
Reserves allocated to other segments  (91.2) (31.5) 
Purchase accounting and other  (23.9) 2.3  2.3
  
 
 
GAAP reserves $4,170.3 $1,777.2 $1,664.3
  
 
 

(1)
Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under Statutoryregulatory accounting.

(2)
Represents fair value adjustment to reserves recorded in purchase accounting. See Note 3 to the Financial Statements.

(3)
Represents long-term workers compensation loss and LAE reserve discount recorded of $42.2 million in 2002 and $42.1 million in 2000, partially offset by incremental guaranty fund assessments required to be recorded under GAAP.

(4)
Represents incremental guaranty fund assessments required to be recorded under GAAP, partially offset by long-term workers compensation loss and LAE reserve discount of $42.2 million.

17



TerrorismESURANCE

        The Esurance group of companies, which is headquartered in San Francisco, have been part of White Mountains since October 2000. Esurance markets personal auto insurance directly to customers and through select online agents. Most customer interaction with the company takes place through Esurance's website, www.esurance.com. Through the website, customers can get real-time quotes, compare quotes from other companies, purchase their policies, report claims and manage their accounts.

        Esurance's underwriting companies, Esurance Insurance Company and Esurance Property and Casualty Insurance Company, are both rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best. Additionally, the Esurance segment also includes insurance ceded by Esurance to its affiliate, Folksamerica.




Geographic Concentration

        As a result of the terrorist attacks of September 11, 2001 (the "Attacks"), OneBeacon incurred approximately $75.0 million of pretax loss and LAE net of reinsurance, or approximately $248.0 million gross of reinsurance. The Attacks have had a profound impact on the U.S. property and casualty insurance marketplace. Prior to the Attacks, most U.S. insurance companies had not contemplated the risk of terrorist attacks when underwriting their policies. In light of the Attacks, OneBeacon and other property and casualty insurance companies have sought to mitigate the risk associated with any future terrorist attacks by seeking to exclude coverage for such losses from their policies.

        On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act (the "Terrorism Act") establishing a federal "backstop" for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. The Terrorism Act requires primary commercial insurers to make terrorism coverage available immediately and provides Federal protection above individual company retention and aggregate industry retention levels. OneBeacon estimates its individual retention level for commercial policies subject to the Terrorism Act to be approximately $100 million in 2003.

        Aggregate industry retention levels are $10.0 billion from the date the Terrorism Act was enacted through December 31, 2003, $12.5 billion for 2004 and $15.0 billion for 2005. The Federal government will pay 90% of covered terrorism losses that exceed either OneBeacon's or the industry's retention levels up to $100.0 billion. The Terrorism Act is in effect until December 31, 2004, at which time certain members of the U.S. government have the authority to renew it for another year. Should the Terrorism Act be renewed on December 31, 2004, it will expire on December 31, 2005. OneBeacon's current property and casualty catastrophe reinsurance programs provide coverage for "non-certified" events as defined under the Terrorism Act, provided such losses are not the result of a nuclear, biological or chemical attack. See the discussion in the "Reinsurance Protection" section below for a further description of OneBeacon's catastrophe program and see "REGULATION" for a further description of the Terrorism Act.

        OneBeacon closely monitors its concentration of risk by geographic area and primarily writes small commercial and personal lines business, under which the insureds are unlikely to be direct targets of terrorism. During 2002, OneBeacon aggressively reduced its terrorism exposure in its commercial linesEsurance is writing business in the largest metropolitan areas in which OneBeacon writes insurance. In the workers compensation line, total covered lives in the ten largest metropolitan areas were reduced 60% from May 31, 2002 (the first date for which OneBeacon accumulated such data) to December 31, 2002, and total insured property values were reduced 52% from December 31, 2001 to December 31, 2002. Total insured property values in New York City were reduced 84% from May 31, 2002 to December 31, 2002. As a result, OneBeacon believes its exposure to losses from future terrorist attacks has been reduced. Nonetheless, risks insured by OneBeacon, and those contemplated by the enacted Terrorism Act, remain exposed to future terrorist attacks and the possibility remains that any future terrorist losses could prove to be material to the Company's financial position and/or its cash flows.

Reinsurance Protection

        In the ordinary course17 states. These states represent 66% of its business, OneBeacon purchases reinsurance from high-quality, highly rated third party reinsurers in order to provide diversification of its business and minimize loss from large risks or catastrophic events. OneBeacon uses probable maximum loss ("PML") forecasting to quantify its exposure to catastrophic losses. PML is a statistical modeling technique that measures a company's catastrophic exposure as the maximum probable loss in a given time period.

        The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OneBeacon's operating results and financial position. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and

18



terrorist acts. The extent of losses caused by catastrophes is both a function of the amount and type of insured exposure in an area affected by the event and the severity of the event. OneBeacon continually assesses and implements programs to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas, such as coastal regions. OneBeacon's largest single natural catastrophe risk is Northeast windstorm. During 2002, OneBeacon reduced its total insured property values in coastal regions that could be affected by Northeast windstorms by 14%.

        OneBeacon seeks to further reduce its exposure to catastrophe losses through the purchase of catastrophe reinsurance. OneBeacon's 2002 catastrophe reinsurance program was through a group of reinsurers, with a $125.0 million retention for losses resulting from any single catastrophe. Property catastrophe losses from a single event in excess of $125.0 million and up to $200.0 million were reinsured for 75% of the loss. Property catastrophe losses from a single event in excess of $200.0 million and up to $750.0 million were reinsured for 95% of the loss. The 2002 catastrophe program was developed based on OneBeacon's exposure to a one-in-250 year Northeast windstorm.

        When evaluating its catastrophe reinsurance program for 2003, OneBeacon determined that its exposure to risks resulting from a catastrophic Northeast windstorm are mitigated in the early part of calendar years due to the seasonality of such storms. Accordingly,premium volume for the first four months of 2003, OneBeacon entered into a catastrophe reinsurance program under which (1) the first $125.0 million of losses resulting from any single catastrophe are retained by OneBeacon and (2) property catastrophe losses from a single event in excess of $125.0 million and up to $325.0 million are reinsured for 99% of the loss. Effective May 1, 2003, OneBeacon intends to enter into a property catastrophe cover that is consistent with the coverage provided by its 2002 catastrophe reinsurance program.

        OneBeacon's property catastrophe reinsurance program does not cover personal or commercial property losses resulting from nuclear, biological or chemical terrorist attacks or from "certified" events as defined under the Terrorism Act. The program covers personal property losses resulting from other types of terrorist attacks and commercial property losses from other types of domestic terrorist attacks. As a result, OneBeacon does not have reinsurance protection under either the Terrorism Act or its catastrophe reinsurance program for personal property losses resulting from a nuclear, biological or chemical attack. In the event of a catastrophe, OneBeacon can reinstate its property catastrophe reinsurance program for the remainder of the original contract term by paying a reinstatement premium which is based on the product of the percentage of coverage reinstated and its original property catastrophe coverage premium. OneBeacon also maintains a casualty reinsurance program which provides protection for catastrophe losses involving worker's compensation, general liability or automobile liability in excess of $5.0 million up to $60.0 million. This program provides one full $55.0 million limit for either "certified" or "non-certified" terrorism losses but does not provide for losses resulting from nuclear, biological or chemical attacks. OneBeacon also purchases reinsurance coverage for certain risks at levels below $125.0 million, on either a facultative or treaty basis, where it deems appropriate.

        In connection with the Acquisition, OneBeacon obtained the NICO Cover under which OneBeacon is entitled to recover up to $2.5 billion in ultimate losses and LAE incurred related to asbestos claims arising from business written by OneBeacon prior to 1992, environmental claims arising from business written by OneBeacon prior to 1987 and certain other exposures. See the "Asbestos and Environmental Reserves" section above for a description of the NICO Cover.

        Also in connection with the Acquisition, OneBeacon obtained the GRC Cover which provided up to $570.0 million of reinsurance protection, consisting of $400.0 million of adverse development coverage on losses occurring in years 2000 and prior, in addition to $170.0 million of reserves ceded as of the date of the Acquisition. Pursuant to the GRC Cover, OneBeacon is not entitled to recover losses to the full contract limit if such losses are reimbursed by GRC more quickly than anticipated at the

19



time the contract was signed. OneBeacon has recorded $531.7 million in recoverables due from GRC at December 31, 2002 and December 31, 2001. OneBeacon will only seek reimbursement from GRC for claims which result in payment patterns similar to those supporting its recoverables recorded pursuant to the GRC Cover. The economic cost of not submitting certain other eligible claims to GRC is primarily the investment spread between the rate credited by GRC and the rate achieved by OneBeacon on its own investments. This cost, if any, is expected to be small.

        At December 31, 2002, OneBeacon had $77.9 million of reinsurance currently recoverable on paid losses and $3,560.6 million that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance contracts do not relieve OneBeacon of its primary obligation to its policyholders, the financial position and solvency of OneBeacon's reinsurers is critical to the collectibility of its reinsurance coverages. OneBeacon is selective with regard to its reinsurers, placing reinsurance with only those reinsurers having strong financial strength ratings. OneBeacon monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not historically been significant. Excluding industry pools and associations of $376.2 million, which are not rated by A.M. Best, 96% of OneBeacon's total reinsurance recoverables at December 31, 2002 were with reinsurers that had an A.M. Best rating of "A-" (Excellent) or better. The following table provides a listing of OneBeacon's top reinsurers, excluding industry pools and associations, based upon recoverable amounts, the percentage of total reinsurance recoverables and the reinsurer's A.M. Best rating.

Top Reinsurers ($ in Millions)

 Balance at
December 31,
2002

 % of Total
 A.M. Best
Rating

Subsidiaries of Berkshire Hathaway Inc. (NICO and GRC) $2,585.1 71%A++
Liberty Mutual and subsidiaries*  273.8 8 A
Tokio Fire and Marine Insurance Company  67.1 2 A++
American Re-Insurance Company  47.0 1 A+
Aviva plc and its affiliates**  34.9 1 not rated
  
 
 

*
At December 31, 2002, OneBeacon had assumed balances payable and expenses payable of approximately $266.9 million under the Renewal Rights Agreement. In the event of Liberty Mutual's insolvency, OneBeacon has the right to offset these balances against its reinsurance recoverable due from Liberty Mutual.

**
Represents non-U.S. insurance entities whose balance is fully collateralized through funds held, letters of credit and/or trust agreements.

New York Assigned Risk Market

        OneBeacon writes voluntaryentire U.S. personal automobile insurance in the State of New York. As a condition to its license to write automobile business within that state, OneBeacon is obligated by statute to accept future assignments from the New York Automobile Insurance Plan ("NYAIP"), a residual insurance market that obtains personal automobile insurance for those individuals who cannot otherwise obtain it in the voluntary insurance market. The share of involuntary written premium for policies assigned by the NYAIP to a particular insurer in a given year is based, in general, on the proportion of the total voluntary writings in New York two years prior. Therefore, by voluntarily writing automobile policies in New York, an insurer has an obligation under New York State insurance laws to provide insurance two years later to individuals assigned to it from the NYAIP.Alternatively, an insurance company can contractually transfer its NYAIP obligation to another insurance company for a fee in satisfaction of its NYAIP obligation. This process is called Limited Assigned Distribution ("LAD"), and the companies that assume this obligation are called LAD servicing carriers. LAD

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servicing carriers are paid fees (referred to as buy-out fees) to assume the insurance risk of NYAIP obligations in addition to the premiums it receives for writing the involuntary policy. The fees are typically a percentage of the total premiums the LAD servicing carrier must write to fulfill the NYAIP obligation of the transferor company. In return, the LAD servicing carrier is contractually obligated to pay all loss and loss adjustment and other underwriting expenses related to the NYAIP assigned premiums of the transferor company, with no recourse to the transferor. At December 31, 2002, White Mountains' estimated liability for discharging its obligations associated with NYAIP assignments resulting from voluntary business written by OneBeacon in the preceding two-year period was $103.0 million.

    AutoOne Insurance

        In the last few years, NYAIP assignments and LAD fees have both increased significantly. During October of 2001, OneBeacon licensed one of its insurance companies, General Assurance Company, to act as a LAD servicing carrier in order to mitigate OneBeacon's exposure to the cost of future NYAIP assignments and to take advantage of rapidly rising LAD servicing fees. This company, which does business as "AutoOne Insurance", wrote 18 LAD contracts with third parties that resulted in approximately $203 million of assigned personal automobile written premium and LAD fees for unaffiliated companies in 2002. Additionally, AutoOne Insurance performed LAD services relating to OneBeacon's obligation to write $53 million in assigned premium in 2002, thereby fulfilling the obligation that arose from voluntary premium written by OneBeacon in 2000. OneBeacon believes that AutoOne Insurance's current business strategy will enable it to capitalize on continued demand for LAD services and improve the results of OneBeacon's overall New York automobile business by reducing its cost of obtaining LAD services. AutoOne Insurance is operated as a separate division of OneBeacon. AutoOne Insurance's primary competitors are Robert Plan and Clarendon Insurance Group, a subsidiary of Hannover Re.

        LAD servicing contracts between AutoOne Insurance and other insurers are for a period of one year. Once an assigned risk policy has been written, AutoOne Insurance is obligated to provide insurance for two more years unless the insured departs from the NYAIP, regardless of whether the LAD contract is renewed. This risk can be mitigated in whole or in part through (i) renewal of the LAD contract in the subsequent year; (ii) through "disengagement" fees due to AutoOne Insurance from the transferor company upon non-renewal of the LAD servicing contract; and (iii) through utilization of various credits offered by New York to those insurers who voluntarily provide coverage to individuals in the NYAIP, the largest of which are referred to as "take-out credits". In recent years, insurers and LAD servicing carriers have not utilized credits to a large extent as the costs to generate these credits did not outweigh the benefits. Under the credit programs in effect for NYAIP assignments written in 2002, an insurer could generally reduce its future NYAIP assignments by one dollar for every dollar of NYAIP premium voluntarily written by the insurer. These credits often could not be used to reduce NYAIP assignments for two years. The NYAIP has revised the structure of its credit programs effective for NYAIP assignments written in 2003 to increase the economic benefits of these credit programs. Under the revised structure, writing a NYAIP assignment on a voluntary basis generates two dollars of credit for each dollar of applicable premium. Takeout credits may be applied to reduce NYAIP assignments in the quarter after the takeout policy is written. OneBeacon believes that AutoOne Insurance will be able to voluntarily write policies currently in the NYAIP thereby generating takeout credits which can be used to reduce its own assignment obligations or sold to other insurance companies to reduce their NYAIP assignments.

New Jersey Skylands

        As part of a restructuring of its New Jersey personal lines, OneBeacon formed New Jersey Skylands Management Corporation and the New Jersey Insurance Department approved the formation

21



of New Jersey Skylands Insurance Association and its wholly owned subsidiary New Jersey Skylands Insurance Company (together, the "Association") during the third quarter of 2002. The lead company of the Association, New Jersey Skylands Insurance Association, is a not-for-profit, policyholder-owned reciprocal insurance carrier. The Association was capitalized by OneBeacon with a $31.3 million surplus note. Principal and interest on the surplus note are repayable upon regulatory approval. OneBeacon has no ownership interest in the Association. As a result, OneBeacon's future operating income derived from the New Jersey automobile insurance market will consist of management and service fees charged by New Jersey Skylands Management Corporation to the Association and interest on the surplus note. The Association began writing personal automobile coverage for new customers in August and, beginning with policies renewing on or after October 23, 2002, is offering all of OneBeacon's current New Jersey personal automobile policyholders coverage upon renewal.

Main Street America Holdings, Inc. ("MSA")

        MSA is a subsidiary of National Grange Mutual Insurance Company ("NGM"), a New Hampshire-domiciled property and casualty insurance company, which insures risks located primarily in New York, Massachusetts, Connecticut, Pennsylvania, New Hampshire, Virginia and Florida. OneBeacon owns 50% of the outstanding common stock of MSA and accounts for this investment using the equity method. OneBeacon's investment in MSA was $128.1 million and $133.7 million at December 31, 2002 and December 31, 2001. MSA's net written premiums totalled $357.3 million, $306.8 million and $265.4 million and its net income (loss) was ($13.5) million, $6.8 million and $3.8 million in 2002, 2001 and 2000. MSA's total assets as of December 31, 2002 and 2001 were $704.5 million and $653.8 million and its shareholders' equity was $253.7 million and $262.3 million. The principal insurance operating subsidiaries of NGM and MSA are rated "A" (Excellent) by A.M. Best.

REINSURANCE

Reinsurance Overview

        Reinsurance is an arrangement in which a reinsurance company (the "reinsurer") agrees to indemnify an insurance company (the "ceding company") for all or a portion of the insurance risks underwritten by the ceding company under one or more insurance policies. Reinsurance can benefit a ceding company in a number of ways, including reducing net liability exposure on individual risks, providing catastrophe protections from large or multiple losses, stabilizing financial results and assisting in maintaining acceptable operating leverage ratios. Reinsurance can also provide a ceding company with additional underwriting capacity by permitting it to accept larger risks and underwrite a greater number of risks without a corresponding increase in its capital or surplus. Reinsurers may also purchase reinsurance, known as retrocessional reinsurance, to cover their own risks assumed from primary ceding companies. Reinsurance companies often enter into retrocessional agreements for many of the same reasons that ceding companies enter into reinsurance agreements.

        Treaty reinsurance is an agreement whereby the reinsurer assumes a specified portion or category of risk under all qualifying policies issued by the ceding company during the term of the agreement, usually one year. In the underwriting of treaty reinsurance, the reinsurer does not evaluate each individual risk and generally accepts the original underwriting decisions made by the ceding insurer. Facultative reinsurance, on the other hand, is underwritten on a risk-by-risk basis, which allows the reinsurer to assess pricing on an individual exposure. Facultative reinsurance is normally purchased by insurance companies for individual risks not covered under reinsurance treaties or for amounts in excess of limits on risks covered under reinsurance treaties.

        A significant period of time normally elapses between the receipt of reinsurance premiums and the payment of reinsurance claims. The claims process generally begins upon the occurrence of an event causing an insured loss followed by: (1) the reporting of the loss by the insured to the ceding company;

22



(2) the reporting of the loss by the ceding company to the reinsurer; (3) the ceding company's adjustment and payment of the loss; and (4) the payment to the ceding company by the reinsurer. During this time, reinsurance companies generate investment income, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities. The period of time between the receipt of premiums and the payment of claims is typically longer for a reinsurer than for a primary insurer.

Folksamerica

        Folksamerica, through its wholly owned subsidiary, Folksamerica Reinsurance Company (a New York-domiciled reinsurance company), is a multi-line, broker-market reinsurer which provides reinsurance to insurers of property, casualty, accident and health and marine risks primarily in the United States, Canada, Continental Europe, Latin America, the Caribbean and Japan. Folksamerica became a wholly-owned subsidiary of White Mountains during 1998. Folksamerica Reinsurance Company is rated "A-" (Excellent) by A.M. Best. At December 31, 2002 and December 31, 2001, Folksamerica had $3.4 billion and $3.2 billion of total assets and $976.4 million and $901.7 million of shareholder's equity, respectively. Folksamerica's total assets and shareholder's equity include the International American Group and Esurance, which are covered elsewhere in this report.

        Folksamerica writes both treaty and facultative reinsurance. The majority of Folksamerica's premiums are derived from treaty reinsurance contracts both on an excess of loss and quota share basis, which in 2002 amounted to 39.0% and 54.7% of its total gross earned premiums, respectively. A quota share reinsurance treaty is an arrangement whereby a reinsurer assumes a predetermined proportional share of the premiums and losses generated on specified business. An excess of loss treaty is an arrangement whereby a reinsurer assumes losses that exceed the retention of loss by the ceding company, as provided by the contract.

        Folksamerica derives its business from a broad spectrum of ceding insurers including national, regional, specialty and excess and surplus lines writers. Folksamerica determines which risks it accepts based on the anticipated underwriting results of the transaction, which are evaluated on a variety of factors including the quality of the reinsured, the attractiveness of the reinsured's insurance rates and policy conditions and the adequacy of the proposed reinsurance terms.

        Folksamerica commenced writing reinsurance coverage in 1980 as one of a host of newly formed, foreign-owned reinsurers capitalized with minimal surplus. In 1991, recognizing that surplus size would become an increasingly important business issue, Folksamerica launched an aggressive strategy to increase its resources and capacity through the acquisition of select broker-market reinsurance and property and casualty insurance companies. Since 1991, Folksamerica has acquired eight other reinsurers. These acquisitions have served to raise Folksamerica's surplus and asset base, broaden its skill set and contribute a number of important business relationships. Folksamerica's acquisition strategy is to seek fundamentally sound companies whose owners are no longer committed to the business. In these cases, the owner's lack of interest in its specific operations which are available for sale have had more to do with difficulties experienced by the owner in its core business rather than problems with the operations being sold. Folksamerica's more recent acquisitions included USF Re Insurance Co. ("USF Re") in 1999, PCA Property & Casualty Insurance Company ("PCA") in 2000, substantially all the reinsurance operations of Risk Capital Reinsurance Company ("Risk Capital") in 2000, C-F Insurance Company ("C-F") in 2001 and Imperial Casualty and Indemnity Insurance Company ("Imperial") in 2002. Folksamerica will continue to seek additional insurance and reinsurance acquisitions in the future.

        In December 2001, Folksamerica received a $400.0 million cash capital contribution from OneBeacon that was provided to increase Folksamerica's capacity to capitalize on improved pricing

23



trends which accelerated after the Attacks. As a result, Folksamerica is now among the largest U.S.-domiciled property and casualty reinsurers as measured by statutory surplus.

    Classes of Business

        Folksamerica writes three main classes of reinsurance: liability reinsurance, property reinsurance and accident and health reinsurance. Folksamerica's net written premiums by class of business forFor the years ended December 31, 2004, 2003 and 2002, 2001 and 2000 were as follows:Esurance's business was produced in the following states:

 
 Year Ended December 31,
Business class ($ in millions)

 2002
 2001
 2000
Liability $381.6 $310.6 $208.4
Property  205.3  93.5  91.6
Accident and Health  68.1  25.1  26.4
Other  23.7  29.7  6.2
  
 
 
 Total $678.7 $458.9 $332.6
  
 
 
     
     Year Ended December 31,
     
    Net written premiums by state

     
     2004
     2003
     2002
     
    California 25%32%43%
    Florida 24 24 14 
    Texas 11 15 12 
    Michigan 7 5 1 
    Pennsylvania 5 7 7 
    New York 5 2 4 
    Other 23 15 19 
      
     
     
     
     Total 100%100%100%
      
     
     
     

    Geographic Concentration
    Marketing

        Folksamerica's net written premiums by geographic region for the years ended December 31, 2002, 2001 and 2000 were as follows:

 
 Year Ended December 31,
Geographic region
($ in millions)

 2002
 2001
 2000
United States $579.9 $408.3 $296.7
Canada  28.3  26.6  21.6
Latin America, the Caribbean and Europe  70.5  24.0  14.3
  
 
 
 Total $678.7 $458.9 $332.6
  
 
 

    Marketing

        Folksamerica obtains most of its reinsurance business either directly through brokers and reinsurance intermediaries that represent the ceding company or indirectly through placements recommended by WMU. Folksamerica considers both the intermediary and the ceding company its clients in any placement. Much of Folksamerica's business is conducted with ceding companies and their management, with whom Folksamerica has developed strong business relationships over a long period of time. The process of placing a brokered reinsurance program typically begins when a ceding company enlists the aid of a reinsurance broker in structuring a reinsurance program. Often the ceding company and the broker will consult with one or more lead reinsurers as to the pricing and contract terms for the reinsurance protection being sought. Once the ceding company has approved the terms quoted by the lead reinsurer, the broker will offer participation to qualified reinsurers until the program is fully subscribed by reinsurers at terms agreed to by all parties. Folksamerica was a lead or co-lead reinsurer onEsurance distributes approximately 80% of its reinsurance arrangements in 2002.business directly to customers online and over the phone. For this business, Esurance does not pay agent commissions on either new or renewal policies. The remaining 20% of Esurance's business is distributed through large online agents. Esurance targets convenience-focused, technology savvy consumers who use the Internet for most of their financial services transactions.

        Folksamerica pays ceding companiesEsurance attracts its target customers through a ceding commission under most quota share reinsurance treatiescontinuously optimized mix of online and some excessoffline advertising. Esurance advertises on a wide variety of loss reinsurance treaties. The ceding commission is generally basedinsurance, finance, and automotive sites, along with major portals (e.g., MSN and Yahoo!) and search advertisers, like Google. Esurance also advertises on the ceding company's cost of acquiring the business being reinsured (commissions, premium taxestelevision, radio and certain miscellaneous expenses). During the years ended December 31, 2002 and 2001, Folksamerica received no more than 10% of its gross reinsurance premiums from any individual ceding company. Additionally, Folksamerica pays reinsurance brokers commissions based on negotiated percentages of the premium it writes. These commissions, which average approximately 5% of premium, constitute athrough direct mail.

24



significant portion of Folksamerica's total acquisition costs and are included in its underwriting expenses. During the years ended December 31, 2002 and 2001, Folksamerica received approximately 57.0% and 54.4%, respectively, of its gross reinsurance written premiums from three major reinsurance brokers as follows: (1) AON Re, Inc. - 28.2% and 21.3%, respectively; (2) Benfield Blanch -13.5% and 17.2%, respectively; and (3) Guy Carpenter -15.3% and 15.9%, respectively.

    Underwriting and Pricing

        Folksamerica's underwriters and pricing actuaries perform a comprehensive review of the underwriting, pricing, claims handling and general business controls of potential clients before quoting a price for its reinsurance products. Folksamerica prices its products by assessing the desired return on the capital determined to be needed to write a given contract and by estimating future loss and LAE costs and investment income to be earned on net cash flow from the contract. Folksamerica will only accept contracts with a high likelihood of generating acceptable returns on equity. Folksamerica's pricing indications are based on a number of underwriting factors including historical results, analysis of exposure and estimates of future loss costs, a review of other programs displaying similar exposure characteristics, the primary insurer's underwriting and claims experience and the primary insurer's financial condition. Folksamerica's underwriters perform regular underwriting audits to monitor the ceding company's pricing discipline. Additionally, Folksamerica's finance staff reviews the financial stability and creditworthiness of current ceding companies. Such reviews provide important input to support renewal discussions.

        FolksamericaWith its web-enabled technology, Esurance collects and other reinsurance companiesverifies detailed underwriting information in real-time while customers transact with the company online. This real-time access to customer information allows Esurance to continually develop and refine its highly segmented, tiered pricing models. Esurance believes that its tiered pricing models have sought to mitigate the risk associateda greater statistical correlation with future terrorist attacks in a similar manner as primary insurers. Since the Attacks, reinsurershistorical loss experience than traditional pricing models have attained significant price increases across all lines of reinsurance in response to greater perceived policy exposures. Regulations regarding permitted policy exclusions applicable to reinsurance contracts are often less stringent than those imposed upon primary insurers. For example, the Terrorism Act is not applicable to reinsurers.shown. As a result, exclusions are more often dictated by the marketplace than by regulation. Folksamerica's reinsurance contracts on commercial risks written subsequentEsurance can quote rates to customers that most closely correspond to the Attacks contain clausesindividual risk characteristics of the customer, enabling Esurance to focus on keeping insurance rates competitive without compromising the company's loss ratio targets.


Competition

        Esurance competes with national and regional personal automobile insurance companies, though Esurance's main competition is other direct writers like Progressive, GEICO, and 21st Century.

        Esurance leverages web-enabled technology, allowing it to capture data real-time and react to market shifts. With an array of customer information at its disposal, Esurance is continually able to refine pricing, enhance its auto product and optimize dollars spent on marketing. Technology also allows Esurance to provide high quality,24/7 customer service and claims handling for a competitive price.



        Esurance's paperless business process allow the company to significantly reduce operating costs typically associated with policy processing, verification and endorsement activities. As a result, the company is able to achieve efficient, low-cost acquisition and operating expense structures.


Claims Management

        Esurance handles its claims through regional claim centers in California, Florida, Texas and New York. Esurance takes the initial notice of loss at the company's customer service center, which exclude terrorist exposure. Reinsurance contracts on personal risks written subsequentis available for customers 24 hours a day, 365 days a year. The loss reporting unit then assigns claims to the Attacks generally contain exclusions relatedregional claim centers.

        Esurance's claims organization leverages technology to nuclear, biologicalreduce cycle times. Rapid response to and chemical attacks.resolution of claims creates a stronger relationship with customers, while also decreasing ancillary claims costs, such as rental car fees. Additionally, Esurance maintains a special investigative unit designed to detect insurance fraud, and actively supports efforts by regulatory bodies and trade associations to curtail the cost of insurance fraud.

    Competition

        There are 20 U.S.-based reinsurance companies with broker-market operations which Folksamerica views as its direct competition. These companies report operating data to the Reinsurance Association of America ("RAA"). Based on surplus size as of December 31, 2002, Folksamerica is the fifth largest of these companies. Additionally, there are reinsurance divisions or departments of four U.S.-based insurers that, while not separate reinsurance companies, participate in the U.S. broker reinsurance market.Catastrophe Risk

        Across allEsurance's sole line of business is personal automobile insurance that covers liabilities and physical damage arising from the operation of automobiles. The majority of Esurance's customers elect coverage for physical damage (85%), resulting in exposure to catastrophe losses at Esurance for hurricanes, hailstorms, earthquakes and other acts of nature. Generally, catastrophe costs are low for personal auto in relation to other lines of business, Folksamerica competes with allsuch as homeowners and commercial property. Additionally, Esurance's broad geographic distribution limits its concentration of risk and the larger broker-market reinsurance companies and reinsurance departments or divisionspotential for losses to accumulate from a single event. Esurance estimates that its PML for a single event is less than 1% of primary insurance companies. As reported by the RAA, Folksamerica wrote approximately 4.6% of grossnet written premiums of all broker-market reinsurance companies and reinsurance divisions of insurance companies in 2002. The broker-market companies or divisions writing the largest portion of gross premiums in 2002 were: XL Reinsurance America (16.4%),Transatlantic Reinsurance Company (13.1%) and Everest Reinsurance Company (12.5%).premium.

        Folksamerica has a 20-year history of close relationships with ceding companies and maintains a disciplined underwriting strategy which, among other things, focuses on writing more business when market terms and conditions are favorable and reducing business volume during soft markets when

25



terms and conditions become less favorable. Folksamerica also employs a multi-line approach, offering clients a wide range of reinsurance products to satisfy their risk management needs. Additionally, during soft markets, Folksamerica utilizes an acquisition-based growth strategy by seeking to acquire fundamentally sound competitors whose ownership structure or other factors limit their ability to compete effectively.

        In general, poor market conditions for primary companies in recent years have caused insurers to reduce their own premium writings or restructure their reinsurance programs, thereby reducing the amount of reinsurance they purchase. As a result of consolidation within the industry, many ceding companies are now larger and financially stronger, thereby enabling them to retain more risk. In addition, increasingly intense competition in the reinsurance markets, primarily as a result of excess industry capital, has historically driven reinsurance prices on many programs below levels that Folksamerica will accept. The significant insured losses resulting from the Attacks, as well as other factors, have reduced the capacity of several reinsurers resulting in marked improvements in reinsurance pricing, terms and conditions. However, due to recent capital raising activities by several Bermuda-based and other reinsurers, there is no assurance that such improved conditions will continue over an extended period. Folksamerica's management believes that the reinsurance industry, including the intermediary market, will continue to undergo further consolidation. Management further believes that size and financial strength will become increasingly important factors in selecting reliable reinsurance partners, particularly in light of the weakening of several reinsurers in the wake of the Attacks.

    Claims

        Folksamerica maintains a staff of experienced reinsurance claim specialists that work closely with reinsurance intermediaries to obtain specific claims information from its customers. Folksamerica's claims staff also regularly perform on-site claim reviews to assess and improve the reinsured's claim-handling ability and reserving techniques. In addition, Folksamerica's claim specialists review loss information provided by the reinsured for adequacy. The results of Folksamerica's on-site claim reviews are shared with its actuaries and underwriters to ensure that they are making the correct assumptions in pricing its products and that all relevant information is used in establishing loss reserves.

    Loss and Loss Adjustment Expense ReservesInformation

        Folksamerica establishes reserves that are estimates of future amounts needed to pay claims and related expenses for insured events that have already occurred.        The process of estimating reserves for FolksamericaEsurance is similar to the process described in ""Loss and Loss Adjustment Expense ReservesReserves" in the" in the "ONEBEACON"ONEBEACON" discussion and, as of any given date, is inherently uncertain. For Folksamerica, reserve estimates reflect the judgment of both the ceding company and Folksamerica, based on the experience and knowledge of their respective claims personnel, regarding the nature and value of the claim. The ceding company may periodically adjust the amount of the case reserves as additional information becomes known or partial payments are made. Upon notification of a loss from a ceding company, Folksamerica establishes case reserves, including LAE reserves, based upon Folksamerica's share of the amount of reserves established by the ceding company and Folksamerica's independent evaluation of the loss. In cases where available information indicates that reserves established by the ceding company are inadequate, Folksamerica establishes case reserves in excess of its share of the reserves established by the ceding company.

        Folksamerica uses a combination of actuarial methods to determine its IBNR reserves. These methods fall into two general categories: (1) methods by which ultimate claims are estimated based upon historical patterns of paid and reported claim development experienced by Folksamerica, as supplemented by reported industry patterns, and (2) methods in which the level of Folksamerica's

26



IBNR reserves are established based upon the application of expected loss ratios relative to earned premium by accident year, line of business and type of reinsurance written by Folksamerica.

As described previously, uncertainties in projecting estimates of ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled, i.e., the "claim-tail". During"claim-tail." Esurance writes primarily "short-tail" personal automobile insurance policies, which reduces the long claims reporting and settlement period, additional facts regarding coverages writtenuncertainty inherent in prior accident years, as well as about claims and trends may become known and, as a result, Folksamerica may adjust its loss and LAE reserves. If management determinesreserves when compared to insurance companies that an adjustment is appropriate, the adjustment is booked in the accounting period in whichwrite "long-tail" policies, such determination is made in accordance with GAAP.as workers compensation.

        Management believes that Folksamerica'sEsurance's loss and LAE reserves as of December 31, 20022004 are reasonably stated;adequate; however, ultimate loss and LAE may deviate, perhaps materially, from the amounts currently reflected in the reserve balance. Adverse development, if any, would impact the Company's future results of operations.

        Folksamerica has exposure to losses caused by hurricanes, earthquakes, winter storms, windstorms, terrorist acts and other catastrophic events. In the normal course of business, Folksamerica seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance and reinsurance enterprises and by closely monitoring aggregate property exposures and related PMLs. To manage and analyze aggregate exposures and PML, Folksamerica utilizes a variety of tools and analyses, including catastrophe modeling software packages. Folksamerica regularly assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure, primarily through limiting accumulation of exposure to acceptable levels and the purchase of catastrophe reinsurance. Folksamerica's current catastrophe protection program includes $35.0 million of protection in excess of a $60.0 million retention for a second loss. The current program also includes coverage of $15.0 million in excess of a $5.0 million retention for Folksamerica's proportional property portfolio. Each of the above contracts are 100% placed with a single, top quality reinsurer and have reinstatement provisions whereby, in the event of one covered loss, the coverage is reinstated for additional premium. Folksamerica's reinsurance program also includes annual aggregate stop loss protection from London Life and General Reinsurance Company, Ltd. ("London Life") which protects the Company's accident year loss ratio from the effect of a very large catastrophic event or a number of smaller events. Folksamerica's limit of coverage under its accident year 2002 contract with London Life was $50.0 million, attaching at a 78% loss ratio.

        In 2000, Folksamerica purchased a reinsurance contract from Imagine Re (the "Imagine Cover") to reduce its statutory operating leverage and protect its surplus from adverse development relating to A&E exposures as well as the reserves assumed in several recent acquisitions. Specifically, the Imagine Cover provided an aggregate of $115.0 million in reinsurance protection on:

        In connection with the Imagine Cover, Folksamerica transferred loss and LAE reserves of $250.0 million and unearned premium reserves of $65.0 million to Imagine Re for consideration of $315.0 million. As of December 31, 2002, there was approximately $9.9 million of coverage remaining under the Imagine Cover.

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        Folksamerica has a quota share retrocessional arrangement with Olympus Reinsurance Ltd. ("Olympus") which is designed to increase Folksamerica's capacity to capitalize on the improved pricing trends which accelerated after the Attacks and to reduce its potential loss exposure to any large, or series of smaller, property catastrophe events. Olympus is a Bermuda-domiciled insurance and reinsurance company that was formed in December 2001 with an initial capitalization of more than $500.0 million to respond to the favorable underwriting and pricing environment in the reinsurance market. Olympus is rated "A-" (Excellent) by A.M. Best. Under the quota share treaty with Olympus, Folksamerica cedes 75% of its short-tailed excess of loss business, mainly property and marine, to Olympus and receives an override commission on the premiums ceded to Olympus. During 2002, Folksamerica received $17.1 million in override and profit commissions from Olympus.

        White Mountains does not have an ownership stake in Olympus, however, certain of the Company's directors, officers and affiliates own approximately 5% of the common shares of Olympus Re Holdings, Ltd. ("Olympus Holdings"), Olympus's parent. Mr. Joseph S. Steinberg, one of the Company's directors, is Chairman of Olympus Holdings.

        At December 31, 2002, Folksamerica had $67.9 million of reinsurance currently recoverable on paid losses and $807.1 million that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance contracts do not relieve Folksamerica of its obligation to its ceding companies, the financial position and solvency of Folksamerica's reinsurers is critical to the collectibility of its reinsurance coverages. Folksamerica is selective with regard to its reinsurers, placing reinsurance with only those reinsurers having strong financial strength ratings. Folksamerica monitors the financial strength of its reinsurers on an ongoing basis. The following table provides a listing of Folksamerica's top reinsurers based upon recoverable amounts, the percentage of total recoverables and the reinsurer's A.M. Best Rating.

Top Reinsurers
($ in Millions)

 Balance at
December 31, 2002

 % of Total
 A.M. Best
Rating

Imagine Re* $381.2 42%A-
London Life*  135.4 15 A
Olympus*  45.5 5 A-
GRC and affiliates  34.9 4 A++
Federal Insurance Company  34.6 4 A++
  
 
 

*
Represents non-U.S. insurance entities whose balances are fully collateralized through funds held, letters of credit and/or trust agreements.

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Montpelier

        In December 2001, White Mountains, the Benfield Group plc and several other private investors established Montpelier and its wholly owned subsidiary Montpelier Reinsurance Ltd. ("Montpelier Re"). Montpelier Re is a Bermuda-domiciled insurance and reinsurance company that was formed with approximately $1.0 billion in capital to respond to the then favorable underwriting and pricing environment in the reinsurance industry. Montpelier Re has initially focused on property reinsurance business. Montpelier Re is rated "A-" (Excellent) by A.M. Best. On October 15, 2002, Montpelier successfully completed an initial public offering and its common shares are listed on the New York Stock Exchange. Through holdings of common shares and warrants, White Mountains owns approximately 21% of Montpelier on a fully converted basis. As of December 31, 2002, White Mountains' investment in Montpelier consisted of 10,800,000 common shares valued at $16.67 per share and warrants to acquire an additional 4,781,572 common shares at $16.67 per share that are exercisable until December, 2011.

        Montpelier's net written premiums totalled $565.9 million and its net income was $152.0 million in 2002, its first full year of operations. Montpelier's total assets as of December 31, 2002 and 2001 were $1.8 billion and $1.0 billion and its shareholders' equity was $1.3 billion and $860.7 million.

White Mountains Underwriting Limited

        In December 2001, White Mountains formed WMU, an underwriting advisement company domiciled in Ireland. WMU, a wholly-owned subsidiary of White Mountains, has expanded Folksamerica's access to international property and marine excess of loss reinsurance business in Continental Europe and Japan and provides professional insurance services to both Folksamerica and Olympus. WMU receives management fees and a profit commission on business placed with Folksamerica and Olympus. During 2002, WMU placed $120.2 million and $40.4 million of written premiums and recorded $35.7 million and $8.2 million of management fees and profit commissions from Olympus and Folksamerica, respectively.

Fund American Re

        On December 20, 2001, Fund American Re acquired substantially all of the international reinsurance operations of the Folksam Group ("Folksam") of Stockholm, Sweden. A $64.0 million purchase price was paid in a combination of cash, a note and Common Shares. Fund American Re is commercially domiciled in Bermuda but maintains its executive office and an operating branch in Stockholm, Sweden, and operates through an additional branch in Singapore. Fund American Re principally writes property, liability, transportation and hail and crop reinsurance for insurance companies based in the United States and in Europe. At December 31, 2002 and 2001, Fund American Re had $149.9 million and $126.3 million of total assets, respectively, and $58.1 million and $63.9 million of shareholder's equity, respectively. Fund American Re wrote $62.5 million in net premiums during the year ended December 31, 2002. Fund American Re is rated "A-" (Excellent) by A.M. Best.

Additional Loss and Loss Adjustment Expense Information

        The following information presents (1) White Mountains' reinsurance segment'sEsurance's reserve development over the preceding tenfour years since inception and (2) a reconciliation of reserves on a Statutory basis to reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.

        Section I of the ten year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid losses and LAE. The liability represents the estimated amount of losses and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid losses and LAE is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the



estimated amount of unpaid losses and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

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        Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid losses and LAE are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section III shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and the re-estimated liability through December 31, 2002.2004. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2002.2004. Section V shows the cumulative amount of net losses and LAE paid relating to recorded liabilities as of the end of each succeeding year.

 
 Years Ended December 31,
 
 
 Reinsurance Loss and LAE(1),(2),(3)
 
Dollars in Millions

 
 1992
 1993
 1994
 1995
 1996
 1997
 1998
 1999
 2000
 2001
 2002
 
I. Liability for unpaid losses and LAE:                                  
  Gross balance $758.3 $798.4 $856.2 $981.5 $1,578.7 $1,461.3 $1,437.6 $1,210.6 $1,500.7 $1,610.6 $1,664.3 
  Less: reins recoverables on unpaid losses and LAE  (172.0) (154.4) (182.4) (201.0) (390.2) (352.0) (398.0) (324.0) (702.8) (879.5) (815.0)
Net balance $586.3 $644.0 $673.8 $780.5 $1,188.5 $1,109.3  1,039.6 $886.6 $797.9 $731.1 $849.3 
  
 
 
 
 
 
 
 
 
 
 
 
II. Net liability re-estimated as of:                                  
  1 year later  601.5  672.5  701.8  834.1  1,222.6  1,125.5  1,036.0  914.4  803.5  743.8   
  2 years later  626.0  706.0  748.6  855.4  1,224.6  1,108.5  1,047.8  917.4  788.5       
  3 years later  653.2  746.3  763.7  862.7  1,206.4  1,114.5  1,032.3  919.3          
  4 years later  680.7  761.3  767.0  874.9  1,214.2  1,088.7  1,027.9             
  5 years later  694.8  764.1  778.8  874.2  1,188.9  1,071.6                
  6 years later  699.6  772.8  779.2  844.9  1,164.9                   
  7 years later  706.5  774.2  755.8  817.6                      
  8 years later  709.1  756.4  736.5                         
  9 years later  696.8  747.4                            
  10 years later  708.0                               
  
 
 
 
 
 
 
 
 
 
 
 
III. Cumulative net (deficiency)/redundancy $(121.7)$(103.4)$(62.7)$(37.1)$23.6 $37.7 $11.7 $(32.7)$9.4 $(12.7)$ 
 Percent (deficient)/ redundant  (20.8)% (16.1)% (9.3)% (4.8)% 2.0%  3.4%  1.1%  (3.7)% 1.2%  (1.7)% %
  
 
 
 
 
 
 
 
 
 
 
 
IV. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above):                                  
 Gross re-estimated liability  954.9  964.2  973.2  1,029.8  1,589.9  1,470.7  1,433.6  1,330.9  1,616.0  1,702.2    
 Less: gross re-estimated reinsurance recoverable  (246.9) (216.8) (236.7) (212.2) (425.0) (399.1) (405.7) (411.6) (827.5) (958.4)   
  
 
 
 
 
 
 
 
 
 
 
 
Net re-estimated liability $708.0 $747.4 $736.5 $817.6 $1,164.9 $1,071.6 $1,027.9 $919.3 $788.5 $743.8    
  
 
 
 
 
 
 
 
 
 
 
 
V. Cumulative net amount of liability paid through:                                  
  1 year later  165.1  219.8  201.9  225.5  322.6  277.5  291.4  102.3  370.8  250.9    
  2 years later  289.8  337.3  323.4  363.6  506.7  472.0  390.6  348.9  512.9       
  3 years later  366.2  418.2  412.8  457.0  656.6  582.4  552.9  452.8          
  4 years later  423.9  481.2  474.3  542.8  774.0  680.9  626.9             
  5 years later  467.9  521.4  530.8  608.2  843.1  733.3                
  6 years later  495.2  565.8  572.7  644.1  883.1                   
  7 years later  530.6  596.3  598.3  672.8                      
  8 years later  554.6  618.2  616.8                         
  9 years later  572.2  636.0                            
  10 years later  590.4                               
  
 
 
 
 
 
 
 
 
 
 
 
 
 Esurance Loss and LAE(1),(2)
Years Ended December 31,

 
($ in millions)

 
 2001
 2002
 2003
 2004
 
I.    Liability for unpaid losses and LAE:             
 Gross balance $4.0 $15.5 $39.1 $63.0 
 Less: reinsurance recoverables on unpaid losses and LAE        0.1 
  
 
 
 
 
Net balance $4.0 $15.5 $39.1 $62.9 
  
 
 
 
 
II.    Net liability re-estimated as of:             
 1 year later  4.0  16.0  34.0   
 2 years later  4.4  15.3       
 3 years later  4.3          
  
 
 
 
 
III.    Cumulative net (deficiency)/ redundancy $(0.3)$0.2 $5.1 $ 
 Percent (deficient)/redundant  (6.7)% 1.3% 13.0% %
  
 
 
 
 
IV.    Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see II. above):             
 Gross re-estimated liability  4.3  15.3  34.2   
 Less: gross re-estimated reinsurance recoverable        0.2    
  
 
 
 
 
Net re-estimated liability $4.3 $15.3 $34.0 $ 
  
 
 
 
 
V.    Cumulative net amount of liability paid through:             
 1 year later  2.5  9.3  18.9   
 2 years later  3.3  12.2       
 3 years later  3.9          
  
 
 
 
 

(1)
The table consists of reserve information for FolksamericaEsurance Insurance Company, Esurance Property & Casualty Insurance Company, and for Fund American Re.business ceded by Esurance to Folksamerica.

(2)
The table includes the complete loss development history for all periods presented for all companies acquired by Folksamerica through an instrument of transfer and assumption approved by the appropriate insurance regulators. Under the instrument, insurance regulators require that Folksamerica report reserve development as if the companies had been combined from their inception.
(3)
FolksamericaEsurance became a wholly owned subsidiary of White Mountains during 1998. Reserve development for the years ended 1991 through 1997 reflects development on reserves established before White Mountains consolidated Folksamerica's results.2000.

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        The following table reconciles loss and LAE reserves determined on a Statutory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:


 Year Ended December 31,
 December 31,
(in millions)

2002
 2001
 2000
(Millions)

 December 31,
Statutory reserves $1,148.8 $1,002.7 $776.7 $16.2 $7.6 $15.5
Reserves allocated from other segments 46.7 31.5 
Reinsurance recoverable on unpaid losses and LAE(1) 513.2 586.7 702.8 .1  
Other(2) 2.3 21.2 21.2
 
 
 
 
 
 
GAAP reserves $1,664.3 $1,610.6 $1,500.7 $63.0 $39.1 $15.5
 
 
 
 
 
 

(1)
Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under Statutoryregulatory accounting.

(2)
Primarily represents purchase accounting adjustments made in connection with Folksamerica acquisition of PCA Property and Casualty Insurance Company.


OTHER OPERATIONS

        White Mountains' other operations consist of the International American Group, Esurance, the Company and the Company's intermediate holding companies.

International American Group

        In October 1999, White Mountains completed its acquisition of International American Group, a collection of insurance and reinsurance companies, for $86.7 million in cash. White Mountains acquired Peninsula, American Centennial and British Insurance Company through its acquisition of International American Group.

        Peninsula, which was established in 1960, is a Maryland-domiciled property and casualty insurer which writes both personal and commercial lines, primarily private passenger automobile, homeowners, commercial automobile and commercial multi-peril. Most of Peninsula's insurance products are sold in Maryland, Delaware and Virginia. Peninsula is rated "A" (Excellent) by A.M. Best. Peninsula markets insurance products principally through independent agents. Peninsula's primary business focus is to establish strong long-term relationships with its agents and insured customers by focusing on providing quality insurance products to families and small private businesses. At December 31, 2002 and 2001, Peninsula had $57.1 million and $55.9 million of total assets and $21.2 million and $22.5 million of shareholder's equity, respectively. For the years ended December 31, 2002, 2001 and 2000, Peninsula had $29.5 million, $28.3 million and $22.7 million in net written premiums.

        American Centennial and British Insurance Company are Delaware-domiciled and Cayman Island-domiciled, respectively, property and casualty insurance and reinsurance companies in run-off. At December 31, 2002 and 2001, American Centennial had $60.9 million and $66.2 million of total assets and $26.7 million and $37.0 million of shareholder's equity, respectively. At December 31, 2002 and 2001, British Insurance Company had $24.7 million and $22.4 million of total assets and $4.3 million and $4.4 million of shareholder's equity, respectively.

Esurance

        Esurance is an online insurance provider that has been writing personal automobile insurance since 2000. Esurance attempts to leverage technology to reduce costs in order to offer its products at competitive prices. The company markets its products through a multi-channel approach, with the majority of its policies sold directly to consumers. Most customer interaction with the company takes place through Esurance's website, www.esurance.com, where customers can get real-time online quotes and purchase their policies. Esurance also offers policyholders 24-hour customer service and claims handling, along with online account management.

        By predominantly interacting with customers through the internet, Esurance is able to collect detailed underwriting information in real-time. This real-time access to customer information has allowed Esurance to develop its own highly segmented, tiered pricing model.

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        During 2002, substantially all of the business generated by Esurance was directly written or assumed by subsidiaries of White Mountains. The underwriting results of this business are included in the underwriting unit that ultimately retains the risk under the policies written through Esurance. Esurance increased its direct written premium volume from $17.4 million in 2001 to $52.6 million in 2002.

        Esurance is headquartered in San Francisco and has operated as an independent subsidiary of Folksamerica since October 2000, when Folksamerica purchased 80% of the company for $9.0 million. During the fourth quarter of 2001, Folksamerica purchased the remaining outstanding stock for $1.4 million. As of December 31, 2002, Folksamerica owned 99.1% of Esurance's outstanding stock. For the years ended December 31, 2002 and 2001, Esurance had total assets of $38.2 million and $16.9 million, total revenues of $10.9 million and $3.1 million and an accumulated shareholder's deficit of $24.9 million and $8.9 million.

The Company and Itsits Intermediate Holding Companies

        The Company's intermediate holding companies include Fund American Companies, Inc. ("FAC") and Fund American Enterprises Holdings, Inc. ("FAEH"), both U.S.-domiciled companies, as well as various intermediate holding companies domiciled in Barbados.the United States, Barbados, Luxembourg, Sweden and Bermuda. White Mountains arranges the majority of its financing through the Company and these intermediate holding companies.

        FAC acquired OneBeaconIn May 2003, Fund American issued $700 million face value of senior unsecured debt through a public offering, at an issue price of 99.7% (the "Senior Notes"). The net proceeds from the issuance of the Senior Notes were used to repay all of the term loans and a portion of the revolving loan (with the remainder repaid with cash on June 1, 2001.hand) under Fund American's previous bank facility.

        In connectionSeptember 2003, Fund American terminated its old revolving credit facility, which then consisted solely of an undrawn $175 million revolving credit line, and replaced it with the Acquisition, FAC and FAEH entered into the following financing arrangements:

The Zenith Preferred Stock is entitled to a dividend of no less than a 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5% per quarter thereafter. The Zenith Preferred Stock is mandatorily redeemable on May 31, 2011. At the Company's option, the Zenith Preferred Stock may be redeemed on June 30, 2007.




International American Group

        In October 1999, White Mountains acquired the group of companies included in the International American Group, which included American Centennial, British Insurance Company and Peninsula.

        Delaware-domiciled American Centennial and Cayman Island-domiciled British Insurance Company are property and casualty insurance and reinsurance companies in run-off. At December 31, 2004 and 2003, American Centennial had $61.3 million and $61.1 million of total assets and $21.0 million and $22.6 million of shareholder's equity, respectively. At December 31, 2004 and 2003, British Insurance Company had $33.4 million and $25.7 million of total assets and $4.5 million and $5.6 million of shareholder's equity, respectively.

        In January 2004, White Mountains sold Peninsula, which is a Maryland-domiciled property and casualty insurer, for $23.3 million. At December 31, 2003 Peninsula had $60.6 million of total assets and $21.7 million of shareholder's equity, respectively. For the years ended December 31, 2003 and 2002, Peninsula had $34.1 million and $29.5 million of net written premiums, respectively.


INVESTMENTS

        The investment portfolios of White Mountains' insurance and reinsurance operations consist primarily of fixed maturity investments but also consist, in part, of short-term investments, common equity securities and other investments.investments (principally investments in limited partnership interests). White Mountains' management believes that prudent levels of investments in common equity securities and other investments within its investment portfolio are likely to enhance after-tax total returns without significantly increasing the risk profile of the portfolio when considered over long periods of time and balanced with leverage and insurance risk considerations. White Mountains seeks to maximize after-tax risk-adjusted returns over the long term.

32



        TheAt December 31, 2004, approximately 99% of White Mountains' fixed maturity portfolios of White Mountains are comprised primarily ofinvestments received an investment grade corporate debt securities, U.S. government and agency securities and mortgage-backed securities (greater than 99% of such securities received a rating from Standard and Poor's ("S&P") or from Moody's Investor Services ("Moody's") if a given security is unrated by S&P. S&P and Moody's are two third party rating agencies that assess the National Associationcredit quality of Insurance Commissioners ("NAIC")companies that have publicly issued debt. An investment grade rating, which is indicative of 1a strong credit profile of an issuer, is defined as "BBB-" (Adequate, the 10th highest of 24 ratings) or 2). Nearly allbetter by S&P and "Baa3" (Adequate, the fixed maturity securities currently held10th highest of 21 ratings) or better by White Mountains are publicly traded.Moody's. White Mountains expects to continue to invest primarily in high quality, fixed maturity investments. Nearly all the fixed maturity investments currently held by White Mountains are publicly traded, and as such are considered to be liquid.

        At December 31, 2002,2004 White Mountains' consolidated investment portfolio consisted of $6,669.1$7,900.0 million (75%) of fixed maturity investments, $1,790.6$1,058.2 million (20%(10%) of short-term investments, and $439.7$1,043.9 million (5%(10%) of common equity securities and $527.4 million (5%) of other investments. White Mountains' fixed maturity portfolioinvestments at December 31, 20022004 consisted principally of corporate debt securities (49%), U.S. government and agency securities (32%(30%), foreign government obligations (10%), mortgage-backed securities (14%(9%) and preferred equity securities foreign government obligations and municipal bonds (5%(2%).


        White Mountains' investment philosophy is to invest all assets with a view towards maximizing its after-tax total return over extended periods of time. Under this approach, each dollar of after-tax investment income, realized and unrealized gains and losses is valued equally. White Mountains' overall fixed maturity investment strategy is to purchase securities that are attractively priced in relation to perceived credit risks. White Mountains generally manages the interest rate risk associated with holding fixed maturity investments by actively monitoring and maintaining the average duration of the portfolio with a view towards achieving an adequate after-tax total return without subjecting the portfolio to an unreasonable level of interest rate risk. At December 31, 2002,2004, the duration of White Mountains' fixed maturity portfolioinvestments and short-term investments was approximately 3.43 years.

Montpelier Re Holdings Ltd. ("Montpelier")

        In December 2001, White Mountains, the Benfield Group plc and several other private investors established Montpelier and its wholly owned subsidiary Montpelier Reinsurance Ltd. ("Montpelier Re"). Montpelier Re is a Bermuda-domiciled insurance and reinsurance company that was formed with approximately $1.0 billion in capital to respond to the then favorable underwriting and pricing environment in the reinsurance industry. Montpelier Re has initially focused on property reinsurance business. Montpelier Re is rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best. On October 15, 2002, Montpelier successfully completed an initial public offering and its common shares are listed on the New York Stock Exchange. White Mountains initially invested $180 million in Montpelier in exchange for 10.8 million common shares and warrants to acquire 4.8 million additional common shares of Montpelier.

        During the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier to third parties. As a result of this sale, as well as changes to the composition of the Board of Directors of both Montpelier and White Mountains, White Mountains changed the method of accounting for its remaining common share investment in Montpelier as of March 31, 2004 from an equity method investment in an unconsolidated affiliate to a common equity security classified as available for sale and carried at fair value. Also during the first quarter of 2004, White Mountains purchased additional warrants to acquire 2.4 million common shares of Montpelier from an existing warrant holder for $54.1 million in cash, thereby raising the total number of such warrants owned by White Mountains to 7.2 million. The Montpelier warrants have an exercise price of $16.67 per share (as adjusted for stock splits) and are exercisable until December 2011.


Investments in Unconsolidated Affiliates

Symetra Financial Corporation ("Symetra")

        On August 2, 2004, White Mountains, Berkshire and several other private investors capitalized Symetra in order to purchase the life and investment operations of Safeco Corporation for $1.35 billion. The acquired companies, which are now operating under the Symetra brand, focus mainly on group insurance, individual life insurance, structured settlements and retirement services. Symetra had an initial capitalization of approximately $1.4 billion, consisting of $1,065 million of common equity and $315 million of debt. White Mountains invested $194.7 million in Symetra in exchange for 2.0 million common shares of Symetra. In addition, White Mountains and Berkshire each received warrants to acquire an additional 1.1 million common shares of Symetra at $100 per share. White Mountains owns approximately 19% of the outstanding common shares of Symetra and approximately 24% of Symetra on a fully-converted basis including the warrants. Three White Mountains designees serve on Symetra's eight member board of directors.

        Symetra's total revenues and net income for the five months ended December 31, 2004 were $701.9 million and $54.3 million, respectively. Symetra's total assets and shareholders' equity as of December 31, 2004 were $22.1 billion and $1.4 billion, respectively. As of December 31, 2004, White



Mountains' total investment in Symetra was $248.4 million, excluding $56.6 million of equity in unrealized gains from Symetra's fixed maturity investments.

Main Street America Holdings, Inc. ("MSA")

        MSA is a subsidiary of National Grange Mutual Insurance Company ("NGM"), a New Hampshire-domiciled property and casualty insurance company, which insures risks located primarily in New York, Massachusetts, Connecticut, Pennsylvania, New Hampshire, Virginia and Florida. White Mountains owns 50% of the outstanding common stock of MSA and accounts for this investment using the equity method. White Mountains' investment in MSA was $161.6 million and $142.8 million at December 31, 2004 and December 31, 2003, respectively. MSA's net written premiums totaled $454.5 million, $427.6 million and $357.3 million and its net income (loss) was $29.6 million, $29.3 million and ($13.2) million in 2004, 2003 and 2002. MSA's total assets as of December 31, 2004 and 2003 were $978.1 million and $875.1 million and its shareholders' equity was $323.3 million and $290.4 million. The principal insurance operating subsidiaries of NGM and MSA are rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best.


REGULATION

United States

        White Mountains' U.S.-based insurance and reinsurance operationsoperating subsidiaries are subject to regulation and supervision in each of the jurisdictionsstates where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. White Mountains believes that it is in compliance with all applicable laws and regulations pertaining to its business that would have a material effect on its financial position in the event of non-compliance.

        Over the last several years most states have implemented laws that establish standards for current, as well as continued, state accreditation. In addition, the NAIC has adopted risk-based capital ("RBC") standards for property and casualty companiesinsurers as a means of monitoring certain aspects affecting the overall financial condition of insurance companies. The current RBC ratios of White Mountains' active insurance and reinsurance operating subsidiaries are satisfactory and such ratios are not expected to result in any adverse regulatory action. White Mountains is not aware of any current recommendations by regulatory authorities that would be expected to have a material effect on its results of operations or liquidity.

        As a condition of its license to do business in certain states, White Mountains' insurance operationsoperating subsidiaries are required to participate in mandatory shared market mechanisms. Each state dictates the types of insurance and the level of coverage that must be provided. The most common type of shared market mechanism in which White Mountains is required to participate is an assigned risk plan. Many states operate assigned risk plans. The NYAIP and New Jersey commercial automobile insurance plans are two such shared market mechanisms in which OneBeacon is required to participate. These plans require insurers licensed within the applicable state to accept the applications for insurance policies of individuals who are unable to obtain insurance in the voluntary market. The total number of such

33



policies an insurer is required to accept is based on its market share of voluntary business in the state. Underwriting results related to assigned risk plans are typically adverse. Accordingly, OneBeacon may be required to underwrite policies with a higher risk of loss than it would otherwise accept.

        Reinsurance facilities are another type of shared market mechanism. Reinsurance facilities require an insurance company to accept all applications submitted by certain state designated agents. The



reinsurance facility then allows the insurer to cede some of its business to the reinsurance facility so that the facility will reimburse the insurer for claims paid on ceded business. Typically, however, reinsurance facilities operate at a deficit, which is funded through assessments against the same insurers. The Massachusetts Commonwealth Automobile Reinsurers ("MassCAR") is one such reinsurance facility in which OneBeacon is compelled to participate. As a result, OneBeacon could be required to underwrite policies with a higher risk of loss than it would otherwise accept.

        The insurance laws of many states generally provide that property and casualty insurers doing business in those states belong to a statutory property and casualty guaranty association. The purpose of these guaranty associations is to protect policyholders by requiring that solvent property and casualty insurers pay certain insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on the insurer's share of voluntary written premiums in the state. While most guaranty associations provide for recovery of assessments through rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments. At December 31, 2002,2004, the reserve for such assessments at OneBeacon totalled $24.7 million, of which $7.7 million related to the insolvency of Reliance Insurance Company.totaled $18.3 million.

        Many states have laws and regulations that limit an insurer's ability to exit a market. For example, certain states limit a private passenger automobile insurer's ability to cancel and non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing from one or more lines of insurance business in the state, unless the state regulators approve the company's withdrawal plans. State regulators may refuse to approve such plans on the grounds that they could lead to market disruption. Such laws and regulations may restrict White Mountains' ability to exit unprofitable markets.

        Nearly all states have insurance laws requiring personal property and casualty insurers to file price schedules, policy or coverage forms, and other information with the state's regulatory authority. In most cases, such price schedules and/or policy forms must be approved prior to use. While pricing laws vary from state to state, their objectives are generally to ensure that prices are adequate, not excessive and not discriminatory. For example, Massachusetts, a state where OneBeacon has a sizable presence, sets virtually all aspects of automobile insurance rates, including agent commissions. Such regulations often challenge an insurers ability to adequately price its product, which often leads to unsatisfactory underwriting results.

        White Mountains' U.S. insurance and reinsurance operating subsidiaries are subject to state laws and regulations that require investment portfolio diversification and that limit the amount of investment in certain categories. Non-compliance may cause non-conforming investments to be non-admitted in measuring statutory surplus and, in some instances, may require divestiture. White Mountains investment portfolio at December 31, 20022004 complied with such laws and regulations in all material respects.

        One of the primary sources of cash inflows for the Company and certain of its intermediary holding companies is dividends received from its insurance and reinsurance operating subsidiaries. Under the insurance laws of the jurisdictionsstates under which White Mountains' U.S.-based insurance and reinsurance subsidiaries are domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. In a given calendar year, the insurance subsidiaries can generally dividend up to the greater of 10% of their statutory surplus at the beginning of the year or the prior year's statutory net income without prior regulatory approval, subject to the availability of unassigned funds (the statutory accounting equivalent of retained earnings). Larger dividends generally can be paid only upon

34



regulatory approval. Accordingly, there is no assurance regarding the amount of such dividends that may be paid by such subsidiariesSee "Dividend Capacity" in the future. During 2002, White Mountains' first-tier insurance subsidiaries declared and paid $172.6 million in dividends to FAC. White Mountains' first tier insurance subsidiaries have the ability to pay dividends"LIQUIDITY AND CAPITAL RESOURCES" section of approximately $261.5 million to FAC in 2003 without approval of regulatory authorities.Item 7 for further discussion.

        White Mountains is subject to regulation under certain state insurance holding company acts. These regulations contain reporting requirements relating to the capital structure, ownership, financial condition and general business operations of White Mountains' insurance and reinsurance operating subsidiaries. These regulations also contain special reporting and prior approval requirements with respect to certain transactions among affiliates. Since the Company is an insurance holding company, the domiciliary states of its insurance and reinsurance operating subsidiaries impose regulatory application and approval requirements on acquisitions of Common Shares which may be deemed to



confer control over those subsidiaries, as that concept is defined under the applicable state laws. Acquisition of as little as 10% of White Mountains' Common Shares may be deemed to confer control under the insurance laws of some jurisdictions, and the application process for approval can be extensive and time consuming.

        While the federal government does not directly regulate the insurance business, federal legislation and administrative policies affect the insurance industry. In addition, legislation has been introduced from time to time in recent years that, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. A recentlyfederal law enacted federal law,in 2002, the Terrorism Act, provides a "back-stop" to property and casualty insurers in the event of future terrorist acts perpetrated by foreign agents or interests. The law limits the industry's aggregate liability by requiring the federal government to share 90 percent of certified losses once a company meets a specific retention or deductible as determined by its prior year's direct written premiums and limits the aggregate liability to be paid by the government and industry without further action by Congress at $100 billion. In exchange for this "back-stop", primary insurers are required to make coverage available to commercial insureds for losses from acts of non-domestic terrorism as specified in the Terrorism Act. OneBeacon is actively complying with the requirements of the Terrorism Act in order to ensure its ability to be reimbursed by the federal government for any losses it may incur as a result of future terrorist acts. (See "Terrorism" in the "ONEBEACON" `section of this Item for a further discussion of the Terrorism Act.) A number of additional enacted and pending legislative measures could lead to increased consolidation and increased competition for business and for capital in the financial services industry. White Mountains cannot predict whether any state or federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what effect such measures may have on its insurance and reinsurance operations.

        Environmental cleanup of polluted waste sites is subject to both federal and state regulation. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes govern the cleanup and restoration of waste sites by potentially responsible parties ("PRPs"). These laws can impose liability for the entire cost of clean-up upon any responsible party, regardless of fault. The insurance industry in general is involved in extensive litigation regarding coverage issues arising out of the cleanup of waste sites by insured PRPs and as a result has disputed many such claims. From time to time, comprehensive Superfund reform proposals are introduced in Congress, but none has yet been enacted. At this time, it remains unclear as to whether Superfund reform legislation will be enacted or that any such legislation will provide for a fair, effective and cost-efficient system for settlement of Superfund related claims. The NICO Cover includes coverage for such exposures;exposures at OneBeacon; however, there can be no assurance that the coverage provided under the NICO Cover will ultimately prove to be adequate.


Sweden

        In accordance with provisions of Swedish law, Sirius International can voluntarily transfer its pretax earnings, or a portion thereof, subject to certain limitations, into an untaxed reserve referred to as a safety reserve. The safety reserve is a Swedish regulatory concept that has no equivalent under GAAP. Accordingly, under GAAP, an amount equal to Sirius International's safety reserve of $1.1 billion at December 31, 2004, net of the related deferred tax liability established at the statutory Swedish tax rate of 28%, is classified as equity. Generally, this deferred tax liability is only required to be paid by Sirius International if it fails to maintain predetermined levels of premium writings in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations.




RATINGS

        Insurance and reinsurance companies are evaluated by various rating agencies in order to measure each company's financial strength. Higher ratings generally indicate financial stability and a stronger

35



ability to pay claims. A.M. Best currently rates OneBeacon's, White Mountains Re's and Esurance's principal operating insurance subsidiaries "A" (Excellent), Folksamerica's principal reinsurance operating subsidiary(Excellent, the third highest of fifteen ratings) and NFU "A-" (Excellent) and Fund American Re "A-" (Excellent)(Excellent, the fourth highest of fifteen ratings). White Mountains believes that strong ratings are important factors in the marketing of insurance and reinsurance products to agents and consumers.consumers and ceding companies.


EMPLOYEES

        As of December 31, 2002,2004, White Mountains employed 5,1155,030 persons (consisting of 1265 persons at the Company and its intermediate holding companies, 10 persons at WMU, 70 persons at Fund American Re and 5,0233,868 persons at OneBeacon, 542 persons at White Mountains Re, 542 persons at Esurance and its subsidiaries, including Folksamerica and its subsidiaries)13 persons at the International American Group companies). Management believes that White Mountains has satisfactory relations with its employees.


AVAILABLE INFORMATION

        The Company is subject to the informational reporting requirements of the Exchange Act. In accordance therewith, the Company files reports, proxy statements and other information with the SecuritiesSEC. These documents are available at www.whitemountains.com shortly after such material is electronically filed with or furnished to the SEC. In addition, the Company's code of business conduct and Exchange Commission (the "SEC").ethics as well as the various charters governing the actions of certain of the Company's Committees of its Board of Directors, including its Audit Committee, Compensation Committee and its Nominating and Governance Committee, are available at www.whitemountains.com.

        The Company will provide to any shareholder, upon request and without charge, copies of allthese documents (excluding any applicable exhibits unless specifically requested) filed by the Company with the SEC.. Written or telephone requests should be directed to the Corporate Secretary, White Mountains Insurance Group, Ltd., 80 South Main Street, Hanover, New Hampshire 03755, telephone number (603) 640-2200. Additionally, all such documents are physically available at the Company's registered office at Clarendon House, 2 Church Street, Hamilton, HM 11 Bermuda and are available for viewing at www.whitemountains.com shortly after such material is electronically filed with or furnished to the SEC.Bermuda.


Item 2. Properties

        The Company maintains two professional offices in Hamilton, Bermuda which serve as its headquarters and its registered office. Fund American Re maintains branch officesWhite Mountains Re's headquarters is in Stockholm, Sweden andHamilton, Bermuda with an additional office in Singapore. The home offices of OneBeacon andNew Jersey. Folksamerica are locatedis headquartered in Boston, Massachusetts and New York, New York respectively, with branch offices in various cities throughout the United States. Sirius International is headquartered in Stockholm, Sweden with various branch offices in Europe and Asia. WMU maintains offices in Dublin, Ireland and Hamilton, Bermuda. The home office of OneBeacon is located in Boston, Massachusetts, with branch offices in various cities throughout the United States. Esurance is headquartered in San Francisco, California with various offices throughout the United States. In addition, the Company maintains a professional office in Hanover, New Hampshire which serves as its principal executive office, and an additional professional office in White River Junction, Vermont.Guilford, Connecticut, which houses its investment and corporate finance functions.

        The Company's headquarters, registered office, and principal executive officesoffice and investment and corporate finance office are leased. Fund American Re's branch officesSirius International's home office in Sweden and Singaporesubstantially all of its branch offices, as well as WMU's offices in Ireland and Bermuda are leased. Folksamerica's home office, and its branch offices are leased as well. The home officesoffice of OneBeacon and Folksamerica and most of its branch offices are leased with the exception of branch offices located in New Jersey and New York, which are owned by OneBeacon. Additionally, OneBeacon owns office facilities in Illinois, Pennsylvania and Oregon. Certain leased and owned OneBeacon office locations have been leased or subleased to



Liberty Mutual in connection with the Renewal RightsLiberty Agreement for a period of no more than three years. Management considers its office facilities suitable and adequate for its current level of operations.


Item 3. Legal Proceedings

        White Mountains, and the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of business. Other than those items listed below, White Mountains was not a party to any material litigation or arbitration other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on its financial condition and/or cash flows.

        On December 20, 2002,In November 2004, OneBeacon Insurance Group received a jury in Federal District Court in Arkansas returned a verdict against OneBeacon in a case involving a claim by an insurance agent that its agency agreement had been

36



improperly terminated in 1999. The award against OneBeacon consistedsubpoena from the Attorney General of $1.2 million in compensatory damagesthe State of New York requesting documents and $32.6 million in punitive damages. OneBeacon strongly believes there are meritorious grounds for setting aside the verdict and intends to vigorously pursue those matters with the District Court. If necessary, OneBeacon will appealseeking information relating to the U.S. Courtconduct of Appeals forbusiness between insurance brokers and OneBeacon. Subsidiaries of the Eighth Circuit.Company have also received information requests from various state insurance departments regarding producer compensation arrangements. White Mountains believes these requests are part of the ongoing, industry-wide investigation regarding industry sales practices.

        On May 15, 2002, The Robert Plan Corporation and several of its subsidiaries filed a lawsuit against the Company, certain of its subsidiaries and several individuals employed by the subsidiaries. The suit alleges that the defendants misappropriated confidential information of the plaintiffs and used such information to enter into the New York automobile assigned risk business in direct competition with the plaintiffs. The plaintiffs seekhave recently increased their damages demand from $66 million to approximately $120$185 million, in damages which they allege represents threetwo years of their lost profits in the subject business. White Mountains, its named subsidiaries and employees do not believe they engaged in any improper or actionable conduct. At present, White Mountains and its subsidiaries have no reason to believe they have any liability to The Robert Plan Corporation and intend to vigorously defend the lawsuit. In addition, OneBeacon has brought a counterclaim against the plaintiffs that it believes to be meritorious. OneBeacon is seeking compensatory damages of $8.8$9 million as a result of the breach by the plaintiffs of the LAD servicing contract that OneBeacon had entered into with them.

        In DecemberOn January 30, 2001, American Centennialan action was filed in Los Angeles on behalf of Sierra National Life Insurance Holdings, Inc. ("Sierra Holdings", which is not related to the Sierra Group, as previously defined), a dissolved corporation in which White Mountains held a 28.8% interest, against Credit Lyonnais, S.A. and other parties who were the successful bidders for arbitration against Gerling Global International Reinsurancethe assets of Executive Life Insurance Company ("Gerling"ELIC"), a reinsurer of American Centennial, based on Gerling's failure to pay American Centennial amounts due under a reinsurance contract. At December 31, 2002, American Centennial had recorded $22.6 million in recoverables from Gerling under this reinsurance contract, of which $10.2 million is currently due. Approximately $16.7 million of this obligation is collateralized. Gerling may owe American Centennial significantly greater amountsCalifornia insurer, in the future should additional losses which are covered1991 sale of those assets conducted by the reinsurance contract emerge. Gerling has requested the arbitration panelCalifornia Commissioner of Insurance. Sierra Holdings alleged that defendants' acquisition violated both federal and state law and that, but for defendants' wrongful acts, it would have been chosen to rescind the contract aspurchase ELIC's assets. Sierra Holdings settled its claims against Credit Lyonnais and certain other defendants for a total of December 31, 2000 based upon, among other things, White Mountains' acquisition of American Centennial in 1999.$87 million. After expenses, White Mountains American Centennial and their counsel believe that Gerling's claims are meritless and intendshare of the settlement proceeds was approximately $15 million. In addition, a default judgment regarding liability was entered at trial against another defendant, Maaf Assurances, SA, a French mutual insurer. Sierra Holdings is reviewing its options in pursuing damages against Maaf. Finally, in certain circumstances, Sierra Holdings may be entitled to pursue collectionadditional amounts from any settlements or judgments resulting from the ongoing lawsuit by the California Commissioner of any and all amounts due under the Gerling reinsurance contract.Insurance against another defendant, Artemis SA.

        In August 2000, Aramarine Brokerage, Inc. ("Aramarine"), a former insurance broker of OneBeacon's, filed a lawsuit alleging that OneBeacon had wrongfully terminated its business relationship with Aramarine. The suit claimsoriginally claimed $410 million in compensatory damages for lost commissions.commissions, although Aramarine has recently reduced its demand to $158 million. OneBeacon does not believe it has engaged in any actionable conduct, has filedconduct. During 2004, OneBeacon prevailed on a motion for summary judgment and intends to vigorously defenddismiss the lawsuit.plaintiff's claim. OneBeacon expects the plaintiff to appeal the summary judgment upon resolution of OneBeacon's counterclaim for return commission.




Item 4. Submission of Matters to Aa Vote of Security Holders

        There were no matters submitted to a voteAt the Company's 2004 Annual General Meeting of Members, which was held on October 21, 2004 in Hamilton, Bermuda, the Company's Members approved proposals (as further described in the Company's 2004 Proxy Statement) calling for the Election of five of the Company's shareholders duringdirectors to Class I ("Proposal I"), the fourth quarterElection of 2002.Directors of Sirius International Insurance Corporation ("Proposal II"), the Election of Directors of Fund American Reinsurance Company, Ltd. and Scandinavian Reinsurance Company Ltd. ("Proposal III"), the Election of Directors of any new non-United States operating subsidiary ("Proposal IV") and the Approval of Appointment of PricewaterhouseCoopers as the Company's Independent Registered Accounting Firm ("Proposal V"). As of August 27, 2004, the "Record Date" for the 2004 Annual Meeting, a total of 10,769,451 Common Shares were eligible to vote.

37        With respect to Proposals I, II, III and IV, 6,386,624 votes, 6,559,440 votes, 6,557,514 and 6,597,508 votes were cast in favor of the proposals, respectively, and 264,527 votes, 91,711 votes, 93,637 votes and 53,643 votes were withheld, respectively. With respect to Proposal V, 7,800,774 votes were cast in favor of the proposal, 5,971 votes were cast against the proposal and 5,952 votes abstained. These results represent the number of Common Shares voted after taking into consideration the voting cut-back of all holders with 10% or more voting control in accordance with Bye-law 47 of the Company's Bye-laws


        In connection with Proposal I, Bruce R. Berkowitz, Steven E. Fass, Edith E. Holiday, Joseph S. Steinberg and Lowndes A. Smith were elected to the Company's Board of Directors with terms ending in 2007. In connection with Proposal II, Messrs. Lars Ek, Fass, Gert Lindberg and Goran Thorstensson were elected to the Board of Directors of Sirius International Insurance Corporation. In connection with Proposal III, Messrs. Fass, Anders Henriksson, Mark Kaplen, Michael E. Maloney, Thorstensson and Michael E. Tyburski were elected to the Board of Directors of Fund American Reinsurance Company, Ltd. and Scandinavian Reinsurance Company Ltd. In connection with Proposal IV, Messrs. Barrette and Fass were elected to any new non-United States operating subsidiary that may be formed by the Company in the future.


Executive Officers of the Registrant and its Subsidiaries (As of March 1, 2005)

Name

 Position
 Age
 Executive officer
since

Raymond Barrette President and CEO 54 1997
John P. Cavoores Managing Director, President and CEO of OneBeacon 47 2002
Charles B. Chokel Managing Director of White Mountains Capital, Inc. 51 2002
Steven E. Fass President and CEO of White Mountains Re 59 2002
David T. Foy Executive Vice President and Chief Financial Officer 38 2003
John D. Gillespie President of WM Advisors 45 2001
Robert R. Lusardi Executive Vice President and Managing Director of White Mountains Capital, Inc. 47 2005
J. Brian Palmer Chief Accounting Officer 32 2001
Robert L. Seelig Vice President and General Counsel 36 2002

        All executive officers of the Company and its subsidiaries are elected by the Board for a term of one-year or until their successors have been elected and have duly qualified. Information with respect to the principal occupation and relevant business experience of the Executive Officers follows:

Mr. Barrette was appointed President and CEO of the Company on January 1, 2003 and has been a director since 2000. Mr. Barrette was CEO of OneBeacon from June 2001 to December 2002 and remains its Chairman. Mr. Barrette joined White Mountains Insurance Group in November 1997 as Executive Vice President and Chief Financial Officer. He was President from January 2000 to June 2001. Prior to joining White Mountains, Mr. Barrette had 23 years of experience in the insurance



business, mostly at Fireman's Fund Insurance Company. He is also Chairman of Esurance, Lead Director of Montpelier and a director of several White Mountains subsidiaries.

Mr. Cavoores was appointed Managing Director and President of OneBeacon in December 2001 and was appointed CEO of OneBeacon in September 2003. Mr. Cavoores formerly served as a Managing Director of Fund American from 2000 to June 2001 and as a Managing Director of OneBeacon from June 2001 to December 2001. Prior to joining White Mountains in 2001, Mr. Cavoores served as Chief Operating Officer of Reliance Insurance Group from April 2000 to October 2000, and as President and CEO of National Union Fire Insurance Company (a wholly-owned subsidiary of American International Group) from May 1998 to April 2000. He was with Chubb Corporation from 1979 to 2000 in a variety of capacities, most recently as their Chief Underwriting Officer of worldwide specialty business.

Mr. Chokel has served as Managing Director of White Mountains Capital, Inc. since September 2003. Prior to that he served as Managing Director and Chief Administrative Officer of OneBeacon since January 2003 and as Managing Director since March 2002. Prior to joining OneBeacon, Mr. Chokel served as Executive Vice President and Chief Financial Officer of Conseco, Inc. from March 2001 to March 2002 and as Co-CEO of The Progressive Corporation from January 1999 to January 2001. Mr. Chokel was with Progressive since 1978. He is also a director of other White Mountains subsidiaries.

Mr. Fass has been a director of the Company since 2000. Mr. Fass has served as President and CEO of White Mountains Re since May 2004. Mr. Fass previously served as President and CEO of Folksamerica and its subsidiaries from 1984 to 2004. He joined Folksamerica as its Vice President, Treasurer and Chief Financial Officer in 1980. Mr. Fass also serves as Chairman of Folksamerica, a director of White Mountains Re and is a director of other White Mountains subsidiaries.

Mr. Foy was appointed Executive Vice President and Chief Financial Officer of the Company in April 2003. Prior to joining White Mountains in 2003, Mr. Foy served as Senior Vice President and Chief Financial Officer of Hartford Life Inc. and joined that company in 1993. Prior to joining Hartford Life, Mr. Foy was with Milliman and Robertson, an actuarial consulting firm. Mr. Foy also serves as the Chairman of Symetra.

Mr. Gillespie has served as a Deputy Chairman of the Company since January 2003 and serves as Chairman and President of WM Advisors. Mr. Gillespie served as Managing Director of OneBeacon from June 2001 to March 2003 and has been a director of the Company since 1999. He is also the founder and Managing Partner of his own investment firm, Prospector Partners, LLC ("Prospector"). Prior to forming Prospector, Mr. Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age Media Fund, Inc. Mr. Gillespie serves as a director of Montpelier, Symetra and certain White Mountains subsidiaries. Mr. Gillespie's father, George Gillespie, is Chairman of the Company.

Mr. Lusardi was appointed Executive Vice President and Managing Director of White Mountains Capital, Inc. in February 2005. Prior to joining White Mountains, Mr. Lusardi was an Executive Vice President of XL Capital Ltd, most recently as Chief Executive of Financial Products and Services. Prior to joining XL Capital Ltd, Mr. Lusardi was a Managing Director at Lehman Brothers, where he was employed from 1980 to 1998.

Mr. Palmer has served as Chief Accounting Officer since June 2001 and previously served as Controller of a subsidiary of White Mountains from 1999 to 2001. Prior to joining White Mountains in 1999, Mr. Palmer was with PricewaterhouseCoopers LLP.

Mr. Seelig is Vice President and General Counsel of the Company. Prior to joining White Mountains in September 2002, Mr. Seelig was with the law firm of Cravath, Swaine & Moore.



PART II

Item 5. Market for the Company's Common Equity, and Related Shareholder Matters and Issuer Purchase of Equity Securities

        As of March 21, 2003,February 15, 2005, there were 467394 registered holders of Common Shares, of the Company, par value $1.00 per share.

        During each of 20022004 and 20012003 the Company declared and paid cash dividends on Common Shares of $1.00 per Common Share. The Company's dividend payment policy provides for an annual dividend payable in the first quarter of each year, dependent on the Company's financial position and the regularity of its cash flows.

        Common Shares (symbol WTM) are listed on the New York Stock Exchange.Exchange (symbol WTM) and the Bermuda Stock Exchange (symbol WTM-BH). The quarterly range of the daily closing price for Common Shares during 20022004 and 20012003 is presented below:

 
 2002
 2001
 
 High
 Low
 High
 Low
Quarter ended:            
 December 31 $334.50 $284.50 $369.99 $330.00
 September 30  340.00  285.00  376.00  315.50
 June 30  378.00  316.50  391.00  304.01
 March 31  352.98  326.50  328.50  290.00
  
 
 
 
 
 2004
 2003
 
 High
 Low
 High
 Low
Quarter ended:            
 December 31 $659.00 $501.00 $461.00 $413.00
 September 30  526.00  467.00  416.75  362.00
 June 30  553.80  476.10  420.50  340.00
 March 31  524.50  453.50  340.00  311.70
  
 
 
 

38        As permitted by the agreement governing the Company's outstanding options to acquire Common Shares ("Options"), the Company accepted 97 common shares in partial satisfaction of the strike price relating to the exercise of 435 Options during the 2004 fourth quarter. The Common Shares received by the Company were valued at the applicable New York Stock Exchange closing price on the day of exercise ($629.75 per Common Share).





Item 6. Selected Financial Data

        Selected consolidated income statement data and ending balance sheet data for each of the five years ended December 31, 2002,2004, follows:



 Year Ended December 31,
 
 Year Ended December 31,
 
Millions, except share and per share amounts

 
2002
 2001(a)
 2000(b)
 1999(c)
 1998(d)
 
$ in millions, except share and per share amounts

$ in millions, except share and per share amounts

 Year Ended December 31,
 
 
Income Statement Data:Income Statement Data:             Income Statement Data:           
RevenuesRevenues $4,185 $3,234 $851 $548 $366 Revenues $4,553 $3,794 $4,208 $3,234 $851 
ExpensesExpenses 4,066 3,662  493 418  311 Expenses 4,305 3,422 4,089 3,662 493 
 
 
 
 
 
   
 
 
 
 
 
Pretax earnings (loss)Pretax earnings (loss) 119 (428) 358 130  55 Pretax earnings (loss) 248 372 119 (428) 358 
Income tax (provision) benefit (11) 179  (43) (42) (20)Income tax (provision) benefit (47) (127) (11) 179 (43)
Accretion and dividends on preferred stock of subsidiaries (41) (23)     Accretion and dividends on preferred stock of subsidiaries  (21)(j) (41) (23)  
Equity in earnings (loss) of unconsolidated affiliates 14 1  (2) 20  16 Equity in earnings (loss) of unconsolidated affiliates 37 57 14 1 (2)
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) from continuing operationsNet income (loss) from continuing operations 81 (271) 313 108  51 Net income (loss) from continuing operations 238 281 81 (271) 313 
Net income from discontinued operations    95 13  28 Net income from discontinued operations     95(b)
Cumulative effect of changes in accounting principles 660(l)       Cumulative effect of changes in accounting principles   660(i)   
Extraordinary gains 7 12      Extraordinary gains 181(k)  7 12  
 
 
 
 
 
   
 
 
 
 
 
Net income (loss)Net income (loss) $748 $(259)$408 $108 $59 Net income (loss) $419 $281 $748 $(259)$408 
 
 
 
 
 
   
 
 
 
 
 
Net income (loss) from continuing operations per share:Net income (loss) from continuing operations per share:             Net income (loss) from continuing operations per share:           
Basic $7.47 $(86.52)$53.08 $19.25 $8.71 Basic $24.05 $26.48 $7.47 $(86.52)$53.08 
Diluted $6.80 $(86.52)$52.84 $17.66 $7.75 Diluted $22.67 $23.63 $6.80 $(86.52)$52.84 
 
 
 
 
 
   
 
 
 
 
 
Balance Sheet Data:Balance Sheet Data:             Balance Sheet Data:           
Total assetsTotal assets $16,034 $16,610 $3,545 $2,049 $2,164 Total assets $19,015 $15,882 $17,267 $18,410 $3,545 
Short-term debtShort-term debt 33 358   4  52 Short-term debt   33 358  
Long-term debtLong-term debt 760 767  96(e) 203  186 Long-term debt 783 743 760 767 96 
Deferred creditsDeferred credits (l) 683(f 92 101(g 37 Deferred credits   (i) 683(c) 92 
Convertible preference sharesConvertible preference shares 219       Convertible preference shares   219   
Mandatorily redeemable preferred stock of subsidiariesMandatorily redeemable preferred stock of subsidiaries 181 170      Mandatorily redeemable preferred stock of subsidiaries 212 195(j) 181 170  
Common shareholders' equity(h)  2,408 1,445  1,046 614  703 
Book value per share(i)  $254.52 $160.36 $177.07 $103.32 $109.68 
Common shareholders' equity(d)Common shareholders' equity(d) 3,884 2,979 2,408 1,445 1,046 
Book value per share(e)Book value per share(e) $349.60 $293.15 $254.52 $160.36 $177.07 
Fully converted tangible book value per share(j)(f)Fully converted tangible book value per share(j)(f) $258.82 $225.81 $187.65 $120.23 $115.11 Fully converted tangible book value per share(j)(f) $342.52 $291.27 $258.82 $225.81 $187.65 
 
 
 
 
 
   
 
 
 
 
 
Share Data:Share Data:             Share Data:           
Cash dividends paid per Common ShareCash dividends paid per Common Share $1.00 $1.00 $1.20 $1.60 $1.60 Cash dividends paid per Common Share $1.00 $1.00 $1.00 $1.00 $1.20 
Ending Common Shares (000's)(g)Ending Common Shares (000's)(g) 8,351 8,245  5,880 5,946  5,829 Ending Common Shares (000's)(g) 10,773 9,007 8,351 8,245 5,880 
Ending equivalent Common Shares (000's)(k)(h)Ending equivalent Common Shares (000's)(k)(h) 2,455 1,803  81   1,002 Ending equivalent Common Shares (000's)(k)(h) 47 1,775 2,455 1,803 81 
 
 
 
 
 
   
 
 
 
 
 
Ending Common and equivalent Common Shares (000's)Ending Common and equivalent Common Shares (000's) 10,806 10,048  5,961 5,946  6,831 Ending Common and equivalent Common Shares (000's) 10,819 10,782 10,806 10,048 5,961 
 
 
 
 
 
   
 
 
 
 
 

(a)
Includes the acquisition of OneBeacon on June 1, 2001 and its results of operations from that date through December 31, 2001. In connection with the OneBeacon Acquisition, White Mountains issued $1,085 million in debt. White Mountains also issued preferred stock of subsidiaries, warrants to acquire Common Shares and Convertible Preference Shares for total proceeds of $758 million.

39



(b)
IncludesRelates to a tax reserve release associated with the acquisitions of PCA and Risk Capital as well as the gain on the1991 sale of White Mountains Holdings, Inc., which controlled a substantial portion of White Mountains' holdings in Financial Security Holdings, Ltd. ("FSA"), to Dexia S.A. (the "FSA Sale").Fireman's Fund Insurance Company.

(c)
Includes gains resulting from the sale of Valley Group, Inc. ("VGI") and the sale of substantially all the mortgage banking assets of White Mountains Services Corporation.

(d)
Includes the interim period income statement and ending balance sheet of Folksamerica which was initially consolidated by the Company during 1998.

(e)
Reflects a significant repayment of debt by Folksamerica during 2000.

(f)
Deferred credits added during 2001 resulted from the purchase of OneBeacon. See Note 2.

(g)(d)
Deferred credits added during 1999 resulted principally from the purchase of the International American Group.

(h)
Reflects reductions in common shareholders' equity resulting from significant repurchases of Common Shares from 1998 to 1999 and an increase in common shareholders' equityIncrease in 2001 resulting fromincluded effects of capital raising activities undertaken in connection with the OneBeacon Acquisition. See Note 2. Also reflects an increase in shareholders' equityIncrease in 2002 resulting fromincluded the recognition of $660 million in net deferred credits as a result of a change in accounting principles. See Note 1.

(i)(e)
Includes the dilutive effects of outstanding optionsOptions and, for years prior to 2004, warrants to acquire Common Shares.

(j)(f)
Book value per share plus unamortized deferred credits less goodwill and the equity in net unrealized gains from Symetra's fixed income portfolio per Common and equivalent Common Share. The 2002 fully converted tangible book value per share assumes outstanding convertible preference shares to be equivalent Common Shares.

(k)(g)
During 2003, 677,966 Common Shares were issued in satisfaction of Convertible Preference Shares. During 2004, 1,724,200 Common Shares were issued in satisfaction of warrants exercised.

(h)
Includes outstanding convertible preference shares, optionsConvertible Preference Shares, Options and warrants to acquire Common Shares.Shares, when applicable.

(l)(i)
In accordance with its adoption of Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" ("SFAS 141"), the Company recognized all of its outstanding deferred credits on January 1, 2002. See Note 1.

(j)
In accordance with its adoption of SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), on July 1, 2003, the Company reclassified its outstanding mandatorily redeemable preferred stock from mezzanine equity to liabilities on its balance sheet and, beginning in the third quarter of 2003, White Mountains began presenting all accretion and dividends on its mandatorily redeemable preferred stock as interest expense. See Note 1.

(k)
Extraordinary gains in 2004 resulted from the excess of the fair value over the cost of net assets acquired in the Sirius, Symetra, Tryg-Baltica and Sierra transactions.

(l)
For a description of the historical factors affecting OneBeacon's loss and LAE reserves prior to the OneBeacon Acquisition, see "Non-Asbestos and Environmental Reserves" under the caption "Loss and Loss Adjustment Expense Reserves" in the "OneBeacon" section of the business description contained within the Company's Amendment No. 6 to Form S-3 dated July 17, 2003 (the "Form S-3"). Such portion of the Form S-3 is incorporated by reference into this Form 10-K.

40



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Within the following discussion, "Investment results" represents comprehensive net income provided by after-tax investment income, realized and unrealized investment gains and losses. "Underwriting results" represents comprehensive net income (losses) provided by after-tax insurance and/or reinsurance results only (i.e., earned premiums and other revenues related to insurance and reinsurance operations less losses and LAE, insurance and reinsurance acquisition expenses and general and administrative expenses). References made to OneBeacon's operations relating to periods prior to the Acquisition have been made solely to illustrate significant trends and changes in OneBeacon's business that have occurred post-Acquisition. White Mountains' reported results for periods prior to June 1, 2001 did not include the financial results of OneBeacon.

        The following discussion contains "forward-looking statements". White Mountains intends statements which are not historical in nature, and are hereby identified as forward-looking statements, to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. White Mountains cannot promise that its expectations in such forward-looking statements will turn out to be correct. White Mountains' actual results could be materially different from and worse than its expectations. See "Forward-Looking Statements" "FORWARD-LOOKING STATEMENTS"for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

The following discussion also includes two non-GAAP financial measures, adjusted comprehensive net income and fully converted tangible book value per share, that have been reconciled to their most comparable GAAP financial measures (see page 55). White Mountains believes these measures to be more relevant than comparable GAAP measures in evaluating White Mountains' financial performance.




RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002

Overview

        White Mountains ended 2004 with a fully converted tangible book value per Common Share of $343, which represents an increase of 18% (including dividends) over the fully converted tangible book value per Common Share of $291 as of December 31, 2003. During 2003, fully converted tangible book value per Common Share increased by 13% (including dividends) from $259 as of December 31, 2002.

        Adjusted comprehensive net income was $539 million for 2004, compared to $360 million in 2003. Net income for 2004 was $419 million, compared to $281 million in 2003.

        The growth in book value was driven by strong investment results, particularly equities which returned 20%, and $180 million in transaction gains. This more than offset the impact of higher than expected losses from catastrophes and prior year reserve development. The growth in earnings was primarily driven by the transaction gains as both 2004 and 2003 had strong investment results.

        All three business segments performed well. OneBeacon's combined ratio in 2004 was 99%, the second consecutive year it was below 100%, and Esurance earned a profit for the first time in 2004. White Mountains Re had a combined ratio of 104% due to 11 points from catastrophes. However, the segment contributed $140 million in transaction gains and therefore was a significant contributor to the Company's growth in book value for the year.




Fully Converted Tangible Book Value Per Share

        The following table presents the Company's tangible book value per share for the years ended December 31, 2004, 2003, and 2002 2001 AND 2000and reconciles this non-GAAP measure to the most comparable GAAP measure.

 
 December 31,
 
 
 2004
 2003
 2002
 
Book value per share numerators (in millions):          
Common shareholders' equity $3,883.9 $2,979.2 $2,407.9 
 Proceeds from assumed exercise of outstanding warrants    300.0  300.0 
 Benefits to be received from share obligations under employee benefit plans  6.7  7.0  8.8 
 Remaining accretion of subsidiary preferred stock to face value  (108.1) (125.5) (139.1)
  
 
 
 
Book value per share numerator  3,782.5  3,160.7  2,577.6 
 Equity in net unrealized gains from Symetra's fixed maturity portfolio  (56.6)    
 Assumed conversion of convertible preference shares to Common Shares      219.0 
 Unamortized goodwill of consolidated limited partnerships  (20.0) (20.3)  
  
 
 
 
Fully converted tangible book value per common and equivalent share numerator $3,705.9 $3,140.4 $2,796.6 
  
 
 
 
Book value per share denominators (in millions):          
Common Shares outstanding  10,772.8  9,007.2  8,351.4 
 Common Shares issuable upon exercise of outstanding warrants    1,724.2  1,714.3 
 Share obligations under employee benefit plans  46.6  50.6  61.9 
  
 
 
 
Book value per share denominator  10,819.4  10,782.0  10,127.6 
 Assumed conversion of convertible preference shares to Common Shares      678.0 
  
 
 
 
Fully converted tangible book value per common and equivalent share denominator  10,819.4  10,782.0  10,805.6 
  
 
 
 
Book value per share $349.60 $293.15 $254.52 
Fully converted tangible book value per common and equivalent share  342.52  291.27  258.82 
  
 
 
 


Review of Consolidated Results

        A tabular summary of White Mountains' consolidated financial results for the years ended December 31, 2004, 2003 and 2002 2001 and 2000 follows:

 
 Year Ended December 31,
Millions, except per share amounts

 2002
 2001(2)
 2000
Total revenues $4,185.4 $3,234.4 $850.9
Total expenses  4,066.0  3,661.9  492.8
Net income (loss)  748.1  (259.3) 407.9
Comprehensive net income (loss)  950.4  (301.8) 447.6
  
 
 
Diluted net income (loss) per share: $80.75 $(84.75)$68.89
Book Value per Common and equivalent Common Share:         
 Book value per share $254.52 $160.36 $177.07
 Fully converted tangible book value per share  258.82(1) 225.81  187.65
  
 
 

(1)
Fully converted tangible book value per share assumes outstanding convertible preference shares to be equivalent Common Shares.

(2)
Includes OneBeacon's results from June 1, 2001, the date of the Acquisition.
 
 Year Ended December 31,
 
Millions

 
 2004
 2003
 2002
 
 Gross written premiums $4,792.1 $3,823.4 $4,421.6 
  
 
 
 
 Net written premiums $3,904.8 $3,007.7 $3,293.5 
  
 
 
 
Revenues          
 Earned insurance and reinsurance premiums $3,820.5 $3,137.7 $3,576.4 
 Net investment income  360.9  290.9  366.0 
 Net realized investment gains  181.1  162.6  156.0 
 Other revenue  190.5  202.6  109.5 
  
 
 
 
  Total revenues  4,553.0  3,793.8  4,207.9 
  
 
 
 
Expenses          
 Losses and LAE  2,591.1  2,138.1  2,638.2 
 Insurance and reinsurance acquisition expenses  743.5  615.0  804.3 
 Other underwriting expenses  521.3  347.1  401.7 
 General and administrative expenses  309.3  201.8  92.7 
 Accretion of fair value adjustment to loss and LAE reserves  43.3  48.6  79.8 
 Interest expense—debt  49.1  48.6  71.8 
 Interest expense—dividends and accretion on preferred stock subject to mandatory redemption  47.6  22.3   
  
 
 
 
  Total expenses  4,305.2  3,421.5  4,088.5 
  
 
 
 
Pretax income $247.8 $372.3 $119.4 
 Income tax expense  (47.0) (127.6) (11.7)
 Accretion and dividends on mandatorily redeemable preferred stock of subsidiaries    (21.5) (40.9)
 Equity in earnings of unconsolidated affiliates  37.4  57.4  14.0 
  
 
 
 
Net income before accounting changes and extraordinary items $238.2 $280.6 $80.8 
 Excess of fair value of acquired net assets over cost  180.5    7.1 
 Cumulative effect of changes in accounting principles      660.2 
  
 
 
 
Net income $418.7 $280.6 $748.1 
 Other comprehensive income  176.5  79.0  202.3 
  
 
 
 
Comprehensive net income $595.2 $359.6 $950.4 
Less: Change in net unrealized gains from Symetra's fixed maturity portfolio  (56.6)    
  
 
 
 
Adjusted comprehensive net income $538.6 $359.6 $950.4 
  
 
 
 

Consolidated Results—Year Ended December 31, 2004 versus Year Ended December 31, 2003

        White Mountains' total revenues increased by 20% in 2004 compared to 2003. Growth in revenues was driven by the 22% increase in earned premiums due to the Sirius Acquisition and Atlantic Specialty transactions. Net investment income grew 24% in 2004 primarily due to the income earned on the additional invested assets acquired in the Sirius Acquisition offset by decreased net invested assets at OneBeacon.



        White Mountains' total expenses grew 26% for 2004 as loss and LAE, insurance acquisition and underwriting expenses were all up due to the Sirius Acquisition and Atlantic Specialty transactions. General and administrative costs were up 53% in 2004, primarily due to an increase in incentive compensation accruals, which were driven by a 41% rise in White Mountains' stock price during the year. White Mountains ended 2002 with a fully converted tangible book value per Common Shareexpenses its full cost of $258.82, which represents a 15% increase over the fully converted tangible book value per Common Share of $225.81 as of December 31, 2001 (which includes the recognition of unamortized deferred creditall incentive compensation programs. This expense is spread among loss and goodwill balances at that time). Investment gainsLAE, other underwriting expense and improved underwriting results in itsgeneral and administrative expense for White Mountains' insurance and reinsurance operating subsidiaries, contributed todepending upon the function of the employees being compensated. For Other Operations, it is entirely included in general and administrative expenses.

        White Mountains' increasenet income in book value and2004 also benefitted from $181 million in fully converted tangible book value during 2002. White Mountains' return on equity in 2002 was 15.1% as measured bytransaction gains: $111 million from the Company's growth in its fully converted tangible book value per share plus dividends.

        OneBeacon's resultsSirius Acquisition, $41 million for the year endedSymetra investment, $20 million from the Tryg-Baltica acquisition and $9 million from the Sierra Group acquisition.

Consolidated Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002 reflected improvements over 2001 results. Steps taken since June 1, 2001

        White Mountains' total revenues decreased by 10% in 2003 compared to improve the business, favorable market conditions and good weather have all contributed to this improvement. OneBeacon's core trade ratio (as defined2002, as an increase in the

41



"Summary of Operationsearned reinsurance premiums at Folksamerica was more than offset by Segment,a decrease in earned insurance premiums at OneBeacon Underwriting Results" section below) improved to 98% for 2002, versus 116% for the year ended December 31, 2001 (which included approximately five points as a result of the terrorist attacks of September 11, 2001, "the Attacks"). OneBeacon's overall trade ratio (which includes business subjecttransferred to Liberty Mutual under the Liberty Agreement. Total revenues in 2003 were also impacted by decreased net investment income due to the Renewal Rights Agreementrun-off of loss reserves from OneBeacon's other businesses as well as the reduced interest rate environment. The decline in total revenues in 2003 was partially offset by an increase in other revenues, primarily as a result of $50 million in gains recorded during 2003 related to the sale of several real estate properties previously written-off under purchase accounting for OneBeacon and certaina $30 million increase in fees and commissions for business placed by WMU.

        Total expenses decreased by 16% in 2003 as compared to 2002, as loss and LAE, as well as insurance acquisition and other insurance products)underwriting expenses, decreased at OneBeacon as a result of improved to 109% for 2002, versus 120% forunderwriting performance on its on-going businesses and as the year ended December 31, 2001 (which included approximately three pointscontinued run-off of unprofitable business through the Liberty Agreement. In addition, interest expense on debt decreased 32% in 2003 as a result of the Attacks). White Mountains expects OneBeacon's operations, particularly its core operations,repayment of the $260 million of debt in November 2002 and the refinancing of $700 million of debt in May 2003. Also contributing to the decrease in expenses was a decrease in the accretion of the fair value adjustment to the reserves acquired as part of the OneBeacon Acquisition. This accretion will continue to improvedecrease as those acquired reserves are paid over time. Partially offsetting these expense decreases was an increase in general and administrative expense of $109 million in 2003 asover 2002, primarily due to an increase in incentive compensation accruals, which were driven by a 42% rise in White Mountains' stock price during 2003.


Income Taxes

        The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. The majority of the effects of better pricing, underwriting and claims management continue to emerge and as businessCompany's worldwide operations are taxed in the United States. Income earned or losses incurred by non-U.S. companies will generally be subject to an overall effective tax rate lower than that imposed by the Renewal Rights Agreement continues to be reduced. In 2003, OneBeacon expects to generate an underwriting profit by taking advantage of its strong balance sheet and the hard market which exists in many sectors.United States.

        Folksamerica'sThe income tax provision related to pretax earnings for 2004, 2003 and 2002 represents an effective tax rate of 19.0%, 34.3% and 9.8%, respectively. White Mountains' effective tax rate for 2004 was lower than the U.S. statutory combined ratio, as adjusted to includerate of 35% primarily from income generated in jurisdictions other than the favorable effectsUnited States and from the recognition of retroactive reinsurance, improved to 99%foreign tax credits, offset by taxes incurred from an internal restructuring of the company. White Mountains' effective tax rate for 2002 was lower than the U.S. statutory rate of 35% primarily from 120% for 2001 (which included twelve points of catastrophe losses, including approximately six points as a result ofincome generated in jurisdictions other than the Attacks). The statutory combined ratio for 2002 included three points of catastrophe losses, mainly due to $9.7 million of additional losses related to the Attacks and $6.6 million of net incurred losses related to European floods during the third quarter of 2002. Aside from the lower level of incurred catastrophe losses, the improvement in Folksamerica's 2002 results is attributable to the continuing positive trends in reinsurance pricing, terms and conditions that began before, and became more dramatic after, the Attacks. White Mountains expects the favorable trends in Folksamerica's operations to continue in 2003 as the effects of better prices, terms and conditions are further reflected in its underwriting results. White Mountains also expects to experience favorable results in 2003 from its other reinsurance operations (consisting of Fund American Re, WMU and its investment in Montpelier) as they continue to develop under favorable market conditions.United States.

42




        A summary of White Mountains' after-tax comprehensive net income for the years ended December 31, 2002, 2001 and 2000 follows:

 
 Year Ended December 31,
 
Millions

 
 2002
 2001
 2000
 
Underwriting results by segment:          
 OneBeacon $(137.3)$(426.3)$ 
 Reinsurance  23.1  (87.3) (59.6)
 Other operations  (29.8) (27.4) (1.1)
  
 
 
 
Consolidated underwriting results  (144.0) (541.0) (60.7)
Investment results by segment:          
 OneBeacon  439.5  220.9   
 Reinsurance  156.5  31.5  64.7 
 Other operations  (15.1) 19.8  32.0 
  
 
 
 
Consolidated investment results  580.9  272.2  96.7 
Holding company and financing activities—other operations  (153.8) (141.2) 370.2 
Recognition of net deferred credits by segment:          
 Reinsurance  27.2  30.7  19.3 
 Other operations  640.1  77.5  22.1 
  
 
 
 
Consolidated recognition of net deferred credits  667.3  108.2  41.4 
Comprehensive net income (loss) by segment:          
 OneBeacon  302.2  (205.4)  
 Reinsurance  206.8  (25.1) 24.4 
 Other operations  441.4  (71.3) 423.2 
  
 
 
 
Consolidated comprehensive net income (loss) $950.4 $(301.8)$447.6 
  
 
 
 


I. Summary of Operations By Segment

        White Mountains conducts its operations through three distinctfour segments: (i) "OneBeacon", (ii) "White Mountains Re" (consisting solelyprimarily of the operations of OneBeacon)Folksamerica, Sirius and WMU), (ii) "Reinsurance" (consisting of Folksamerica, Fund American Re, WMU(iii) "Esurance" and White Mountains' investment in Montpelier) and (iii)(iv) "Other Operations" (consisting of Peninsula, American Centennial, British Insurance Company, Esurance and the operations of the Company and its intermediate subsidiary holding companies).companies, White Mountains' segment information is presentedinvestments in Note 13 toits Montpelier and Symetra warrants and the Consolidated Financial Statements.International American Group). White Mountains manages all of its consolidated investments through its wholly owned subsidiary, White Mountains Advisors LLC ("WM Advisors"), therefore, a discussion of White Mountains' consolidated investment resultsoperations is provided belowincluded after the segmented operating results discussion.discussion of operations by segment. White Mountains' segment information is presented in Note 13 to the Consolidated Financial Statements.

OneBeacon

        Financial results for OneBeacon reported comprehensive net income of $302.2 million for the yearyears ended December 31, 2004, 2003 and 2002 consisting of $439.5 million of comprehensive net income from investment results, offset by a net underwriting loss of $137.3 million. OneBeacon's comprehensive net loss was $205.4 million for the seven months ended December 31, 2001, which consisted of a net underwriting loss of $426.3 million, offset by $220.9 million in comprehensive net income from investment results.follows:

43


 
 Year Ended December 31,
Millions

 2004
 2003
 2002
 Gross written premiums $2,657.5 $2,250.9 $3,351.6
  
 
 
 Net written premiums $2,459.1 $1,972.5 $2,522.8
  
 
 
 Earned insurance and reinsurance premiums $2,378.5 $2,160.3 $2,870.9
 Net investment income  221.4  223.7  314.0
 Net realized investment gains  129.6  127.0  113.0
 Other revenue  141.8  90.5  14.4
  
 
 
  Total revenues  2,871.3  2,601.5  3,312.3
  
 
 
 Losses and LAE  1,545.2  1,475.6  2,131.3
 Insurance and reinsurance acquisition expenses  442.3  394.2  629.6
 Other underwriting expenses  369.2  258.7  329.2
 General and administrative expenses  122.2  67.6  22.4
 Interest expense on debt  1.0  .3  
  
 
 
  Total expenses  2,479.9  2,196.4  3,112.5
  
 
 
Pretax earnings $391.4 $405.1 $199.8
  
 
 

    Underwriting Results

        The following tables provide the underwriting results of OneBeacon's four underwriting sub-segments for the twelve months ended December 31, 2002 and for the seven months ended December 31, 2001:

 
 OneBeacon
 
Twelve Months Ended December 31, 2002
Millions

 
 Personal
 Commercial
 Specialty
 Total Core
 Non-Core
 Total
 
Net written premiums $1,092.1 $454.6 $284.1 $1,830.8 $692.0 $2,522.8 
  
 
 
 
 
 
 
Earned insurance premiums $1,015.5 $527.4 $253.4 $1,796.3 $1,074.6 $2,870.9 
Loss and LAE  (714.3) (351.9) (143.3) (1,209.5) (921.8) (2,131.3)
Insurance acquisition expenses  (160.4) (75.2) (67.6) (303.2) (325.9) (629.1)
Other underwriting expenses  (103.5) (72.2) (28.2) (203.9) (120.0) (323.9)
  
 
 
 
 
 
 
Net pre-tax underwriting gain (loss) $37.3 $28.1 $14.3 $79.7 $(293.1)$(213.4)
Income tax benefit from underwriting results                 76.1 
                 
 
Comprehensive net loss from underwriting                $(137.3)
                 
 
 
 OneBeacon
 
Seven Months Ended December 31, 2001
Millions

 
 Personal
 Commercial
 Specialty
 Total Core
 Non-Core
 Total
 
Net written premiums $513.2 $358.0 $139.8 $1,011.0 $867.2 $1,878.2 
  
 
 
 
 
 
 
Earned insurance premiums $521.5 $427.5 $127.0 $1,076.0 $1,132.2 $2,208.2 
Loss and LAE  (444.7) (449.6) (79.9) (974.2) (1,099.6) (2,073.8)
Insurance acquisition expenses  (87.5) (77.8) (26.3) (191.6) (211.6) (403.2)
Other underwriting expenses  (53.1) (100.6) (16.0) (169.7) (238.8) (408.5)
  
 
 
 
 
 
 
Net pre-tax underwriting gain (loss) $(63.8)$(200.5)$4.8 $(259.5)$(417.8)$(677.3)
Income tax benefit from underwriting results                 251.0 
                 
 
Comprehensive net loss from underwriting                $(426.3)
                 
 

44


        The following tables provide OneBeacon's tradeGAAP ratios, for the twelve months ended December 31, 2002 and comparative trade ratios for the twelve months ended December 31, 2001.

 
 OneBeacon
 
Twelve Months Ended December 31, 2002

 Personal
 Commercial
 Specialty
 Total Core
 Non-Core
 Total
 
Trade Ratios(a),(b):             
Loss and LAE 69%67%57%66%86%74%
Expense 29%36%33%32%40%35%
  
 
 
 
 
 
 
Total 98%103%90%98%126%109%
  
 
 
 
 
 
 
 
 OneBeacon
 
Twelve Months Ended December 31, 2001

 Personal
 Commercial
 Specialty
 Total Core
 Non-Core
 Total
 
Trade Ratios (a),(b):             
Loss and LAE 84%92%64%85%90%88%
Expense 26%35%35%31%34%32%
  
 
 
 
 
 
 
Total 110%127%99%116%124%120%
  
 
 
 
 
 
 

(a)
The trade ratio is a modified statutory combined ratio. A statutory combined ratio is calculated by adding (i) the ratio of incurred loss and LAE to earned premiums (the "loss and LAE ratio") and (ii) the ratio of commissions, premium taxes and other underwriting expenses, including general and administrative expenses, to written premiums (the "expense ratio"). In calculating OneBeacon's trade ratio, the expense ratio is modified by dividing certain other underwriting expenses, including general and administrative expenses, by earned premiums rather than written premiums. OneBeacon believes that the trade ratio is the best measure of the underwriting performance of its business because it relates the elements of the expense ratio relating to the cost of producing the business tonet written premiums and the elements relating to the cost of operating the business to earned premiums. For purposes of the trade ratio, fees earned by AutoOne Insurance,insurance premiums for OneBeacon's limited assignment distribution businessongoing businesses and in New York, have been reflected as a reduction of net loss and LAE incurred. Statutory accounting principles reflect such fees as a reduction of general and administrative expenses.

(b)
A GAAP combined ratio is calculated by adding (i) the loss and LAE ratio and (ii) the ratio of acquisition and other expenses to earned premiums. The GAAP combined ratio differs from the trade ratio in the expense ratio calculation. The GAAP combined ratio measures all expenses to earned premiums whereas the trade ratio measures acquisition costs to written premiums. Additionally, GAAP results record fees earned by AutoOne Insurance as premiums as compared to reduction of net loss and LAE incurred for trade ratio purposes. The GAAP combined ratio also reflects differences between statutory accounting principles and GAAP, such as in accounting for deferred acquisition costs, pensions and post-retirement benefits and certain purchase accounting adjustments. Also, during 2002, GAAP curtailment gains on OneBeacon's pension and retiree health care plans are not included in the trade ratio. OneBeacon's total GAAP combined ratio for the years ended December 31, 20022004, 2003, and 2001 was 107%2002:

Twelve Months Ended December 31, 2004

 Specialty
 Personal
 Commercial
 Total(1)
 
GAAP Ratios:             
Loss and LAE  59% 62% 56% 65%
Expense  31% 32% 41% 34%
  
 
 
 
 
 Total Combined  90% 94% 97% 99%
  
 
 
 
 
Dollars in millions

  
  
  
  
 
Net written premiums $848.5 $724.7 $807.1 $2,459.1 
  
 
 
 
 
Earned insurance premiums $812.0 $723.8 $703.3 $2,378.5 
  
 
 
 
 
Twelve Months Ended December 31, 2003

 Specialty
 Personal
 Commercial
 Total(1)
 
GAAP Ratios:             
Loss and LAE  54% 61% 61% 68%
Expense  32% 30% 34% 30%
  
 
 
 
 
 Total Combined  86% 91% 95% 98%
  
 
 
 
 
Dollars in millions

  
  
  
  
 
Net written premiums $733.7 $676.8 $426.7 $1,972.5 
  
 
 
 
 
Earned insurance premiums $694.9 $744.7 $432.0 $2,160.3 
  
 
 
 
 
Twelve Months Ended December 31, 2002

 Specialty
 Personal
 Commercial
 Total(1)
 
GAAP Ratios:             
Loss and LAE  64% 71% 67% 74%
Expense  28% 26% 33% 33%
  
 
 
 
 
 Total Combined  92% 97% 100% 107%
  
 
 
 
 
Dollars in millions

  
  
  
  
 
Net written premiums $696.6 $845.2 $454.6 $2,522.8 
Earned insurance premiums $564.3 $871.3 $527.4 $2,870.9 
  
 
 
 
 

(1)
Includes results from reciprocals (consolidated beginning April 1, 2004) and 123%, respectively.run-off operations. Results from reciprocals are net of business assumed by OneBeacon, which is contained in Personal Lines.

        OneBeacon's underwriting results for the year endedOneBeacon Results—Year Ended December 31, 2002 improved from those for the seven months after the date of the Acquisition. Improved pricing and other market conditions, mild weather and actions taken since the Acquisition have contributed to the improvements. Additionally, OneBeacon shifted its commercial lines business mix away from historically less profitable lines, such as workers compensation and its contractors book within commercial multiple peril. Workers compensation represented 14% of OneBeacon's total commercial lines net written premiums in 2002, down from 20% in 2001. OneBeacon's contractors book represented 17% of total commercial multiple peril lines net written premiums in 2002, down from 21% in 2001. Regional premium writings declined

45



further during 2002 as the book continued to be repositioned for improved profitability. Concentrations of value in New York City, other urban areas and the Atlantic seacoast were decreased to reduce OneBeacon's exposure to terrorism and coastal wind damage. Specialty and AutoOne Insurance premium writings grew and are expected to continue to grow in 2003. The trade ratio for core operations was 98% for the year ended2004 versus Year Ended December 31, 2002 compared to 116% for all of 2001. Net written premiums and earned premiums for core operations were both $1.8 billion for the year ended 2002 and $1.8 billion and $1.9 billion, respectively, for all of 2001, as price increases were offset by reductions in volume necessary to re-underwrite the book and reduce exposure to catastrophe claims.2003

Overview

        OneBeacon's total tradepretax income for 2004 was $391 million, compared to pre-tax income of $405 million for 2003 and its GAAP combined ratio including non-core business, was 109%99% for 2004, compared to 98% for 2003. The earnings and combined ratios for each period were relatively consistent as each period had solid performance for the current underwriting year, ended December 31, 2002 comparedpartially offset by some adverse development in prior year's reserves. In total, adverse development was $100 million in 2004 (relating primarily to 120% for all of 2001. Net written premiums and earned premiums on OneBeacon's total business were down to $2.5 billion and $2.9 billion, respectively, in 2002 from $3.5 billion and $3.9 billion, respectively, for all of 2001, as premiums from non-core operations continued to run-off.

        Loss and LAE totalled $2.1 billion for both the year ended December 31, 2002 and for the seven months ended December 31, 2001. A full year over year comparison showed a decrease of $1.4 billion from $3.5 billionprior accident years) and $147 million in 2001, which is2003 (relating primarily due to the drop in business volume resulting from the Renewal Rights Agreement. Loss and LAE for 2002 included $57.4 million of reserve strengthening recorded during the fourth quarter of 2002 after OneBeacon completed a detailed study on its non-asbestos and environmental reserves. As previously described, OneBeacon has A&E coverage under the NICO Cover. Management believes the NICO Cover will be adequate to cover all of its A&E obligations. Reserves for accident years 2000 and prior were increased by $97.4 million, while reserves for accident year 2001 were reduced by $40.0 million. Reserve increases for 2000 and prior accident years primarily relate to increases in reserves for workers compensation coverages reduced by decreases in reserves for unallocated LAE. Workers compensation reserves for accident years 2000 and prior (primarily 2000, 1999 and 1998) increased $155.3 million (on reserves of $1.2 billion as of December 31, 2001)years).

The 2002 reserve increases2004 development related primarily to a continuing unfavorable trend of increasespersonal auto liability, general liability and multiple peril reserves due in workers compensation medicalpart to emerging trends in claims experienced in OneBeacon's run-off operations, as



well as national account and indemnity costs. Based on a study providedprogram claims administered by the National Council on Compensation Insurance ("NCCI"), a not-for-profit rating, statisticalthird parties. These claim trends principally included higher defense costs and data management services organization and a significant source for workers compensation data, medical claims costs rose an average of 14% during 2002, compared with an average of 12% during 2001. Increases of this magnitude were not expected when setting 2001 reserves. Average workers compensation indemnity costs rose 11% during 2002 compared with an increase of 9% during 2001. Decreases in reserves for unallocated LAE resultedhigher damages from completion of an activity-based-cost study which indicated future claim servicing costs were less than originally projected. This decreaseliability assessments. The 2003 development was primarily related to multiple perilconstruction defect claims. Adverse development in 2004 and general2003, respectively, was partially offset by the release of approximately $20 million and $30 million of the New York assigned risk liability coverages. The reductiondue to the shrinking New York assigned risk pool.

        OneBeacon's total revenues for 2004 increased by 10% compared to 2003, due principally to an increase in reserves for accident year 2001 was due in large part to favorable development on property lossesearned premiums resulting primarily from the Attacks.Atlantic Specialty Transaction. Total revenues for 2004 were also impacted by an increase in other revenues due mainly to the commencement of two new private equity funds managed by Tuckerman Capital, a group of private equity funds that are consolidated as a result of White Mountains' significant investment in the funds.

        OneBeacon's total expenses for 2004 increased 13% compared to 2003, primarily as a result of increased incentive compensation accruals driven by the 41% rise in White Mountains' share price in 2004, partially offset by the release of $20 million of the New York assigned risk liability. The release of this liability resulted from the continued effects of favorable revisions to the structure of credit programs. General and administrative expenses were higher in 2004 due mainly to the commencement of two new private equity funds managed by Tuckerman Capital, a group of private equity funds that are consolidated as a result of White Mountains' significant investment in the funds.

        During the fourth quarter of 2001,2004, OneBeacon increased net reserves for prior accident years by $64.6 million ($426.0 million before recoveriessold two of approximately $361.4 million under the General Reinsurance Cover). These increases in net reserves related to long-tail linesits subsidiaries, Potomac Insurance Company of business, primarily for accident years 1998 through 2000. Reserve increases before recoveries under the General Reinsurance Cover were primarily from $205.4 million for workers compensation (on reserves as of December 31, 2000 of $998.2 million), $34.0 million for general liability (on reserves as of December 31, 2000 of $1.2 billion), $152.2 million for multiple peril (on reserves as of December 31, 2000 of $1.3 billion)Illinois ("Potomac") and $58.9 million for commercial automobile liability (on reserves as of December 31, 2000 of $676.1 million). As further described in Amendment No. 3 to Form S-3 (filed March 14, 2003)Western States Insurance Company ("Western States"), these increases in reserves reflected the impact of external factors as well as OneBeacon-specific factors. External factors includedits boiler inspection service business, and recognized gains on the emergencesales of construction defect$22 million through other revenues.

        Specialty Lines.    The specialty lines combined ratio was 90% for 2004, compared to the 2003 combined ratio of 86%. The 2004 combined ratio was higher than 2003 primarily due to losses medical inflation, a general deterioration in market pricing, terms and conditions, adverse judicial rulings and higher-than-anticipated legal costs.

46



These external factors were also experienced throughoutrelating to the property and casualty insurance industry as evidenced by adverse development reported since 2000 by other property and casualty insurers. A significant portion of the 2001 reserve increases is attributable OneBeacon-specific factors including changesfour storms in the mixsoutheastern United States that impacted IMU and better than expected weather losses in 2003. Written premiums for specialty lines were up 16% in 2004, driven by growth in writings at OBPP and AutoOne Insurance, as well as the introduction of business written by General AccidentOBSP in 2004, a new division offering coverages to the excess and surplus property market.

        Personal Lines.    The combined ratio for personal lines for 2004 was 94%, compared to a lesser extent, Commercial Union during the mid-1990s that along with being2003 combined ratio of 91%. The 2004 personal lines combined ratio was adversely impacted by external factors, in hindsight, was poorly written and priced. White Mountains has taken significant actions with respect to OneBeacon since it completed the Acquisition including (1) shedding non-core businesses through the Renewal Rights Agreement, (2) increasing prices, (3) reevaluating the risks, terms and conditions associated with renewing certain policies (and in appropriate cases declining to issueseven points as a renewal policy), (4) eliminating unprofitable products, accounts and agents, (5) improving the claims adjudication, settlement administration and processing functions and (6) improving management information systems and deploying new technology to contribute to process improvement and overall results. See "Loss and Loss Adjustment Expense Reserves" within the "ONEBEACON" sectionresult of Item 1 of this report.

        Insurance acquisition expenses, which consist primarily of commission expenses, totalled $629.1 million for the year ended December 31, 2002. For the seven months ended December 31, 2001, insurance acquisition expenses totalled $403.2 million. A full year over year comparison showed a decrease of $124.9 million from $754.0 million in 2001, which is principallyincreased incentive compensation accruals, partially offset by three points due to the reduction of the New York assigned risk liability. The 2003 combined ratio benefitted by four points due to a reduction of the New York assigned risk liability. Premiums in this line grew 7% due in part to improved production of new business and increased retention levels and also $47 million in premiums assumed from New Jersey Skylands Insurance Association through a quota-share reinsurance agreement.

        Commercial Lines.    The combined ratio for commercial lines for 2004 was 97%, compared to the 2003 combined ratio of 95%. The 2004 combined ratio was a bit higher as a result of transition and integration costs related to the Atlantic Specialty Transaction and adverse results from its non-Atlantic Mutual New York commercial lines book. The 2004 loss ratio includes two points relating to the four storms in the southeastern United States, which primarily related to Atlantic Specialty business in that area. Excluding these losses, the commercial lines loss ratio significantly improved. Premiums in this line grew by 89% primarily due to the Atlantic Specialty Transaction.

        During the third quarter of 2004, OneBeacon entered into an agreement to sell the renewal rights to most of its non-Atlantic Mutual New York commercial lines business to Tower Insurance Group. The transaction, effective with December 1, 2004 renewals, will remove approximately $110 million of premiums over the next year.



OneBeacon Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002

Overview

        OneBeacon's pretax income for 2003 was $405 million, compared to pre-tax income of $200 million for 2002, and its GAAP combined ratio was 98% for 2003 compared to 107% for 2002. All of OneBeacon's ongoing businesses—specialty, personal and commercial lines—delivered combined ratios below 100% in 2003 and, in the second half of 2003, its premiums from its ongoing businesses grew for the first time since the OneBeacon Acquisition.

        OneBeacon's total revenues for 2003 declined by 21% compared to 2002, due principally to a 25% decline in earned premiums, resulting primarily from a reduction in premiums assumed under the Liberty Agreement. Total revenues for 2003 were also impacted by a 29% decrease in business volume resulting fromnet investment income due to the Renewal Rights Agreement.runoff of loss reserves as well as the reduced interest rate environment. Other revenues increased significantly in 2003 due mainly to fee revenue generated by New Jersey Skylands Management LLC and certain consolidated limited partnerships.

        OneBeacon's total expenses for 2003 declined by 29% compared to 2002, primarily as a result of reduced premium writings and improved underwriting performance. Total expenses in 2003 included a net $147 million reserve increase in OneBeacon's runoff operations, primarily related to prior year construction defect claims, that was partially offset by an approximate $30 million release of the New York assigned risk liability due to the shrinking New York assigned risk pool. General and administrative expenses totalled $323.9increased significantly in 2003 due mainly to expenses generated by New Jersey Skylands Management LLC and certain consolidated limited partnerships.

        During the fourth quarter of 2003, OneBeacon sold one of its subsidiaries, National Farmers Union Standard Insurance Company ("NFU Standard"), for $22 million forand recognized a $9 million gain on the sale through other revenue.

        Specialty Lines.    The combined ratio in 2003 was 86%, a six point improvement over the 92% reported in 2002. This was driven by good underwriting results across OneBeacon's various specialty businesses, as well as favorable development in AutoOne Insurance's prior year ended December 31, 2002. Forreserves, which positively impacted the seven months ended December 31, 2001, general and administrative expenses totalled $408.5 million. A full year over year comparison showed a decreasecombined ratio by two points. OneBeacon wrote specialty lines premiums of $282.2 million from $606.1$734 million in 2001.2003, up 5% over 2002, mostly due to an increase in business written by OBPP and IMU.

        Recurring general        Personal Lines.    The combined ratio in 2003 was 91%, a six point improvement over the 97% reported in 2002 as price increases achieved in 2002 and administrative expenses did not decrease proportionately to2003 flowed through into underwriting results. In addition, the 2003 period reflected the reduction in OneBeacon's premiums in 2002, as the costs related to overhead and other administrative functions which previously supported the book of business transferred to Liberty Mutual are being reduced more slowly than the corresponding premium volume. General and administrative expenses for 2003 will eventually reflect the elimination of overhead functions that will no longer be needed to support the business transferred to Liberty Mutual. Management expects that its general and administrative expenses will continue to decrease in 2003 as it takes further cost reduction initiatives. During 2002, OneBeacon's cost-reduction initiatives included the curtailment of its pension and retiree medical plan and a reduction in costs related to headcount, excluding costs relating to new operations such as AutoOne Insurance and OBPP. As a result of the curtailment of OneBeacon's pension plan and retiree health benefits, general and administrative expenses in 2002 include a pre-tax gain of $35.1 million. Effective January 1, 2003, OneBeacon adopted an employee stock ownership plan, which is a OneBeacon-funded, qualified retirement plan. Management believes that its employee benefits plans are now aligned with the interests of White Mountains' shareholders, as its plans are now performance oriented, not entitlement oriented.

    Core Underwriting Results

        Core operations consist of personal and commercial lines sold through agents in the Northeast, and specialty businesses underwritten in various geographic areas. Core operations do not include business transferred to Liberty Mutual through the Renewal Rights Agreement and certain other insurance operations.

    Personal Lines.

        OneBeacon writes the majority of its personal business in New York Massachusetts, New Jersey and Maine. New York, Massachusetts and New Jersey are all states with difficult automobile regulatory environments and significant involuntary market loads. A dedicated staff with expertise inassigned risk liability, discussed above, which lowered the unique regulatory aspects of each state manages each business.

47


        Throughout its personal lines business, OneBeacon has focused on improving its underwriting results. OneBeacon improved premium adequacy in 2002 through rate increases approvedcombined ratio by regulators, re-underwriting efforts, aggressive rate pursuit actions and continued improvement in insurance-to-value programs in its homeowners line. As a result, OneBeacon achieved price increases of 19% and 22% in automobile and homeowners, respectively, during 2002, compared with increases of 4% and 7% in 2001. OneBeacon's mix of personal lines products for automobile, homeowners and Custom-Pac products was 62%, 18% and 15%, respectively, of personal lines net written premium for 2002, compared with 61%, 16% and 15% for all of 2001.three points. OneBeacon's personal lines written premium volume for 2003 decreased 20% from core operations for 2002, increased 27% as compared to all of 2001 due primarily to new business produced by AutoOne Insurance. Excluding AutoOne Insurance written premium and LAD servicing fees, written premium volume decreased 9% from written premium for all of 2001. This decrease is due to re-underwriting efforts such as actions to reduce exposure to windstorms on property located in coastal areas, a decision to reduce exposureareas. Also contributing to the private passenger automobile businessdecrease were declines in Massachusetts due to unfavorable market conditions and the formation of a reciprocal insurance carrier in New Jersey. In 2003, personal lines written premiumpremiums relating to the transfer of OneBeacon's private passenger automobile business in New Jersey will continue to decline due to the transfer of OneBeacon's business to a newly formed reciprocal carrier, New Jersey Skylands Insurance Association (see "New Jersey Skylands" within the "ONEBEACON" section of Item 1 of this report).in 2002.

        AutoOne Insurance, a division of OneBeacon, became a limited assignment distribution carrier in late 2001 in order to capitalize on significant market opportunities created by the growth of the NYAIP. During 2002, AutoOne Insurance wrote premiums and billed LAD fees of approximately $203 million for policies written for third parties. AutoOne Insurance has completed its LAD contracting for 2003, with 21 third parties committed for approximately $162 million of NYAIP quota premium and LAD fees. The Automobile Insurance Plans Service Office ("AIPSO"), a management organization and service provider for various insurance industry groups, has projected that total NYAIP quota premiums for 2003 will be relatively flat compared to 2002 at between $1.1 billion and $1.2 billion. Rate increases implemented in the NYAIP program during 2002, along with overall improved loss ratios due to changes in plan mix (a higher percentage of standard risks flowing into the assigned risk pool) associated with growth in NYAIP volume, have led to better pricing and resulted in a decrease in the average LAD fee for contracts covering the 2003 year. Such decreases in LAD fees were expected and management believes that the margins in the program remain adequate for the coming year and that underwriting results will remain acceptable.

    Commercial Lines.

        Commercial    The combined ratio in 2003 was 95%, a five point improvement over the 100% reported in 2002 as the Company's efforts to re-underwrite its book took hold, partially offset by prior year reserve development of three points. OneBeacon's commercial lines underwriting results significantly improved inwritten premium volume for 2003 decreased 6% from 2002, primarily due to the positive impact of underwriting and pricing initiatives as well as good weather. However, they fell short of OneBeacon's target due to thecontinued effects of large losses and a significant decrease in OneBeacon's premium base. Premium written for 2002 decreased 33% from all of 2001 primarily due to actions taken to reduce the concentration of risks subject to terrorism, exposure,such as well as continued efforts to re-underwrite the commercial book, terminate underperforming accountsreducing total insured values in 11 major cities, and agencies and tighten credit terms toward market standards. 2001's trade ratio includes approximately 13 points of losses attributable to the Attacks. OneBeacon's mix of commercial lines products for multiple peril, commercial automobile andreductions in workers compensation was 52%, 29% and 14% of OneBeacon's commercial lines net written premium for 2002, compared with 46%, 22% and 20% during all of 2001. Price increases of 21% were achieved for business written during 2002 as compared to 16% for all of 2001.writings.

    Specialty Lines.        Run-off Operations.

        Overall underwriting results for specialty businesses were excellent with written premiums growing due to rate increases, favorable weather conditions, high renewal retentions and new business. During

48


2002, OneBeacon wrote Specialty lines premiums of $284.1 million, a 28% increase as compared to $221.6 million written during all of 2001. The 2002 written premium includes $109.0 million from IMU and $103.0 million from Agri, representing 18% and 11% increases in written premium, respectively, as compared to all of 2001. Specialty lines written premium also includes $28.7 million of new written premiums during 2002 from D&O, professional liability and medical provider excess markets coverages written by OBPP, which commenced operations in February 2002.

    Non-core Underwriting Results

        Results for OneBeacon's non-core businesses during 2002 were worse than expected. Written premiums decreased to $692.0 million in 2002, from $1.7 billion for all of 2001, generating a pre-tax underwriting loss of $293.1 million for 2002. For the seven months ended December 31, 2001, non-core business generated a pre-tax underwriting loss of $417.8 million.

        Non-core operations include the results of business subject to the reinsurance provisions of the Renewal Rights Agreement. For 2002, written premiums on business subject to the Renewal Rights Agreement decreased to $496.7 million from $1.4 billion for all of 2001. In 2002, OneBeacon also recognized a $22.8 million pretax write-off of deferred acquisition costs associated with its business subject to the Renewal Rights Agreement.

        In accordance with the Renewal Rights Agreement, a reinsurance agreement pro-rates results so that OneBeacon assumed approximately two-thirds of the operating results and cash flows from renewals through October 31, 2002 and assumes approximately one-third of the operating results and cash flows from renewals from November 1, 2002 to October 31, 2003. Beyond November 1, 2003, net written premiums from business subject to the Renewal Rights Agreement will be nil, although OneBeacon has an option to assume 10% of all of Liberty Mutual's regional agency markets business for the years 2004 to 2006 on a pari passu basis with Liberty Mutual. In addition, OneBeacon will receive commissions of 3% of written premiums on policies transferred to Liberty Mutual that are renewed in the year after the Renewal Rights Agreement expires.

        The Renewal Rights Agreement was undertaken so that OneBeacon could exit a substantial portion of its non-core businesses and further strengthen and focus on its core commercial and personal lines located in the Northeast and its core specialty operations where it historically had better operating results. The underwriting performance of the business subject to the Renewal Rights Agreement historically had, and for the remainder of the Renewal Rights Agreement is expected to continue to have, a higher relative underwriting loss than that of OneBeacon's core businesses. Therefore, although OneBeacon's premium levels have declined, and are expected to continue to decline, as a result of the Renewal Rights Agreement, OneBeacon's future results of operations and financial position are expected to improve from what OneBeacon would have expected had the agreement not been executed.

        Liberty Mutual has control over a variety of factors which could impact the underwriting performance of Renewal Rights Agreement business, such as pricing adequacy, actual renewal premium volume, claims management, catastrophe exposures and other considerations. Management believes Liberty Mutual has done an acceptable job in each of these areas except for the handling of pre-November 1, 2001 claims.    Pursuant to the Renewal RightsLiberty Agreement, Liberty Mutual assumed control of OneBeacon's claims offices in the regions subject to the Renewal RightsLiberty Agreement and iswas responsible for servicing claims from the OneBeacon policies written prior to November 1, 2001, as well as policies



which have renewed in those regions since that date. Service agreements were put in place in connectionEffective July 11, 2003, the servicing agreement with the Renewal Rights Agreement, through which Liberty Mutual became a TPA for those claims. Upon review of claims information during the thirdwas amended and fourth quarters of 2002, OneBeacon's management determined that average paid claims in offices where Liberty was acting as a TPA were higher than expected. As a result, management has begun a process to directly handle more

49



of thoseOneBeacon took back substantially all remaining outstanding claims related to policies written prior to the Renewal Rights AgreementLiberty Agreement.

        During the second quarter of 2003, OneBeacon claims and expectsactuarial personnel noticed an unusual spike in case reserves related to the policies taken back from Liberty Mutual. The spike was isolated primarily to incurred losses on construction defect claims which were approximately $38 million higher than expected. There were 924 new claims, 32% higher than expected. The four states with the largest number of new construction defect claims were California, Nevada, Colorado and Arizona (345 of the total 924 new claims). As a result, OneBeacon claims and actuarial personnel undertook a study to determine the cause of the increase. This study, which was completed in the third quarter of 2003, indicated that substantially allmost of the increase in activity was due to differences in case reserving philosophies between OneBeacon's and Liberty's claims adjusters, such as the identification and coding of construction defect claims. However, the study also indicated that some of the increase in activity related to an increase in the severity of construction defect claims will be handled directly bystemming from increased litigation and resulting adverse court decisions. As a result, OneBeacon byrecorded an increase for construction defect claim reserves of $98 million in the endthird quarter of 2003.

SeeReinsuranceConstruction Defect Claims in CRITICAL ACCOUNTING ESTIMATES below for further background on construction defect claims.

    Folksamerica.White Mountains Re

        Folksamerica reported comprehensive net income of $106.3 million for 2002, consisting of $75.2 million of comprehensive net income from investment results, a net underwriting gain of $3.9 million and $27.2 million from the recognition of net deferred credits. Folksamerica reported a comprehensive net loss of $25.5 million for 2001, which consisted of a net underwriting loss of $86.4 million, offset by $33.2 million in comprehensive net income from investmentFinancial results and $27.7 million from the recognition of net deferred credits. Folksamerica reported comprehensive net income of $24.4 millionGAAP combined ratios for 2000, which consisted of $64.7 million in comprehensive net income from investment results and $19.3 million from the recognition of net deferred credits, offset by a net underwriting loss of $59.6 million.

    Underwriting Results

        A summary of Folksamerica's underwriting resultsWhite Mountains Re for the years ended December 31, 2004, 2003 and 2002 2001 and 2000 follows:

 
 Year Ended December 31,
 
Dollars in millions

 
 2002
 2001
 2000
 
Net written premiums by line of business:          
 Liability $381.6 $310.6 $208.4 
 Property  205.3  93.5  91.6 
 Accident and Health  68.1  25.1  26.4 
 Other  23.7  29.7  6.2 
  
 
 
 
Net written premiums $678.7 $458.9 $332.6 
  
 
 
 
Earned premiums  620.5  421.5  312.5 
Other revenues  11.7  3.2  .9 
Losses and LAE  (431.9) (385.0) (271.2)
Reinsurance acquisition expenses(1)   (147.5) (124.6) (98.0)
General and administrative expenses  (52.2) (44.0) (30.0)
Interest expense  (2.0) (.4) (8.2)
  
 
 
 
 Pre-tax net underwriting loss  (1.4)$(129.3)$(94.0)
Income tax benefit on underwriting results  5.3  42.9  34.4 
  
 
 
 
 Comprehensive net income (loss) from underwriting results $3.9 $(86.4)$(59.6)
  
 
 
 
Statutory combined ratios(2):          
 Loss and LAE ratio  74%  91%  88% 
 Expense ratio  29  34  38 
  
 
 
 
   Statutory combined ratio  103%  125%  126% 
 Effects of retroactive reinsurance and acquisition protection(3)   (4 (5 (9)
  
 
 
 
   Adjusted statutory combined ratio  99%  120%  117% 
  
 
 
 

(1)
The 2002 reinsurance acquisition expenses exclude $7.9
 
 Year Ended December 31,
Millions

 2004
 2003
 2002
 Gross written premiums $1,933.3 $1,414.9 $982.0
  
 
 
 Net written premiums $1,246.3 $885.7 $688.2
  
 
 
 Earned insurance and reinsurance premiums $1,265.5 $845.8 $635.0
 Net investment income  98.5  50.4  51.5
 Net realized investment gains  29.6  7.7  30.3
 Other revenue  36.1  75.5  53.6
  
 
 
  Total revenues  1,429.7  979.4  770.4
  
 
 
 Losses and LAE  918.9  557.6  442.2
 Insurance and reinsurance acquisition expenses  271.8  198.0  161.2
 Other underwriting expenses  122.9  57.8  41.0
 General and administrative expenses  15.1  19.6  20.6
 Accretion of fair value adjustment to loss and LAE reserves  10.1    
 Interest expense on debt  3.8  2.0  2.0
  
 
 
  Total expenses  1,342.6  835.0  667.0
  
 
 
Pretax earnings $87.1 $144.4 $103.4
  
 
 
 
 Years Ended December 31,
 
 
 2004
 2003
 2002
 
GAAP ratios:       
 Loss and LAE 73%66%70%
 Expense 31%30%32%
  
 
 
 
  Total Combined 104%96%102%
  
 
 
 

White Mountains Re Results—Year Ended December 31, 2004 versus Year Ended December 31, 2003

        White Mountains Re's GAAP combined ratio increased from 96% in 2003 to 104% in 2004, due primarily to $135 million of claims incurred related to significant property catastrophe events in intra-segment commissions paid to WMU and $4.6 million in inter- segment commissions paid to Esurance, allthe second half of 2004. These catastrophes, which are eliminated in White Mountains' consolidated results.

(2)
A statutorydiscussed further below, increased the combined ratio is calculatedin 2004 by adding (i)11 points. In general, White Mountains Re has experienced favorable underwriting conditions for the ratiopast three underwriting years. Earnings from business segments not impacted by the property catastrophe events, and earnings from the recently completed Sirius Acquisition, have partially offset the impact of incurred loss and LAE to earned premiums (the "loss and LAE ratio") and (ii) the ratio of commissions, premium taxes and other

50


    underwriting expenses, including general and administrative expenses, tothese natural disasters. Net written premiums, (the "expense ratio").

(3)
Folksamerica's statutory combined ratios do not take into accounttotal revenues, and total expenses were all up substantially in 2004 due to the full favorable impact of the retroactive coverage provided by the Imagine CoverSirius Acquisition.

        Gross written premiums increased $518 million, or the indemnification of losses associated with certain of Folksamerica's acquisitions in recent years. The reinsurance benefit recorded in its statutory financial statements on recoverables for adverse development on prior years' reserves is not included in Folksamerica's statutory combined ratio under statutory accounting principles; however, adverse development on reserves covered under this contract is required37% from 2003 to be included in its statutory combined ratio. Folksamerica believes that the adjusted statutory combined ratio is a better measure of the full economic impact of its reinsurance results.

        Folksamerica's comprehensive net income from underwriting results of $3.9 million for 2002 was an improvement of $90.3 million over the comprehensive net loss from underwriting results of $86.4 million for 2001. Folksamerica's financial results improved during 2002 and are expected to continue to improve in 2003 as the effects of favorable reinsurance conditions are recognized in underwriting results. In 2002, Folksamerica experienced significant rate increases and improved terms across virtually all lines of business written.

        Folksamerica's gross2004, and net written premiums increased $361 million, or 41% for the same period. This increase is due primarily to the Sirius Acquisition, which contributed $612 million of gross written premiums and $418 million of net written premiums during 2004. Included in these amounts is the U.S. program business written by Sirius America totaling $216 million of gross written premiums and $85 million of net written premiums. Additionally, in late 2003, White Mountains Re, through Folksamerica, entered into the CNA Re agreement and established a Chicago underwriting office. Annual gross written premiums for the 2004 underwriting year resulting from this transaction and the related opening of the Chicago underwriting office were $965.3approximately $177 million, of which $129 million was recorded as gross written premium and $678.7$91 million as net written premium for the year ended December 31, 2004. Partially offsetting the increases resulting from these transactions was the cancellation of several large casualty treaties at Folksamerica whose pricing or terms did not meet White Mountains Re's underwriting guidelines.

        There were significant levels of property catastrophe activity during the last half of 2004, including the four hurricanes which affected the Southeast United States and the Caribbean, where White Mountains Re has historically been a significant participant in the property reinsurance market. Additionally, Sirius International was exposed to losses from the devastating tsunami that impacted South Asia in December 2004. White Mountains Re believes its underwriting discipline and risk management approach helped to contain these losses to manageable levels. This significant property catastrophe activity during the last half of 2004 resulted in $135 million of pre-tax losses, including $16 million related to the tsunami. There was no significant property catastrophe activity in 2003.

        During 2004, White Mountains Re recorded $11 million of net unfavorable loss reserve development, which contributed 1 point to the loss ratio in 2004, as compared to $46 million, or 5 points in 2003. The 2003 unfavorable development is described in further detail in the section titled White Mountains Re Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002, below. The majority of the unfavorable development recorded in 2004 resulted from certain discontinued lines at Folksamerica as well as run-off operations acquired as part of the Sirius Acquisition. This unfavorable development was partially offset by favorable development in the Sirius International reserve portfolio, stemming mainly from the three most recent underwriting years, and is indicative of the favorable terms and conditions that have existed in the global reinsurance marketplace during that time. Additionally, White Mountains Re recorded $10 million of unfavorable loss development on its workers compensation reserves acquired as part of the Sierra acquisition in 2004. This adverse development was offset dollar-for-dollar by the adjustable note discussed in Note 2—Significant Transactions.

        White Mountains Re receives fee income on reinsurance placements referred to Olympus and is entitled to a profit commission based on net underwriting profits on referred business. The additional capacity provided by the reinsurance relationship with Olympus supports White Mountains Re's ability to offer significant reinsurance protection. White Mountains Re recognized net fee income of $69 million from Olympus in 2004 as compared to $98 in 2003. The decline in the fee income earned is



due primarily to the negative impact of the four hurricanes on the profit commission arrangement between White Mountains Re and Olympus.

White Mountains Re Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002

        White Mountains' Re's pretax income was $144 million for 2003, an increase of 40% over the $103 million recorded in 2002. White Mountains Re's GAAP combined ratio improved to 96% for 2003, from 102% for 2002. The improvement in White Mountains Re's combined ratio resulted primarily from more favorable terms and conditions in the reinsurance marketplace, and fewer catastrophe losses affecting White Mountains Re in 2003 as compared to 2002.

        White Mountains Re's gross written premiums increased 44% from 2002 respectively, representing an approximately 50%to 2003, while net written premiums increased 29% and 48% increase over 2001.earned premiums increased 33%. The increase wasincreases in net written and earned premiums were due to increased pricing on Folksamerica'sWhite Mountains Re's expiring and renewed contracts, increased shares on renewed contactscontracts and new contracts resulting from the increased demand of reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers.

        White Mountains expects this trendRe's total revenues were up 27% in 2003 over 2002, primarily driven by a 33% increase in earned premiums. The increase in earned (and net written) premiums was due to continue for the foreseeable future, particularly considering the announced withdrawalincreased pricing on White Mountains Re's expiring and renewed contracts, increased shares on renewed contracts and new contracts resulting from the marketincreased demand of several reinsurers and the potential effect of negative rating agency actions in regard to certain other reinsurers in the last several months.reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers. Also contributing to the increase in net written premiumsrevenues in 2003 was Folksamerica's new relationship with WMU, which has resulted in referrals of international reinsurance placements to Folksamerica. Additionally, under a new quota share agreement, Folksamerica cedes up to 75% of substantially all underwritten business referred to it by WMU and 75% of substantially all its short-tailed, non-casualty excess of loss business to Olympus. Folksamerica also receives an override commission on all premiums ceded to Olympus. The additional capacity provided by the quota share relationship with Olympus and the $400$49 million cash contribution it received from OneBeacon in December 2001 enhanced Folksamerica's ability to provide significant reinsurance capacity in 2002, a period of strengthening prices. Folksamerica's significant increase in premiums for 2001 versus 2000 was primarily attributable to additional writings across most lines in response to improved terms and conditions in the overall reinsurance market.

        Folksamerica's 2002 losses and LAE include $6.6 million, net of reinstatement premiums, related to European Floods during the third quarter of 2002 as well as $9.7 million of additional losses related to the Attacks. These catastrophe losses accounted for 3 points of Folksamerica's adjusted statutory combined ratio of 99% for 2002. Folksamerica's 2002 comprehensive net income from underwriting also includes $11.7 million of other revenues, of which $7.3 million related to the take down of certain accruals established in connection with its acquisition of PCA. Folksamerica's losses and LAE for 2002 included $17.0 million related to prior accident years. This prior year development consisted primarily of (i) additional losses of $9.7 million relating to the Attacks, (ii) additional losses of $7.3 million from aviation insurance coverage, in relation to the Risk Capital business, (iii) reserve additions relating to asbestos and environmental losses of $11.4 million, (iv) $3.5 million of adverse development relating to the remaining business from the USF Re acquisition, offset by (v) $17.0 million of net income recorded during the first quarter from the reversal of an allowance for doubtful reinsurance recoveries related to PCA. These losses, with exception of the those relating to the Attacks, are covered under the Imagine Cover, and were partially offset by amortization of the deferred gain related to retroactive reinsurance (see below).

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        During 2001, Folksamerica recorded gross losses from the Attacks of approximately $104.0 million, or approximately $25.0 million net of reinsurance recoverables and reinstatement costs. This loss represented approximately six points of its 2001 statutory combined ratio. Folksamerica also established a reserve of $5.0 million for Enron-related surety exposures in 2001.

        Folksamerica's 2001 losses and LAE included $25.0($98 million in losses related to prior accident years representing (i) higher than expected reported losses2003 vs $49 million in Folksamerica's property excess line2002) in advisory fees and (ii) an increase in reserves related to losses arising from the portfolios acquired from the USF Re and Risk Capital. Folksamerica's losses and LAE for 2000 included $22.9 million related principally to prior accident years representing losses arising from the portfolios acquired with USF Re and Risk Capital, nearly all of which was covered under the Imagine Cover described below.

        Folksamerica's underwriting results do not take into account the full favorable impact of the retroactive coverage provided by the Imagine Cover or the indemnification of losses associated with certain of Folksamerica's acquisitions in recent years. The reinsurance benefit recorded on recoverables for adverse development on prior years' reserves are deferred and recognized into income over the expected settlement period of the underlying claims. The reinsurance benefits obtained from this contract totaled $21.7 million and $22.2 million for 2002 and 2001, respectively. The adverse loss development ceded under the retroactive reinsurance agreement in 2002 included A&E losses of $11.4 million and losses relating to the business acquired with Risk Capital of $7.3 million. There is approximately $9.9 million of coverage remaining under this contract.

    Montpelier.

        As of December 31, 2002, White Mountains' investment in Montpelier consists of common shares, which are accounted for under the equity method, and warrants to acquire additional common shares at a fixed price, which are accounted for in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Through its holdings of common shares and warrants, White Mountains owned approximately 21% of Montpelier on a fully-converted basis as of December 31, 2002. Pre-tax amounts recordedprofit commissions received by White Mountains relating to its investment in Montpelier as of and for the periods ended December 31, 2002 and 2001 follow:

Millions

 Common
Shares

 Warrants
 Total
 
Original cost of White Mountains' investment in Montpelier as of December 6, 2001 $180.0 $ $180.0 
Equity in loss from Montpelier common shares  (3.0)   (3.0)
Equity in net unrealized investment gains from Montpelier's investment portfolio  .4    .4 
  
 
 
 
White Mountains' investment in Montpelier as of December 31, 2001 $177.4 $ $177.4 
Realized gains from Montpelier warrants $ $58.0 $58.0 
Equity in earnings from Montpelier common shares  30.7    30.7 
Equity in net unrealized investment gains from Montpelier's investment portfolio  5.7    5.7 
  
 
 
 
White Mountains' investment in Montpelier as of December 31, 2002 $213.8 $58.0 $271.8 
  
 
 
 
Fair Value of White Mountains' investment in Montpelier as of December 31, 2002 $311.0 $58.0 $369.0 
  
 
 
 

        As of December 31, 2002, Montpelier's shareholders' equity totalled approximately $1.3 billion versus $860.7 million as of December 31, 2001. Montpelier wrote net premiums of $565.9 million for 2002. Earned premiums totalled $329.9 million for 2002.

52



        During 2002, Montpelier reported net income of $152.0 million, with comprehensive net income of $185.7 million. Montpelier's 2002 reported return on equity on a diluted basis was 18% and its GAAP combined ratio was 67%.

        A large portion of Montpelier's business is global specialty property reinsurance which has large aggregate exposures to natural and man-made disasters. As such, management expects that Montpelier's claim experience from this business will be the result of relatively few claims of high magnitude. The occurrence of claims from catastrophic events is likely to result in substantial volatility in, and could have a material adverse effect on, Montpelier's financial condition and results and their ability to write new business.

    WMU.

        WMU generated comprehensive net income of $24.7 million for 2002. WMU receives management feesRe on reinsurance placements referred to Olympus, and is entitleddue principally to a profit commission on net profits on referred business. During 2002, WMU placed $120.2 millionan increase in written premiums withthe volume of business ceded to Olympus and recorded $14.4 million and $21.3in 2003.

        White Mountains Re experienced approximately $46 million of management feesunfavorable loss reserve development during 2003, primarily due to strengthening of A&E reserves and profit commissions from Olympus. WMU generatedreserves on Risk Capital casualty lines. White Mountains Re's 2003 loss development for A&E exposures was due to the completion of a net lossdetailed A&E market share study. This study compared Folksamerica's share of $.3 million for 2001, representing start-up costsindustry paid losses to estimated industry carried reserves and resulted in Folksamerica increasing its first month of operations.IBNR by approximately $25 million.



    Fund American Re.Esurance

        Fund American Re reported a comprehensive net loss of $5.8 million for 2002, consisting of a net underwriting loss of $6.1 million, offset by a net investment return of $.3 million. Fund American Re's 2002 underwritingEsurance's financial results were primarily comprised of $55.3 million of earned premiums ($62.5 million written) offset by loss and LAE of $46.9 million (includes $3.7 million of incurred losses related to European floods during the third quarter of 2002), acquisition expenses of $13.6 million and general and administrative expenses of $6.8 million. Fund American Re's underwriting results also includes $4.6 million in service fee revenues and $1.6 million in adverse development losses related to contracts acquired as part of Fund American Re's purchase of the international reinsurance operations of Folksam International in December 2001. Under terms of a note issued to Folksam in connection with the purchase, Fund American Re was able to reduce the face value of that note during 2002 by the $1.6 million in adverse loss development, with a corresponding amount recorded as other revenues. At December 31, 2002, the remaining balance on the note was $1.7 million.

        Fund American Re reported comprehensive net income of $2.4 million for 2001, consisting of a net underwriting loss of $.6 million and a $3.0 million extraordinary gain on the purchase of the net assets of Folksam in December 2001.

Other Operations

        White Mountains' other operations are comprised of the Company, the International American Group, Esurance and the Company's intermediate holding companies. A summary of White Mountains'

53



after-tax comprehensive net income from its other operationsGAAP combined ratios for the years ended December 31, 2004, 2003 and 2002 2001 and 2000 follows:

 
 Year Ended December 31,
 
Millions

 
 2002
 2001
 2000
 
Underwriting results $(29.8)$(27.4)$(1.1)
Investment results  (15.1) 19.8  32.0 
Holding company and financing activities  (153.8) (141.2) 370.2 
Recognition of net deferred credits  640.1  77.5  22.1 
  
 
 
 
Comprehensive net income (loss) from other operations $441.4 $(71.3)$423.2 
  
 
 
 
     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
     Gross written premiums $201.3 $116.4 $53.0 
      
     
     
     
     Net written premiums $199.4 $116.4 $53.0 
      
     
     
     
     Earned insurance and reinsurance premiums $176.5 $99.9 $40.8 
     Net investment income  3.5  1.3  1.2 
     Net realized investment gains  1.1  .2   
     Other revenue  2.2  .3  1.6 
      
     
     
     
      Total revenues  183.3  101.7  43.6 
      
     
     
     
     Losses and LAE  122.4  81.0  36.6 
     Insurance and reinsurance acquisition expenses  29.4  18.8  9.7 
     Other underwriting expenses  27.7  20.4  22.4 
      
     
     
     
      Total expenses  179.5  120.2  68.7 
      
     
     
     
    Pretax earnings (loss) $3.8 $(18.5)$(25.1)
      
     
     
     
     
     Years Ended December 31,
     
     
     2004
     2003
     2002
     
    GAAP ratios:       
     Loss and LAE 69%81%89%
     Expense 33%39%80%
      
     
     
     
      Total Combined 102%120%169%
      
     
     
     

    Underwriting Results.Esurance Results—Year Ended December 31, 2004 versus Year Ended December 31, 2003

        Comprehensive net lossesEsurance's pretax income of $4 million for 2004 represented an improvement over the pretax loss of $19 million in 2003. Esurance's 2004 combined ratio improved to 102% from underwriting results for 2002120% in 2003 due to improvements in both loss and 2001 primarily consistexpense ratios. Esurance's loss ratio improvement resulted from the continued rollout and refinement of Esurance's after-tax underwriting losses during its start upproprietary auto insurance program. Loss ratio improvement also resulted from better claims performance, driven by the transition from a third party administrator to an in-house claims operation in 2003, as well as 3 points of favorable development on loss reserves.

        The auto program, combined with Esurance's self-service, web-enabled operating platform, allowed Esurance to increase premium volume and development stagein-force policy count while reducing the expense ratio from 39% to 33%. As of $19.5December 31, 2004, Esurance's in-force count was 118,513 policies, a 60% increase over December 31, 2003. Increased advertising, particularly in radio and TV, drove policy count growth.

Esurance Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002

        The trends described above that drove Esurance's favorable results in 2004 relative to 2003 also benefitted the 2003 results in relation to 2002. Thus, the pretax loss for Esurance decreased by $7 million in 2003 and $15.2 million, respectively,the combined ratio fell 49 points, while net written premiums more than doubled.



Other Operations

        Other Operations consists of the operations of the Company and after-tax underwriting losses atthe Company's intermediate subsidiary holding companies and the International American Group, of $10.3 millionas well as White Mountains' investments in Montpelier and $12.2 million, respectively.

        During 2002, substantially all of the business generated by Esurance was directly written or assumed by subsidiariesSymetra warrants. A summary of White Mountains. The underwritingMountains' financial results of this business are included infrom its Other Operations segment for the underwriting unit that ultimately retains the risk under the policies written through Esurance. The following table summarizes Esurance's results on an enterprise-wide basis (i.e., including the underwriting results of business written within the OneBeaconyears ended December 31, 2004, 2003 and Reinsurance segments):2002 follows:

 
 Year Ended December 31,
 
Millions

 
 2002
 2001
 
Net written premiums $52.6 $17.4 
  
 
 
Earned premiums  40.8  13.3 
Other revenues  1.6  .3 
Losses and LAE  (36.7) (13.7)
Acquisition expenses  (13.8) (8.7)
General and administrative expenses  (18.2) (13.8)
  
 
 
 Pre-tax net underwriting loss  (26.3)$(22.6)
Income tax benefit from underwriting results  9.2  7.9 
  
 
 
 Comprehensive net loss from underwriting results of Esurance $(17.1)$(14.7)
  
 
 

    Holding Company and Financing Activities.

 
 Year Ended December 31,
 
Millions

 
 2004
 2003
 2002
 
 Gross written premiums $ $41.2 $35.0 
  
 
 
 
 Net written premiums $ $33.1 $29.5 
  
 
 
 
 Earned insurance and reinsurance premiums $ $31.7 $29.7 
 Net investment income  37.5  15.5  (.7)
 Net realized investment gains  20.8  27.7  12.7 
 Other revenue  10.4  36.3  39.9 
  
 
 
 
  Total revenues  68.7  111.2  81.6 
  
 
 
 
 Losses and LAE  4.6  23.9  28.1 
 Insurance and reinsurance acquisition expenses    4.0  3.8 
 Other underwriting expenses  1.5  10.2  9.1 
 General and administrative expenses  172.0  114.6  49.7 
 Accretion of fair value adjustment to loss and LAE reserves  33.2  48.6  79.8 
 Interest expense on debt  44.3  46.3  69.8 
 Interest expense—dividends and accretion on preferred stock subject to mandatory redemption  47.6  22.3   
  
 
 
 
  Total expenses  303.2  269.9  240.3 
  
 
 
 
Pretax loss $(234.5)$(158.7)$(158.7)
  
 
 
 

        White Mountains' capital raising and capital allocation activities are principally conducted through the Company and its intermediate holding companies. In this regard, the results of its holding company and financing activitiesOther Operations segment primarily relate to financing activities, and purchase accounting adjustments relating to the OneBeacon Acquisition, gains and losses recognized from the purchase and sale of certain of the Company's subsidiaries and other assets and general and administrative expenses incurred at the holding company level.

Other Operations Results—Year Ended December 31, 2004 versus Year Ended December 31, 2003

        White Mountains' holding companies recorded $39.2Other Operations segment reported a pre-tax loss of $235 million of other revenuesfor 2004, compared to $159 million for 2003. The increased loss for the year was primarily due to a $20 million increase in incentive compensation accruals, which were driven by a 41% rise in White Mountains' stock price during 2002, which consisted primarily of (i)2004, and higher gains from salesthe sale of certain real estate assets that had previously been written-off as part of purchase accounting for the Acquisitionin 2003 ($13 million in 2004 and (ii) interest income recorded on amounts due resulting from Internal Revenue Service examinations which were finalized during the period. White Mountains' holding companies recorded other revenues of $25.6$43 million during 2001, which

54



consisted primarily of net gains on the sales of certain insurance subsidiaries and net gains on sales of certain real estate assets that had previously been written-off as part of purchase accounting for the Acquisition. White Mountains holding companies recorded other revenue during 2000 of $386.3 million, which consisted almost entirely of the gain resulting from the FSA Sale.

        Interest expense at White Mountains' holding companies totalled $69.8 million for 2002 versus $45.3 million for 2001 and $7.9 million for 2000. The increase in 2003). In addition, interest expense from 2001on preferred stock was up $25 million in 2004 due to 2002 resulted from the effectinclusion of a full twelve monthsyear of borrowings outstanding under the Bank Facilityexpense in pre-tax income in 2004 as opposed to six months included in 2003 as a result of the Company's adoption of SFAS 150, effective July 1, 2003. Prior to the adoption of SFAS 150, the interest expense on preferred stock was classified below the pretax loss line on the income statement as preferred stock dividends.

        During the periods presented, Peninsula was the only seven monthsoperating company in 2001. Interest expense from the Seller Notesegment, and therefore it accounts for all of the premiums reported in the tables above. During January 2004, White Mountains sold Peninsula for $23 million. The operations of American Centennial and British Insurance Company are not significant to White Mountains, as those companies have been in run-off since they were acquired in 1999.



Other Operations Results—Year Ended December 31, 2003 versus Year Ended December 31, 2002

        White Mountains' Other Operations segment reported pre-tax losses of $159 million for both 2003 and 2002. Incentive compensation accruals increased from $10.3by $72 million in 2001 to $12.32003, but this increase was offset by, among other items, a $43 million decrease in 2002 as declining interest rates partially offset the effect of four additional months of interest in 2002. The increase in interest expense from 2000 to 2001 resulted from borrowings under the Bank Facility and the Seller Note which were undertakenlosses on June 1, 2001, offset slightly by reduced interest expense resulting from the Debt Tender and the Debt Escrow transactions (described below). White Mountains has entered into various interest rate swap agreements which were undertaken to achieveand a fixed interest rate on a portion$31 million decrease in the accretion of the Bank Facility. The swap program resultedfair value adjustment on loss reserves acquired in the OneBeacon Acquisition. Interest expense on debt decreased by $24 million in 2003, due to the pay-off of a weighted average fixed rate$260 million loan and the refinancing of 7.1% on $700.0$700 million of its total borrowings undersenior debt and amortization of the Bank Facility.

        In connection with purchase accounting forprevious credit facility. This decrease was offset by the Acquisition, White Mountains was required to discount OneBeacon's loss and LAE reserves and the related reinsurance recoverables by $646.9inclusion of $22 million and $346.9 million, respectively,of interest expense on OneBeacon's balance sheet at June 1, 2001. This net reduction to loss and LAE reserves of $300.0 million is being accreted through an income statement charge ratably with and over the period that the claims are expected to be settled. Aspreferred stock as a result White Mountains recognized $79.8 million and $56.0 million of accretion to loss and LAE reserves during 2002 and 2001, respectively. White Mountains will accrete the remaining $164.2 million over the future periods in which the claims are settled, which is expected to be seven or eight years from the Acquisition.SFAS 150.

        Other holding company expenses consisted primarilyII.    Summary of share-based compensation expenses of holding company employees, including performance shares, options to acquire Common Shares ("Options") and restricted Common Shares ("Restricted Shares"). See "Share-Based Compensation" on page 59.Investment Results

        On June 1, 2001, Berkshire purchased from the Company, for $75.0 million in cash, warrants (the "Warrants") to acquire 1,714,285 Common Shares at an exercise price of $175.00 per Common Share. Of the total Warrants purchased by Berkshire, Warrants to purchase 1,170,000 Common Shares (the "Series A Warrants") were immediately exercisable and Warrants to purchase 544,285 Common Shares (the "Series B Warrants") became exercisable upon shareholder approval at the 2001 Annual Meeting. Share appreciation expense for Series B Warrants of $58.8 million was recorded during 2001 representing an increase in the value of Common Shares during the period in which the Series B Warrants were not exercisable by Berkshire. Upon shareholder approval at the August 23, 2001 Annual Meeting, the Series B Warrants were reclassified to common shareholders' equity.

        In April 2001, the Company completed a tender offer and consent solicitation for $96.3 million in outstanding medium-term notes (the "Debt Tender"), which facilitated the Acquisition by amending the indenture governing its medium-term notes ("the "Notes"). Pursuant to the Debt Tender, the Company repurchased and retired $90.9 million of its Notes and subsequently prepaid, through a fully-funded irrevocable escrow arrangement (the "Debt Escrow"), the balance of the Notes. The Company recorded a $4.8 million extraordinary loss on extinguishment of debt in connection with the Debt Tender and the Debt Escrow during 2001.

        Net income of $95.0 million from discontinued operations was recorded during 2000 related to a tax reserve release associated with the sale of Fireman's Fund Insurance Company ("Fireman's Fund") in 1991.

55



II. Investment Results.Philosophy

        White Mountains manages all of its consolidated investments through its wholly-owned subsidiary, WM Advisors. A breakdown of White Mountains' consolidated investment results for the years ended December 31, 2002, 2001 and 2000 follows:

 
 Year Ended December 31,
 
Millions

 
 2002
 2001
 2000
 
Net investment income $352.7 $284.5 $85.9 
Net realized investment gains (losses)  156.0  173.1  (8.8)
  
 
 
 
Pre-tax investment income and realized gains (losses)  508.7  457.6  77.1 
Income taxes on investment income and realized gains (losses)  (144.1) (143.3) (18.0)
After-tax unrealized investment gains (losses)  202.3  (42.5) 39.7 
After-tax equity in earnings (loss) of unconsolidated affiliates  14.0  .4  (2.1)
  
 
 
 
Comprehensive net income from investments $580.9 $272.2 $96.7 
  
 
 
 

Overview

White Mountains' investment philosophy is to invest allits assets with a view towards maximizing its after-tax total return over extended periods of time. Under this approach, each dollar of after-tax investment income and realized and unrealized gains and losses is valued equally. White Mountains' overall fixed maturity investment strategy is to purchase securities that are attractively priced in relation to perceived credit risks. White Mountains generally manages the interest rate risk associated with holding fixed maturity investments by actively monitoring and maintaining the average duration of the portfolio with the goal of achieving an adequate after-tax total return without subjecting the portfolio to an unreasonable level of interest rate risk. White Mountains' investment portfolio mix as of December 31, 2002 was focused on capital preservation and2004 consisted in large part of high-quality, fixed maturity investments and short-term investments.

        A breakdown ofinvestments, as well as some equity investments and limited partnerships. White Mountains' investment portfolio asmanagement believes that prudent levels of December 31, 2002 and 2001 follows:

 
 December 31,
 
Millions

 
 2002
 2001
 
Fixed maturity investments $6,669.1 75%$6,128.3 68%
Short-term investments  1,790.6 20  2,545.8 28 
Common equity securities  275.0 3  173.6 2 
Other investments  164.7 2  158.0 2 
  
 
 
 
 
Total investments $8,899.4 100%$9,005.7 100%
  
 
 
 
 

        White Mountains' fixed maturity portfolio avoided the significant credit problems experienced throughout the public markets during 2002. As of December 31, 2002, the duration of the fixed maturity portfolio, including short-term investments was approximately 3.4 years. During 2002, OneBeacon began to purchase a modest amount ofin common equity securities and convertible securities, primarily in the electric utility industry.

        Under current market conditions, WM Advisors has been gradually accumulating value equities in response to a fairly valued stock market, and gradually shortening White Mountains' fixed maturity portfolio in response to historically low rates.

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Results

        White Mountains was pleased withother investments within its overall investment results during 2002. White Mountains' fixed maturity portfolios achieved returns while avoiding credit problems and its investments in common equities generated gains for the year despite large losses generally experienced in the U.S. markets. White Mountains' total portfolio provided a pre-tax return of 11.4% during 2002 (valuing White Mountains' equity investment in Montpelier's common shares at quoted market value and excluding interest rate swap contracts) compared to 6.5% in 2001 and 8.9% in 2000.

        White Mountains' net investment income is comprised primarily of interest income associated with its substantial portfolio of fixed maturity investments and dividend income from its equity investments. The significant increase in investment income from 2001 to 2002 was due primarily to the inclusion of a full year of investment income generated by OneBeacon's assets in the 2002 results as compared to the seven months of OneBeacon's post-Acquisition investment activity included in the 2001 results.

        White Mountains recorded $156.0 million of realized investment gains during 2002, compared to $173.1 million during 2001, principally from sales of fixed maturity investments during both periods. During 2002, the Company recognized a $58.0 million gain on its Montpelier warrants in its GAAP financial statements. It recognized a $47.4 million loss related to its interest rate swap agreements due to the decrease in market interest rates during the year. During 2001, White Mountains sold a large portion of its fixed maturity investment portfolio including its portfolio of mortgage-backed securities, and subsequently reinvestedare likely to enhance after-tax total returns without significantly increasing the proceeds in fixed maturity and short-term investments.

        During 2002, White Mountains' net increase in after-tax unrealized investment gains was principally the result of significant decreases in market interest rates. During 2001, the net decrease in after-tax net unrealized gains for investments resulted principally from the realization of gains as a result of White Mountains's sale of a large portion of its fixed maturity investment portfolio.

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Other-than-temporary Impairment

        The following table presents an analysisrisk profile of the continuous periods during which White Mountains has held investment positions which were carried at an unrealized loss as of December 31, 2002 (excluding short-term investments):

 
 December 31, 2002
 
Dollars in Millions

 0–6
Months

 6–12
Months

 Greater Than 12
Months

 Total
 
Fixed Maturity Investments:             
 Number of positions  77  11  25  113 
 Market value $423.1 $22.5 $13.5 $459.1 
 Amortized cost $442.5 $22.7 $15.2 $480.4 
 Unrealized loss $(19.4)$(.2)$(1.7)$(21.3)
  
 
 
 
 
Common Equity Securities:             
 Number of positions  48  2  1  51 
 Market value $119.0 $.6 $.3 $119.9 
 Amortized cost $139.8 $.7 $.4 $140.9 
 Unrealized loss $(20.8)$(.1)$(.1)$(21.0)
  
 
 
 
 
Other Investments:             
 Number of positions  4  2  6  12 
 Market value $5.5 $5.8 $6.8 $18.1 
 Amortized cost $6.5 $6.9 $10.6 $24.0 
 Unrealized loss $(1.0)$(1.1)$(3.8)$(5.9)
  
 
 
 
 
Total:             
 Number of positions  129  15  32  176 
 Market value $547.6 $28.9 $20.6 $597.1 
 Amortized cost $588.8 $30.3 $26.2 $645.3 
 Unrealized loss $(41.2)$(1.4)$(5.6)$(48.2)
  
 
 
 
 
% of total gross unrealized losses  85%  3%  12%  100% 
  
 
 
 
 

        Management believes that the gross unrealized losses recorded on White Mountains' fixed maturity investment portfolio at December 31, 2002 resulted primarily from increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as White Mountains has the intent and ability to retain such investments for a period of time sufficient to allow for any anticipated recovery in market value. Management also believes that the gross unrealized losses recorded on White Mountains' portfolio of common equity and other investments at December 31, 2002 resulted primarily from decreases in quoted market values from the dates that certain investments securities within that portfolio were acquired as opposed to fundamental changes in the issuer's financial performance and near-term financial prospects. Therefore, these decreases are also viewed as being temporary. As of December 31, 2002, no single investment security within White Mountains' investment portfolio had an after-tax unrealized loss of more than $5.0 million.

        White Mountains assesses other-than-temporary impairments based on security-specific facts, circumstances and intentions as of the balance sheet date. During 2002, White Mountains experienced $9.6 million in pretax other-than-temporary impairment charges. Of the charge recorded in 2002, $4.9 million related to White Mountains' investment in Insurance Partners and $3.5 million was related to its investment in the Conning Connecticut Insurance Fund. Both of these investments are limited partnerships that are carried in other investments in White Mountains' consolidated balance sheet.

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White Mountains did not experience any material impairment charges relating to any other individual investment security during any of the three years ended December 31, 2002.

        Temporary losses on investment securities are recorded as unrealized losses. Temporary losses do not impact net income and earnings per common share but do reduce comprehensive net income, shareholders' equity and tangible book value. Unrealized losses subsequently identified as other-than-temporary impairments are recorded as realized losses. Other-than-temporary impairments previously recorded as unrealized losses do not impact comprehensive net income, shareholders' equity and tangible book value but do reduce net income and earnings per common share.

III. Discussion of Other Consolidated Items

Share-based Compensation

        White Mountains' share-based compensation plans, consisting primarily of performance shares, are designed to maximize shareholder valuewhen considered over long periods of time by aligningwhen balanced with leverage and insurance risk considerations. White Mountains seeks to maximize after-tax risk-adjusted returns over the financial interestslong term.


Investment Returns

        White Mountains generated strong investment returns in 2004. The GAAP total return on invested assets was 7%, while the equity portfolio returned 20% for the year. The equity return was significantly better than the S&P 500, which returned 11% for the year, while the bond portfolio performed in line with its duration and credit characteristics. Management is continuing to keep its fixed maturity portfolio duration relatively short at about 3 years to reflect its concern that interest rates may rise in the next few years. Net investment income was up 24% from last year mainly due to the Sirius Acquisition, after declining 21% in 2003 primarily due to the decline in reserves at OneBeacon as its premium volume was reduced.

        White Mountains sold a portion of its management with thoseinvestment in Montpelier common shares during the first quarter of its owners. The Board2004 resulting in a $35 million pre-tax realized gain and, as a result, changed the method of Directors (the "Board") believes that share-based compensationaccounting for its key employees shouldremaining Montpelier common shares to the fair value method, resulting in a $33 million increase in after-tax unrealized gains in the first quarter.

Impairment

        SeeNote 5—Investments of the accompanying consolidated financial statements for White Mountains' analysis of impairment losses on investment securities.




NON-GAAP FINANCIAL MEASURES

        This report includes two non-GAAP financial measures that have been reconciled to their most comparable GAAP financial measures. White Mountains believes these measures to be payablemore relevant than comparable GAAP measures in full only ifevaluating White Mountains' financial performance.

        Adjusted comprehensive net income is a non-GAAP measure that excludes the Company achieves superior returns for its owners. Performance shareschange in net unrealized gains from Symetra's fixed maturity portfolio from comprehensive net income. GAAP requires these assets to be marked-to-market, which results in gains during periods when interest rates fall and losses in periods when interest rates rise. Because the liabilities related to the life insurance and structured settlement products that these assets support are payable upon achievementnot marked-to-market, it is likely that the economic impact on Symetra would be the opposite of pre-defined business goalsthat shown under GAAP (i.e., in general, Symetra's intrinsic value increases when interest rates rise and are valued baseddecreases when interest rates fall). The reconciliation of adjusted comprehensive net income to comprehensive net income is included on page 43.

        Book value per share is derived by dividing the market valueCompany's total GAAP shareholders' equity as of a given date by the number of Common Shares atoutstanding as of that date, including the time awards are earned. Performance shares are typically paid in cash, though they may be paid indilutive effects of outstanding Options and warrants to acquire Common Shares, atas well as the electionunamortized accretion of preferred stock. Fully converted tangible book value per share is a non-GAAP measure which is derived by expanding the Board. The target of White Mountains' performanceGAAP book value per share programs is linkedcalculation to achievement of an overall annualized return of at least equal to the market yield available from a ten-year U.S. Treasury note plus 700 basis points at the time of grant (11% for the 2003 grant). White Mountains' policy is to expense all its share-based compensation, including its outstanding Options. As a result, the Company's calculation of return includes the full expense of all outstanding share-based compensation awards.

        During 2002, 2001 and 2000, White Mountains recorded compensation charges of $63.5 million, $31.6 million and $25.8 million, respectively, for outstanding performance shares. In addition, White Mountains issued 94,500 Restricted Shares in 2001 and issued a one-time award of 81,000 Options during 2000. During 2002 and 2001, White Mountains recorded compensation charges relating to Options of $.7 million and $9.5 million, respectively, and recorded compensation expense charges relating to Restricted Shares of $16.2 million and $10.4 million, respectively.

Deferred Credits

        In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142, which affected the way the Company had previously recognized deferred credits and goodwill. Unamortized deferred credits arising from business combinations prior to July 1, 2001 were recognized through the income statement as a change in accounting principle on January 1, 2002. Deferred credits arising from business combinations on or after July 1, 2001 have been recognized immediately upon completion of the combination through the income statement as an extraordinary gain. Finally, goodwill is no longer systematically amortized over a perceived benefit period and a write down to goodwill is now recognized when it is considered to be impaired.

        On January 1, 2002, in accordance with SFAS No. 141, White Mountains recognized all its unamortized deferred credits, which amounted to $641.4 million at its holding companies, entirely related to its acquisition of

        OneBeacon, and $41.1 million at its reinsurance segment, primarily from Folksamerica's acquisition of PCA. White Mountains also recognized a $22.3 million transitional impairment loss in accordance with SFAS No. 142, primarily related to goodwill associated with Folksamerica's acquisition of Risk

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Capital. All of these items were recognized through the income statement as a cumulative effect of a change in accounting principle.

        In accordance with SFAS No. 141, for the years ended December 31, 2002 and 2001, White Mountains recognized extraordinary gains of $7.1 million and $16.6 million, respectively, at its reinsurance segment representing the excess of fair value of net assets acquired over their costs for acquisitions made after June 30, 2001. Folksamerica recognized $7.1 million during the second quarter of 2002 in connection with its acquisition of Imperial in April 2002 and $13.6 million during the third quarter of 2001 in connection with its acquisition of C-F. Fund American Re recognized $3.0 million during the fourth quarter of 2001 in connection with its acquisition of the net assets of the international reinsurance operations of Folksam in December 2001.

        Prior to its adoption of SFAS Nos. 141 and 142, White Mountains recognized $91.6 million and $41.4 million during 2001 and 2000, respectively, in income from the amortization of deferred credits.

Income Taxes

        The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. The majority of the Company's worldwide operations are taxed in the United States. Income earned or losses incurred by non-U.S. companies will generally be subject to an overall effective tax rate lower than that imposed by the United States.

        The income tax provision related to pretax earnings for 2002, 2001 and 2000 represents an effective tax rate of 9.8%, 41.9% and 12.0%, respectively. White Mountains' effective tax rate for 2002 and 2000 was lower than the U.S. statuory rate of 35% primarily from income generated in jurisdictions other than the United States. White Mountains' effective tax rate for 2001 (resulting from a net loss reported during the period) was greater than the U.S. statutory rate of 35% primarily as a result ofinclude the effects of deferred credit amortization.assumed conversion of all convertible securities and to exclude any unamortized goodwill and net unrealized gains from Symetra's fixed maturity portfolio. The reconciliation of fully converted tangible book value per share to book value per share is included on page 42.


LIQUIDITY AND CAPITAL RESOURCES

Operating cash and short-term investments

Operating Cash and Short Term Investments        Holding company level.

    The primary sources of cash inflows for the Company and certain of its intermediate holding companies are investment income, sales of investment securities, dividends and tax sharing payments received from its insurance and reinsurance operating subsidiaries, financing activities and net investment income and proceeds from sales and maturities of holding company investments. The primary uses of cash are interest payments on the Senior Notes, dividend payments on the Berkshire and Zenith Preferred Stock as well as on Common Shares, purchases of investments and holding company operating subsidiaries.expenses.

        Operating subsidiary level.    The primary sources of cash for White Mountains' insurance and reinsurance operating subsidiaries are premium collections, net investment income and proceeds from sales and maturities of investments. The primary uses of cash are claim payments, policy acquisition costs, operating expenses, the purchase of investments and dividend and tax sharing payments made to parent holding companies.

        Both internal and external forces influence White Mountains' financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to White Mountains and the settlement of the liability for that loss. The exact timing of the payment of claims and benefits cannot be predicted with certainty. White Mountains' insurance and reinsurance operating subsidiaries maintain portfolios of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate cash for the payment of claims.

        Management believes that White Mountains' cash balances, cash flows from operations, routine sales of investments and the liquidity provided by its Bank Facility are adequate to meet expected cash requirements for the foreseeable future on both a holding company and insurance and reinsurance operating subsidiary level.




Dividend Capacity

        Under the insurance laws of the states and jurisdictions under which the holding companies of White Mountains' insurance and reinsurance operating subsidiaries are domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. Accordingly, there can be no assurance regarding the amount of such dividends that may be paid by such subsidiaries in the future. In 2003,Following is a description of the Company's first tierability of White Mountains' insurance and reinsurance operating subsidiaries to pay dividends to the Company and certain of its intermediate holding companies:

OneBeacon:

        Generally, OneBeacon's regulated insurance operating subsidiaries have the ability to pay dividends of approximately $261.5 million to FACduring any 12 month period without the prior approval of regulatory authorities.authorities in an amount equal to the greater of prior year statutory net income or 10% of prior year end statutory surplus, subject to the availability of unassigned funds. As a result, based on 2004 statutory net income, OneBeacon's top tier regulated insurance operating subsidiaries have the ability to pay $325 million of dividends during 2005 without prior approval of regulatory authorities, subject to the availability of unassigned funds. As of December 31, 2004, OneBeacon's top tier regulated insurance operating subsidiaries had $1.3 billion of unassigned funds available for dividend distribution.

        White Mountains' consolidated sourcesIn addition, as of December 31, 2004, OneBeacon had $195 million of cash consist primarilyand investments outside of premium collections,its regulated insurance operating subsidiaries available for distribution during 2005. During 2004, OneBeacon paid $305 million of cash dividends to Fund American.

White Mountains Re:

        Folksamerica's principal regulated reinsurance operating subsidiary has the ability to pay dividends during any 12 month period without the prior approval of regulatory authorities in an amount equal to the lesser of net investment income, financing activities and proceeds from sales and maturitiesas defined by statute, or 10% of investments. White Mountains' consolidated usesstatutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. As a result, based upon December 31, 2004 statutory surplus of $917 million, Folksamerica's principal regulated reinsurance operating subsidiary would have the ability to pay approximately $92 million of dividends during 2005 without prior approval of regulatory authorities, subject to the availability of earned surplus. As of December 31, 2004, Folksamerica's principal regulated reinsurance operating subsidiary had $17 million of earned surplus, therefore it can pay dividends of $17 million plus additional earned surplus reported during 2005, subject to the $92 million limitation discussed above.

        As of December 31, 2004, WMU had $3 million of cash are primarily claim payments,and investments available for distribution during 2005. In addition, WMU has the ability to distribute its 2005 earnings without restriction. During 2004, WMU paid $60 million of cash dividends to its immediate parent.

        In addition, as of December 31, 2004, White Mountains Re had approximately $97 million of cash and investments outside of its regulated insurance and reinsurance operating expenses, financing costs andsubsidiaries available for distribution during 2005.


Safety Reserve

        In accordance with provisions of Swedish law, Sirius International can voluntarily transfer its pretax earnings, or a portion thereof, subject to certain limitations, into an untaxed reserve referred to as a safety reserve. The safety reserve is a Swedish regulatory concept that has no equivalent under GAAP. Accordingly, under GAAP, an amount equal to Sirius International's safety reserve of $1.1 billion at December 31, 2004, net of the purchaserelated deferred tax liability established at the statutory Swedish tax rate of investments.28%, is classified as equity. Generally, this deferred tax liability is only required to be paid by Sirius



International if it fails to maintain predetermined levels of premium writings in future years. As a result of the Renewal Rights Agreement, OneBeacon will run-off the claims on business transferred to Liberty Mutual. Therefore, OneBeacon will need to periodically liquidate invested assets to fund the paymentindefinite deferral of these claims and will manage its short-term liquidity needs accordingly.taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations.


Keep-Well

        Both internal and external forces influence the Company's financial condition, resultsOn November 30, 2004, White Mountains completed a significant corporate reorganization, through which ownership of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up

60



to several years or more, may lapse between the occurrence of an insured loss, the reporting of the lossFolksamerica was transferred to White Mountains Re from Fund American. In order to effect the reorganization, White Mountains and Fund American entered into or amended certain agreements with respect to the settlementBerkshire Preferred Stock. Under the terms of a Keep-Well Agreement dated November 30, 2004 between White Mountains and Fund American (the "Keep-Well"), White Mountains has agreed to return to Fund American up to approximately $1.1 billion, which equals the amount of net assets transferred out of Fund American as a result of the liabilityreorganization, if some or all of that amount is required by Fund American to meet its obligations to Berkshire under the Berkshire Preferred Stock. Additionally, the Keep-Well limits the aggregate amount of distributions that White Mountains may make to its shareholders to approximately $1.3 billion plus White Mountains' aggregate consolidated net income after September 30, 2004. The Keep-Well will expire when all obligations of the Berkshire Preferred Stock, which is redeemable in May 2008, have been satisfied, or when approximately $1.1 billion has been returned to Fund American.


Insurance Float

        Insurance float is an important dynamic of White Mountains' operations that must be managed effectively. Float is money that an insurance company holds for a limited time. In an insurance operation, float arises because premiums are collected before losses are paid. This interval can extend over many years. During that loss. Management believestime, the insurer invests the money. When the premiums that an insurer collects do not cover the Company'slosses and expenses it eventually must pay, the result is an underwriting loss, which is considered to be the cost of float. The amount and cost of float for White Mountains is affected by underlying market conditions, as well as acquisitions or dispositions of insurance and reinsurance businesses. Although insurance float can be calculated using numbers determined under GAAP, insurance float is not a GAAP concept and therefore there is no comparable GAAP measure.


        One of the means by which White Mountains calculates its insurance float is by taking its net investment assets and subtracting its total tangible capital. The following table illustrates White Mountains' consolidated insurance float position as of the past five year-ends:

 
 December 31,
 
($ in millions)

 
 2004
 2003
 2002
 2001
 2000
 
Total investments $10,529.5 $8,547.5 $8,899.4 $9,005.7 $2,102.2 
Cash  243.1  89.9  121.5  67.4  4.4 
Investment in unconsolidated insurance affiliate(s)  466.6  515.9  399.9  311.1  130.6 
Equity in net unrealized gains from Symetra's fixed maturity portfolio  (56.6)        
Accounts receivable on unsettled investment sales  19.9  9.1  160.8  75.2   
Accounts payable on unsettled investment purchases  (30.9) (371.6) (495.2) (311.2) (.2)
Interest-bearing funds held by ceding companies(1)  516.9  70.4  50.1  42.9  23.4 
Interest-bearing funds held under reinsurance treaties(1)  (105.1) (152.5) (236.2) (311.0) (400.6)
  
 
 
 
 
 
 Net investment assets $11,583.4 $8,708.7 $8,900.3 $8,880.1 $1,859.8 
  
 
 
 
 
 
Total common shareholders' equity $3,883.9 $2,979.2 $2,407.9 $1,444.6 $1,046.5 
Debt  783.3  743.0  793.2  1,125.4  96.0 
Preferred stock subject to mandatory redemption  211.9  194.5  180.9  170.3   
Convertible preference shares      219.0     
Less:                
  Unamortized deferred credits and goodwill  (20.0) (20.3)   660.2  66.8 
  Equity in net unrealized gains from Symetra's fixed maturity portfolio  (56.6)        
  
 
 
 
 
 
 Total tangible capital $4,802.5 $3,896.4 $3,601.0 $3,400.5 $1,209.3 
  
 
 
 
 
 
 Insurance float $6,780.9 $4,812.3 $5,299.3 $5,479.6 $650.5 
  
 
 
 
 
 
Insurance float as a multiple of total tangible capital  1.4x 1.2x 1.5x 1.6x 0.5x
Net investment assets as a multiple of total tangible capital  2.4x 2.2x 2.5x 2.6x 1.5x
Insurance float as a multiple of common shareholders' equity  1.7x 1.6x 2.2x 3.8x 0.6x
Net investment assets as a multiple of common shareholders' equity  3.0x 2.9x 3.7x 6.1x 1.8x
  
 
 
 
 
 

(1)
Excludes funds held by ceding companies from which White Mountains does not receive interest credits and excludes funds held by White Mountains under reinsurance treaties for which White Mountains does not provide interest credits.

        White Mountains has historically obtained its float primarily through acquisitions, as opposed to organic growth. For each of the years in the three-year period ending December 31, 2004, White Mountains has had negative cash balances,flows from operations but has generated significant float from its insurance and reinsurance operations. This is due to the fact that White Mountains' cash flow from operations routine salesdoes not reflect cash and investments generated by the acquisition of insurance and



reinsurance businesses in recent years. Post-acquisition, such companies are often placed into partial or complete run-off, thereby resulting in negative cash flows from operations as the investments acquired are liquidated over time to pay claims.

        In the case of OneBeacon, the substantial amount of float initially acquired with the OneBeacon Acquisition has shrunk as a result of OneBeacon's re-underwriting efforts and the liquidity providedeffects of the Liberty Agreement. OneBeacon's float is expected to continue to shrink during 2005 as older, long-tailed loss reserves are paid and are not replaced with the same level of current writings as those written in the past. In the case of White Mountains Re, its float increased substantially in 2004 as a result of the Sirius and Sierra acquisitions. White Mountains Re's float is expected to increase during 2005 as a result of higher premium writings from its increased capital base and acquisitions over the past few years.

        It is White Mountains' intention to generate low-cost float over time through a combination of acquisitions and/or by the Bank Facility are adequateorganic growth in its existing insurance and reinsurance operations. However, White Mountains will seek to meet expected cash requirementsincrease its float organically only when market conditions allow for the foreseeable future.an expectation of generating underwriting profits.


Financing

        The following table summarizes White Mountains' capital structure as of December 31, 20022004 and 2001:2003:

Millions

 December 31,
2002

 December 31,
2001

Bank Facility $746.4 $825.0
Seller Note    260.0
Other debt  46.8  40.4
  
 
 Total debt $793.2 $1,125.4
  
 
Common shareholders' equity  2,407.9  1,444.6
Convertible preference shares  219.0  
Mandatorily redeemable preferred stock of subsidiaries  180.9  170.3
  
 
 Total capitalization $3,601.0 $2,740.3
  
 

        On October 31, 2002, FAC completed an amendment
 
 December 31,
 
$ in millions

 
 2004
 2003
 
Senior Notes, carrying value $698.3 $698.1 
Bank Facility     
Other debt of operating subsidiaries(1)  85.0  44.9 
  
 
 
 Total debt  783.3  743.0 
Preferred stock subject to mandatory redemption  211.9  194.5 
Total common shareholders' equity  3,883.9  2,979.2 
Unamortized goodwill of consolidated limited partnerships  (20.0) (20.3)
Equity in net unrealized gains from Symetra's fixed maturity portfolio  (56.6)  
  
 
 
 Total tangible capital $4,802.5 $3,896.4 
  
 
 
Senior Notes to total tangible capital  15% 18%
Total debt to total tangible capital  16% 19%
Total debt and preferred stock to total tangible capital  21% 24%


(1)
SeeNote 6—Debt of the Bank Facility, which included the issuanceaccompanying Consolidated Financial Statements for a discussion of a new $143.8 million Tranche C term loan that was utilized to refinance a portion of the existing $228.8 million Tranche A term loan. The new Tranche C term loan has nominal amortization until its final maturity in March 2007. The refinancing reduces the amount of quarterly amortization payments FAC must make over the next four years. The applicable eurodollar rate margin on the new Tranche C term loan is 87.5 basis points higher than the margin on the existing Tranche A term loan, and the applicable eurodollar rate margin on the existing and otherwise unchanged Tranche B term loan was increased by 12.5 basis points. In connection with the amendment, certain financial and other covenants that governed the Bank Facility were relaxed or eliminated, thereby increasing the Company's operational and financial flexibility.

        On October 24, 2002, White Mountains sold $225.0 million of its equity securities in private transactions. Investment funds managed by Franklin Mutual Advisers, LLC, already large shareholders of White Mountains, purchased 677,966 convertible preference shares of the Company at a price of $200.0 million ($295.00 per share), which had the effect of increasing the Franklin Mutual-managed investment funds' ownership in White Mountains from 12% to 17% on a fully converted basis. The convertible preference shares bear an annual dividend of $2.95 per share, payable in installments on June 30 and December 31, and will be automatically converted into 677,966 Common Shares of the Company upon approval by shareholders. White Mountains intends to seek shareholder approval at its 2003 Annual Meeting. If shareholder approval has not been obtained prior to March 31, 2005, each holder of convertible preference shares will thereafter have the right to require the Company to repurchase for cash the convertible preference shares on an "as converted" basis at the then-current market price of a Common Share. In addition, investment funds managed by Highfields Capital Management LP purchased 84,745 Common Shares for $25.0 million ($295.00 per Common Share). The proceeds from these private equity issuances, along with cash on hand, were used to repay the $260.0 million Seller Note on November 29, 2002.

operating subsidiary debt.

        Management believes that White Mountains' strong financial strengthposition provides it with the flexibility and capacity to obtain funds externally as needed through debt or equity financing on both a short-term and long-term basis. In May 2003, White Mountains has primarily accessedreduced its cost of capital and significantly reduced its near-term obligations by fully prepaying its previous $740 million amortizing bank facility, principally through the net proceeds from the issuance of the Senior Notes, which were issued by Fund American through a public offering. The Senior Notes bear a fixed annual interest rate of 5.9% and mature in May 2013. In July 2003, White Mountains enhanced its access to the capital markets by having a shelf registration declared effective by the SEC for offerings of up to $2.0 billion in debt andand/or equity markets in connection withsecurities.

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acquisitions, most notably        In August 2004, Fund American restructured and re-syndicated its existing $300 million Bank Facility to increase the acquisition of OneBeacon in June 2001. To fundavailability under the Acquisition, White Mountains undertookrevolving credit facility to $400 million and to extend the following capital raising activities:

(a)
Issued convertible preference shares for $437.6 million (which were retired and convertedmaturity from September 2006 to Common Shares in August 2001) and issued to Berkshire, for $75.0 million in cash, Warrants to acquire 1,714,285 Common Shares at an exercise price of $175.00 per Common Share. The Warrants have a term of seven years from the date of issuance, although the Company has the right to call the Warrants for $60.0 million in cash commencing on the fourth anniversary of their issuance. As a result of White Mountains' private equity issuances in the fourth quarter of 2002, customary anti-dilution provisions applicable to the Warrants increased the number of Common Shares purchasable on exercise of the Warrants to 1,724,200 and decreased the exercise price per Common Share of the Warrants to $173.99.

(b)
Issued two separate classes of subsidiary preferred stock. For $225.0 million in cash, Berkshire purchased cumulative non-voting subsidiary preferred stock with a face value of $300.0 million, which is entitled to a dividend of 2.35% per quarter and is mandatorily redeemable seven years after issuance. Zenith purchased $20.0 million in cumulative non-voting subsidiary preferred stock, which is entitled to a dividend of 2.5% per quarter through June 30, 2007 and a dividend of 3.5% per quarter thereafter. This preferred stock is mandatorily redeemable ten years after issuance, and may be called by White Mountains at par commencing June 30, 2007.

(c)
Borrowed $825.0 million under2009. Under the Bank Facility, for which was comprisedboth Fund American and the Company are permitted borrowers, the Company guarantees all obligations of two term loan facilities (subsequently refinanced into three term loan facilities)Fund American, and a revolving credit facility. The original term loan facilities were comprisedFund American guarantees all borrowings of a $300.0 million amortizing Tranche A term loan with a five-year maturity and a $400.0 million amortizing Tranche B term loan with a six-year maturity. See the discussion above forCompany, subject to certain limitations imposed by the terms of the refinanced term loan facilities. The revolving credit facility provides for revolving credit loans of up to $175.0 million, including up to $25.0 million available for the issuance of letters of credit. The revolving credit facility matures on June 1, 2006.Berkshire Preferred Stock. As of December 31, 2002, $50.0 million was available under the revolving credit facility.

(d)
Issued the Seller Note to Aviva. The $260.0 million Seller Note was repaid on November 29, 2002 in cash, provided in part by the private equity issuances that White Mountains completed in October 2002.

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Contractual Obligations and Covenants

        Below is a schedule of White Mountains' material contractual obligations and commitments as of December 31, 2002:

December 31, 2002

 Due in One Year or Less
 Due in Two Years
 Due in Three Years
 Due in Four Years
 Due After Four Years
 Total
 
 Millions

Debt $33.4 $31.3 $59.2 $139.5 $529.8 $793.2
Mandatorily redeemable preferred stock          320.0  320.0
Operating leases  35.6  29.0  26.7  25.5  46.1  162.9
  
 
 
 
 
 
Total contractual obligations $69.0 $60.3 $85.9 $165.0 $895.9 $1,276.1
  
 
 
 
 
 

        For comparative purposes, set forth below is a schedule of White Mountains' material contractual obligations and commitments as of December 31, 2001:

December 31, 2001

 Due in One Year or Less
 Due in Two Years
 Due in Three Years
 Due in Four Years
 Due After Four Years
 Total
 
 Millions

Debt $358.4 $67.2 $69.6 $102.1 $528.1 $1,125.4
Mandatorily redeemable preferred stock          320.0  320.0
Operating leases  33.5  28.7  19.9  16.8  43.1  142.0
  
 
 
 
 
 
Total contractual obligations $391.9 $95.9 $89.5 $118.9 $891.2 $1,587.4
  
 
 
 
 
 

        During 2002, through the refinancing of2004, the Bank Facility and the repaymentwas undrawn.

        In connection with its acquisition of the SellerSierra Group on March 31, 2004, Folksamerica entered into a $62 million purchase note (the "Sierra Note"), $58 million of which will be adjusted over its approximate six-year term to reflect favorable or adverse loss reserve development on the acquired reserve portfolio and run-off of remaining policies in force (mainly workers compensation business) as well as certain other balance sheet protections. During 2004, the Sierra Note was reduced by $12 million as a result of adverse development on the acquired reserves and run-off of unearned premiums.

        In connection with its acquisition of Atlantic Specialty on March 31, 2004, OneBeacon issued a $20 million ten-year note to the seller (the "Atlantic Specialty Note"). OneBeacon is required to repay $2 million of principal on the notes per year, commencing with the first payment due on January 1, 2007.

        Fund American's Senior Notes are currently rated "Baa2" (Adequate, the 9th highest of 21 ratings) with a stable outlook by Moody's and "BBB-" (Adequate, the 10th highest of 24 ratings) with a positive outlook by S&P and "BBB" (Good, the 9th highest of 24 ratings) with a stable outlook by Fitch Ratings. It is possible that, in the future, one or more of the rating agencies may lower White Mountains' existing ratings. If one or more of its ratings were downgraded, White Mountains significantly reducedcould incur higher borrowing costs and its near-term obligations.ability to access the capital markets could be impacted. In addition, White Mountains' debt dueinsurance and reinsurance operating subsidiaries could be adversely impacted by a downgrade in one-yeartheir financial strength ratings, including a possible reduction in demand for their products in certain markets.

        The Senior Notes were issued under an indenture which contains restrictive covenants that, among other things, limit the ability of the Company, Fund American and their respective subsidiaries to create liens and enter into sale and leaseback transactions and substantially limits the ability of Fund American and its respective subsidiaries to consolidate, merge or less astransfer their properties and assets. The indenture does not contain any financial ratios or specified levels of net worth or liquidity to which the Company or Fund American must adhere. At December 31, 2002 includes $5.1 million2004, White Mountains was in other indebtedness, which was subsequently repaid in February 2003, and scheduled principal amortizationcompliance with all of $28.3 millionthe covenants under the Bank Facility.Senior Notes, and anticipates it will continue to remain in compliance with these covenants for the foreseeable future.

        The Bank Facility contains various affirmative, negative and financial covenants which areWhite Mountains considers to be customary for such borrowings and include requirements to meetmaintaining certain minimum net worth and financial ratio standards.maximum debt to capitalization standards for White Mountains. Failure to meet one or more of these covenants could result in an event of default, which ultimately could accelerate requiredeliminate availability under the facility and result in acceleration of principal repayments.repayment on any amounts outstanding. At December 31, 2002,2004, White Mountains was in compliance with all of the covenants under the Bank Facility, and anticipates it will continue to meet the financialremain in compliance with these covenants under the Bank Facility for the foreseeable future.




Contractual Obligations and Commitments

        Below is a schedule of White Mountains' material contractual obligations and commitments as of December 31, 2004:

Millions

 Due in
One Year
or Less

 Due in
Two to Three
Years

 Due in
Four to Five
Years

 Due After
Five
Years

 Total
Debt $ $17.0 $4.0 $764.0 $785.0
Mandatorily redeemable preferred stock      300.0  20.0  320.0
Loss and LAE reserves(1)  2,967.9  3,026.4  1,485.0  2,588.2  10,067.5
Reserves for structured contracts  69.5  102.9  68.5  135.0  375.9
Interest on debt and dividends and accretion on preferred stock subject to mandatory redemption  98.0  216.0  119.6  149.5  583.1
Long-term incentive compensation  248.1  250.3  6.2  61.3  565.9
Operating leases  41.8  71.8  26.3  28.6  168.5
  
 
 
 
 
 Total contractual obligations $3,425.3 $3,684.4 $2,009.6 $3,746.6 $12,865.9
  
 
 
 
 

(1)
Represents expected future cash outflows resulting from loss and LAE payments. Accordingly, these balances exclude the discount on OneBeacon's workers compensation loss and LAE reserves of $259.4 million and the remaining purchase accounting fair value adjustment of $409.6 million related to the OneBeacon and Sirius acquisitions as they are non-cash items. Further, the amounts presented include reinsurance recoverables recorded of $3,797.4 million.

        White Mountains' loss reserves do not have contractual maturity dates. However, based on historical payment patterns, the preceding table includes an estimate of when management expects White Mountains' loss reserves to be paid. The timing of claim payments is subject to significant uncertainty. White Mountains maintains a portfolio of marketable investments with varying maturities and a substantial amount of short-term investments to provide adequate cash flows for the payment of claims.

        The balances included in the table above regarding White Mountains' long-term incentive compensation plans include amounts payable for performance shares and units, as well as deferred compensation balances. Exact amounts to be paid cannot be predicted, for performance shares, with certainty, as the ultimate amounts of these liabilities are based on future performance of the Company and the market price of Common Shares at the time the payments are made. The estimated payments reflected in the table are based on current accrual factors (Common Share price and pay-out percentage) and assume that all outstanding balances were 100% vested as of December 31, 2004.

        There are no provisions within White Mountains' leasing agreements that would trigger acceleration of future lease payments. White Mountains does not finance its operations through the securitization of its trade receivables, through special purpose entities or through synthetic leases. Further, White Mountains has not entered into any material arrangement requiring it to guarantee payment of third party debt, lease payments or to fund losses of an unconsolidated special purpose entity.entity, except as noted in the following paragraph.

        In June 1999, White Mountains sold VGI to Unitrin, Inc. ("Unitrin") (the "VGI Sale"). As part of the VGI Sale,Through Sirius International, White Mountains has provided Unitrin with adverse loss development protectiona long term investment as a stockholder in LUC Holdings, an entity that has entered into a head lease to rent the London Underwriting Center ("LUC") through 2016. LUC Holdings in turn subleases space in the LUC. In the LUC Holdings stockholders agreement, the stockholders have guaranteed any shortfall between the head lease and the sub-leases on a joint and several basis. As a consequence, in recent years the stockholders have funded an operating shortfall of upLUC. At December 31, 2004, White Mountains has recorded a liability of $10 million for its share of the expected future shortfall between LUC Holdings' head lease payments



and sub-lease receipts. White Mountains does not believe that future shortfalls, if any, will have a material impact on its results of operations.

        White Mountains also has future binding commitments to $50.0fund certain limited partnership investments. These commitments, which total approximately $25.9 million, on loss reserves sold to Unitrin. Unitrin has made a demand fordo not have fixed funding dates and are therefore excluded from the full $50.0 million.table above.

        Detailed information concerning White Mountains' liquidity and capital resource activities during 2002, 20012004, 2003 and 20002002 follows:

For the Year Endedyear ended December 31, 2004

Financing and Other Capital Activities

        On June 29, 2004, Berkshire exercised of all of its warrants to purchase 1,724,200 Common Shares of White Mountains for $294 million. Berkshire acquired the warrants in connection with the financing of White Mountains' acquisition of OneBeacon in 2001. The warrants were exercisable at any time until May 2008 and callable by the Company on or after May 31, 2005. In consideration for the early exercise of the warrants, Berkshire and the Company agreed to reduce the exercise price by approximately 2%.

        During 2004, White Mountains declared and paid dividends of $9 million, $28 million and $2 million to holders of Common Shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.

        During 2004, Fund American restructured and re-syndicated the Bank Facility to extend its maturity and to increase the availability of the revolving credit facility to $400 million.

        During 2004, White Mountains paid a total of $41 million in interest under the Senior Notes.

        During 2004, OneBeacon declared and paid a total of $305 million in cash dividends to Fund American. Also during 2004, WMU paid a total of $60 million of cash dividends to its immediate parent. On March 31, 2004, OneBeacon distributed Folksamerica to Fund American.

        During 2004, the Company issued a net total of 3,938 Common Shares to its employees through the exercise of Options during the year and the Company received cash proceeds of $.5 million in connection with these Option exercises. In addition, during the first quarter of 2004, White Mountains issued 27,772 Common Shares to employees of OneBeacon in connection with OneBeacon's employee stock ownership plan. OneBeacon paid $13 million to the Company in consideration for these Common Shares.

        On August 27, 2004, White Mountains repaid the $25 million note that was issued as part of the financing of its 2001 acquisition of C-F Insurance Company.

Acquisitions and Dispositions

        During 2004, White Mountains acquired Sirius for $428 million, 19% of Symetra for $195 million, Tryg-Baltica for $58 million, the Sierra Group for $14 million in cash and a $62 million note and Atlantic Specialty for $30 million in cash and a $20 million note.

        During 2004, White Mountains sold Potomac for $22 million, Western States, as well as its boiler inspection service business, for $15 million (both subsidiaries of OneBeacon) and Peninsula for $23 million.

        SeeNote 2—Significant Transactions of the accompanying Consolidated Financial Statements for further discussion of these transactions.



Other Liquidity and Capital Resource Activities

        During the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier to third parties for net proceeds of $155.3 million. Also during the first quarter of 2004, White Mountains purchased additional warrants to acquire 2.4 million common shares of Montpelier from an existing warrant holder for $54.1 million in cash.

        During the first quarter of 2004, White Mountains made payments amounting to $127 million, in cash or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries, to participants in its long-term incentive compensation plans. These payments were made with respect to 167,782 performance shares at payout levels ranging from 93% to 200% of target.

For the year ended December 31, 2003

Financing and Other Capital Activities

        In May 2003, Fund American issued the Senior Notes for net proceeds of $693 million. Using proceeds from the Senior Notes, Fund American repaid the entire $615 million of term loans outstanding under its previous bank facility. In addition, on May 27, 2003, using the remaining $78 million in proceeds from the Senior Notes and cash on hand, Fund American repaid the entire $125 million of revolving loans outstanding under its previous bank facility. In connection with the repayment of its previous bank facility, Fund American paid an aggregate $56 million to unwind all of its existing interest rate swap agreements.

        In September 2003, Fund American established its $300 million revolving Bank Facility. As discussed earlier, this Bank Facility was restructured and re-syndicated in August 2004.

        During 2003, White Mountains paid a total of $20 million in interest under the Senior Notes.

        During 2003, White Mountains made scheduled principal amortization payments of $7 million and paid a total of $23 million in interest under its previous bank facility, including $11 million paid under the interest rate swap agreements, prior to its repayment.

        During 2003, White Mountains declared and paid dividends of $8 million, $28 million and $2 million to holders of Common Shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.

        During 2003, White Mountains filed a shelf registration statement, which was declared effective by the SEC in July 2003, for offerings of up to $2.0 billion in debt and/or equity securities.

        During 2003, OneBeacon declared and paid a total of $235 million in cash dividends to Fund American. Also during 2003, WMU paid a total of $35 million in cash dividends to its immediate parent, White Mountains Re, and WM Advisors paid a total of $10 million in cash dividends to Fund American.

        During 2003, the Company issued a total of 11,116 Common Shares to its employees through the exercise of Options and, as a result, the Company received cash proceeds of $1.5 million in connection with these Option exercises.

Acquisitions and Dispositions

        During 2003, OneBeacon sold one of its subsidiaries, NFU Standard, for $22 million.

Other Liquidity and Capital Resource Activities

        During the first quarter of 2003, White Mountains paid a total of 45,000 performance shares (relating to the 2000-2002 performance period) at 200%, amounting to $29 million, to its participants in



cash, Common Shares or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries. In the second quarter of 2003, White Mountains made performance share payments amounting to $13 million in cash or by deferral into certain non-qualified compensation plans of the Company. The payments on these additional performance shares in the second quarter represented accelerated payments to certain non-employee directors of the Company for performance periods originally scheduled to end on December 31, 2003, 2004 and 2005.

For the year ended December 31, 2002

        In December 2002, OBPP borrowed $8.0 million from a related third party.Financing and Other Capital Activities

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        On November 29,        During 2002, White Mountains repaidsold $225 million of its equity securities in a private transaction and used the proceeds, along with cash on hand, to repay in full the $260.0$260 million Seller Note to Aviva, along with approximately $22.6$23 million of related accrued interest.

        In October 2002, White Mountains amended the Bank Facility and issued $225.0 million of equity securities. See "Financing" above for a detailed discussion of these transactions.

        On December 31, 2002, September 30, 2002, June 28, 2002 and March 29,        During 2002, White Mountains made scheduled principal amortization payments of $1.4 million, $14.2 million, $14.1$78 million and $49.0interest payments of $55 million respectively, on the Bank Facility. During 2002, White Mountains paid a total of $55.3 million in interest under the Bank Facility, including $18.0(including $18 million paid under related interest rate swap agreements.agreements) on its previous bank facility.

        During 2002, OneBeacon declared and paid a total of $172.6$173 million in cash dividends to FAC, its immediate parent company.Fund American.

        During 2002, White Mountains declared and paid a total of $30.7$31 million in dividends on the Berkshire Preferred Stock, the Zenith Preferred Stock and the Convertible Preference Shares.

        In July and August of 2002, White Mountains received federal tax refunds totalling $166.7 million representing accelerated recoveries of carryback losses from 2001 under the Job Creation and Worker Assistance Act of 2002 (the "Economic Stimulus Bill").

        On April 25, 2002, Folksamerica acquired Imperial for $4.2 million including related expenses ($.5 million net of cash acquired). Significant assets and liabilities acquired included investments of $22.8 million and loss and LAE reserves of $11.9 million.

        In March Also in 2002, the Company declared and paid an annual dividend of $8.3$8 million to its common shareholders.shareholders

        During 2002, the Company issued a total of 23,200 Common Shares to its employees in satisfaction of performance share and Option obligations under White Mountains' Long-Term Incentive Plan.Plan (the "Incentive Plan"). The Company received proceeds of $1.3 million as a result of exercises of Options to acquire 11,500 Common Shares during the period.

For the Year Ended December 31, 2001

        In December 2001, White Mountains filed a "shelf" registration statement with the SEC for offerings of up to $1.0 billion of various types of debt and preferred equity securities. To date, White Mountains has not offered any securities for sale pursuant to this shelf registration.

        In December 2001, OneBeacon invested $180.0 million in Montpelier consisting of 10,800,000 common shares of Montpelier valued at $16.67 per share and the Company received warrants to acquire an additional 4,781,572 common shares of Montpelier at $16.67 per share, which are exercisable until December 2011.

        In December 2001, White Mountains acquired the net assets of the international reinsurance operations of Folksam International, which were valued at approximately $66.9 million on the date of purchase. The purchase price including related expenses consisted of approximately $30.9 million in cash, $3.0 million in a note payable to the seller and 86,385 Common Shares (valued at approximately $30.0 million).

        In December 2001, OneBeacon contributed $400.0 million in cash to Folksamerica.

        In December 2001, Folksamerica2002, OBPP borrowed $7.0$8 million from a related third party.

        In October 2001, OneBeacon sold 2,025,680 shares of the common stock of United Fire & Casualty Company to a third party for $54.7 million.

64



        In September 2001, OneBeacon repaid all its outstanding long-term debt of $3.2 million.Acquisitions and Dispositions

        In September 2001,On April 25, 2002, Folksamerica acquired C-F, an inactive insurance company in run-off,Imperial for total consideration of $49.2 million plus related expenses. The purchase consideration included the issuance of a $25.0 million, four-year note by Folksamerica which may be reduced by adverse loss development experienced by C-F post-acquisition.

        In June 2001, White Mountains acquired OneBeacon for cash and the Seller Note. The total consideration paid for OneBeacon was $2,114.3$4 million including related expenses,expenses.

Other Liquidity and the net book value of the assets acquired was $2,796.3 billion. Significant assets and liabilities acquired through OneBeacon included $7,442.6 million of cash and investments, $2,448.9 million of reinsurance recoverable on paid and unpaid losses, $1,267.3 million of insurance balances receivable, $6,364.2 million of loss and LAE and $1,897.7 million of unearned insurance premiums.

        In connection with the Acquisition, the Company issued convertible preference shares for $437.6 million (which were retired and converted to Common Shares in August 2001) and issued the Warrants for $75.0 million. The Warrants have a term of seven years from the date of issuance although the Company has the right to call the Warrants for $60.0 million in cash commencing on the fourth anniversary of their issuance.

        In connection with the Acquisition, White Mountains issued two separate classes of subsidiary preferred stock. Berkshire purchased $300.0 million in face value of cumulative non-voting subsidiary preferred stock for $225.0 million in cash. The Berkshire Preferred Stock is entitled to a dividend of no less than 2.35% per quarter and is mandatorily redeemable after seven years. Zenith purchased $20.0 million in cumulative non-voting subsidiary preferred stock. The Zenith Preferred Stock is entitled to a dividend of no less than 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5% thereafter and is mandatorily redeemable after ten years.

        In connection with the Acquisition, White Mountains borrowed $825.0 million under the Bank Facility. The Bank Facility is comprised of two term loan facilities and a revolving credit facility. The term loan facilities are comprised of a $300.0 million Tranche A Loan with a five-year maturity and a $400.0 million Tranche B Loan with a six-year maturity. The revolving credit facility provides for revolving credit loans of up to $175.0 million, including up to $25.0 million available for the issuance of letters of credit. The revolving credit facility matures on June 1, 2006. The Bank Facility was refinanced during 2002—See "Financing" above for a detailed discussion.Capital Resource Activities

        In connection with the Acquisition,July and August of 2002, White Mountains issuedreceived federal tax refunds totaling $167 million representing accelerated recoveries of carryback losses from 2001 under the Seller Note to Aviva. The Seller Note had an eighteen-month termJob Creation and bore interest at a rate equal to 50 basis points over the rate on White Mountains' revolving loan facility described above. The Seller Note was repaid in full on November 29,Worker Assistance Act of 2002.

        In April 2001, the Company paid $100.8 million in cash to complete the Debt Tender and to establish the Debt Escrow. Completion of the Debt Tender permitted the Company to effect an amendment to the indenture governing the Notes which facilitated the Acquisition.

        In March 2001, the Company declared and paid an annual dividend of $5.9 million to its common shareholders.

        In January 2001, the Company completed the sale of Waterford Insurance Company ("Waterford") to a third party for consideration of $23.6 million in cash, net of transaction related expenses.

During 2001, the Company issued a total of 2,390,566 Common Shares which consisted of 2,184,583 Common Shares issued in connection with the retirement and conversion of convertible preference shares, 86,385 Common Shares issued in connection the purchase of the Folksam net assets, 94,500 Restricted Shares issued to key employees and 25,098 Common Shares issued to employees in connection with various White Mountains employee benefit plans.

65



        During 2001, OneBeacon declared and paid a total of $153.5 million in dividends to FAC, its immediate parent company.

        During 2001, the Company repurchased and retired 6,000 Common Shares for $1.9 million in cash.

        During 2001,2002, White Mountains paid a total of $18.431,300 performance shares (relating to the 1999-2001 performance period) at a 200% value, amounting to $21 million, in dividends to holders of the Convertible Preference Shares, the Berkshire Preferred Stock and the Zenith Preferred Stock. During 2001, White Mountains paid a total of $29.2 million in interest under the Bank Facility including $2.9 million paid under related interest rate swap agreements.

For the Year Ended December 31, 2000

        In December 2000, White Mountains provided $259.6 million of capital to Folksamerica through the contribution of American Centennial and British Insurance Company and through the issuance of a $195.0 million intercompany note which was forgiven during 2001. Folksamerica subsequently contributed American Centennial and $80.0 million of such cash to Folksamerica Reinsurance Company in order to provide the statutory capital needed to support its acquisitions of PCA and Risk Capital. The remaining $115.0 million was used by Folksamerica to repay its outstanding bank indebtedness.

        In July 2000, White Mountains concluded the FSA Sale for proceeds of $620.4 million.

        In May 2000, Folksamerica acquired Risk Capital for consideration of $20.3 millionparticipants in cash, plus related expenses. Significant assets and liabilities acquired with Risk Capital included $249.9 million of cash and investments, $108.6 million of premiums receivable, $312.5 million of net loss and LAE reserves and $82.0 million of unearned reinsurance premiums. In addition, Risk Capital provided Folksamerica with two specialty underwriting units (Accident & Health and Marine) and several significant new treaty clients.

        In March 2000, Folksamerica acquired PCA for consideration of $122.3 million in cash. Significant assets and liabilities acquired through PCA included $339.8 million of cash and investments, $160.0 million of reinsurance recoverables and $405.5 million of loss and LAE reserves.

        During 2000, the Company repurchased and retired 65,838 Common Shares for $8.3 million in cash.

        During 2000, the Company declared and paid quarterly cash dividends totalling $7.1 million.

        As part of the Folksamerica acquisition in 1998, White Mountains refinanced Folksamerica's existing long-term indebtednessor by utilizing a six-year revolving credit agreement whereby Folksamerica could borrow up to $120.0 million at market interest rates. This facility was repaid and terminated by Folksamerica during 2000 as described above.

RELATED PARTY TRANSACTIONS

Berkshire

        NICO and GRC, which have provided the NICO Cover and the GRC Cover to subsidiaries of White Mountains, are wholly-owned subsidiaries of Berkshire (see "Reinsurance Protection" within the "ONEBEACON" section of Item 1 of this report). Through the Warrants, at December 31, 2002, Berkshire has the right to acquire 1,724,200 Common Shares at an exercise price of $173.99 per Common Share, which represented approximately 16.1% of the total outstanding Common Shares on a fully-converted basis. Reinsurance recoverable from, and preferred stock of White Mountains' subsidiaries owned by, Berkshire are shown as separate line items in White Mountains' consolidated balance sheet.

66



Olympus

        In January 2002, Folksamerica entereddeferral into a quota share retrocessional arrangement with Olympus. Under the quota share treaty, Folksamerica cedes 75% of substantially all of its property and marine excess of loss business to Olympus. During 2002, Folksamerica ceded approximately $229.7 million in written premiums and approximately $54.4 million in losses and LAE to Olympus.

        White Mountains, through either Folksamerica or WMU, receives fee income on reinsurance placements referred to Olympus and is entitled to additional fees based on net underwriting profits on referred business. During 2002, White Mountains earned $48.9 million from management and service fee revenues on business referred to Olympus.

        In June 2002, OneBeacon supplemented its existing catastrophe reinsurance protection through a new contract with Folksamerica which was subsequently reinsured to Olympus through the 75% quota share retrocessional arrangement. Pursuant to the terms of this arrangement, Folksamerica and Olympus are responsible for 25% and 75%, respectively, of the first $25 million of any losses in excess of $100 million incurred by OneBeacon related to a catastrophic event. Under this arrangement, Olympus has received $2.6 million in premiums. All balances related to the Folksamerica portion of the reinsurance cover have been eliminated in consolidation.

        Certain directors, officers and affiliates of White Mountains own approximately 5% of the common shares of Olympus Holdings. Mr. Joseph S. Steinberg, a directorcertain non-qualified compensation plans of the Company is Chairman of Olympus Holdings. White Mountains does not have an ownership stake in Olympus Holdings.or its subsidiaries.

Montpelier
RELATED PARTY TRANSACTIONS

        In December 2001, White Mountains invested $180.0 million in Montpelier, which was formed to respond to the favorable underwriting and pricing environment        SeeNote 17—"Related Party Transactions" in the reinsurance industry with approximately $1.0 billion of capital. As of December 31, 2002, as adjusted for stock splits, White Mountains' investment in Montpelier consisted of 10,800,000 common shares and warrants to acquire 4,781,572 common shares at $16.67 per share that are exercisable until December 6, 2011. Through its holdings of common shares and warrants, White Mountains owns approximately 21% of Montpelier on a fully-converted basis, as adjusted for its initial public offering ("IPO").

        Four of White Mountains' directors serve on Montpelier's eleven member board of directors. John J. Byrne, Chairman of the Company, serves as Montpelier's non-executive Chairman, and Raymond Barrette, John D. Gillespie and K. Thomas Kemp serve as Directors of Montpelier. In addition, Mr. Kemp is the Chiefaccompanying Consolidated Financial Officer of Montpelier. Certain directors, officers and affiliates of White Mountains own approximately 3% of the common shares of Montpelier.Statements.

Other Relationships

        Mr. Howard Clark, a Director of the Company, is Vice Chairman of Lehman Brothers Inc. ("Lehman"). Lehman has, from time to time, provided various services to White Mountains including investment banking services, brokerage services, underwriting of debt and equity securities and financial consulting services. Lehman is the arranger, the administrative agent and a lender under the $875.0 million Bank Facility. In addition, Fund American paid Lehman approximately $1.5 million in fees related to the October 2002 refinancing of the Bank Facility. See Note 6.

        Mr. George Gillespie, a Director of the Company, is a Partner at Cravath, Swaine & Moore, which has been retained by White Mountains from time to time to perform legal services.

        Pursuant to an employment agreement with White Mountains, Mr. John Gillespie, a Director and Deputy Chairman of the Company and President of WM Advisors, may continue his active involvement with Prospector Partners, LLC ("Prospector"), so long as Mr. Gillespie devotes the requisite time

67



required to fulfill his responsibilities to WM Advisors. The agreement specifies procedures pursuant to which Prospector's funds have the ability to invest first in opportunities appropriate for both White Mountains and such funds. Pursuant to revenue sharing agreements, Mr. Gillespie has agreed to pay White Mountains a portion of the revenues and distributions allocable to him in connection with Prospector, in return for White Mountains agreeing to pay the operational expenses of his investment management companies. At December 31, 2002, White Mountains had $64.9 million invested in funds managed by Prospector.

        In September 2001, White Mountains entered into a five-year lease at a market-based rate for a building partially owned by Mr. John Gillespie and trusts for the benefit of members of his family (the "Gillespie Trusts"). For 2002, the rental payments attributable to Mr. Gillespie's ownership in the building totalled approximately $13,000 and the rental payments attributable to the Gillespie Trusts' ownership in the building totalled approximately $104,000.

        Mr. John Gillespie indirectly through general and limited partnership interests holds a 44% interest in Dowling & Partners Connecticut Fund III, LP ("Fund III"). OBPP and Folksamerica Specialty Underwriting, Inc. ("FSUI") have borrowed approximately $8 million and $7 million, respectively, from Fund III in connection with an incentive program sponsored by the State of Connecticut known as the Connecticut Insurance Reinvestment Act (the "Act"). The loans mature in April 2007 and bear interest at the option of OBPP and FSUI at either (1) the greater of (a) the prime rate minus 1% and (b) the federal funds rate minus 0.50% or (2) the eurodollar rate plus 0.325%. The Act provides for Connecticut income tax credits to be granted for qualifying investments made by approved fund managers. The loans made by Fund III to OBPP and FSUI are qualifying investments and, together, have the potential to generate up to $15 million of tax credits that would be shared equally between Fund III on the one hand and OBPP and FSUI on the other. As a result of his interest in Fund III, Mr. Gillespie could realize up to $3.3 million from the tax credits, although any such amount would be subject to the revenue sharing agreements with White Mountains described above.

        Mr. Zankel is Senior Managing Member of the General Partner of High Rise Capital Advisors LLC, which is the General Partner of High Rise Partners, L.P. At December 31, 2002, White Mountains had $8.8 million in limited partnership investment interests in High Rise Partners, L.P. and White Mountains owned $36.6 million in investments that are managed by High Rise Capital Advisors LLC.

        WM Advisors provides investment advisory and management services to Montpelier Re and Olympus. Montpelier Re and Olympus pay investment management fees based on month-end market values of investments held under custody to WM Advisors. The fees, which vary depending on the amount of assets under management, are between 0.15% and 0.30%. This agreement may be terminated by either party upon 30 days written notice. At December 31, 2002, WM Advisors had $1.4 billion and $653.9 million of assets under management from Montpelier Re and Olympus, respectively. During 2002, WM Advisors had received $2.1 million and $1.1 million in fees from Montpelier Re and Olympus, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with GAAP.



The financial statements presented herein include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of White Mountains. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

68



        In the current year presentation of financial information, certain amounts in the prior period financial statements have been reclassified to conform with the current presentation. White Mountains has completed numerous significant transactions during the periods presented that have affected the comparability of the financial statement information presented herein.

        On an ongoing basis, management evaluates its estimates, including those related to loss and LAE reserves, purchase accounting, and related deferred credits and goodwill, reinsurance transactionsestimates and its pension benefit obligations. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources.

        Management believes that its critical accounting policies affect its more significant estimates used in the preparation of its consolidated financial statements. The descriptions below are summarized and have been simplified for clarity.


1.    Loss and Loss Adjustment Expenses

InsuranceOneBeacon

    Non-Asbestos and Environmental Reserves

        White Mountains' insurance subsidiaries establishOneBeacon establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. ReinsuranceThe process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is an arrangement in which a reinsurance company (a "reinsurer") contractually agrees to indemnify an insurance company for all or a portioninherently uncertain.

        Reserves are typically comprised of the insurance risks underwritten by the insurance company. White Mountains establishes estimates of amounts recoverable from its reinsurers in a manner consistent with the claim liability covered by the reinsurance contracts, net of an allowance for uncollectible amounts. Net insurance loss reserves represent loss and LAE reserves reduced by reinsurance recoverable on unpaid losses.

        In a broad sense, loss and LAE reserves have two components: (i)(1) case reserves which are reserves established within the claims function for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to White Mountains and (ii) IBNR.as incurred but not reported ("IBNR") reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim. White Mountains' claims staff periodically adjusts case reservesclaim and are adjusted as additional information becomes known or payments are made. GenerallyIBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are usedadjusted as additional information becomes known or payments are made.

        Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to project estimatespersist into the future. In forecasting ultimate loss and LAE with respect to any line of IBNR. Actuaries use a varietybusiness, past experience with respect to that line of statisticalbusiness is the primary resource, but cannot be relied upon in isolation. OneBeacon's own experience, particularly claims development experience, such as trends in case reserves, payments on and analytical methods to determine estimatesclosings of IBNR, which are based, in part, on historical claim reporting and payment patterns. In estimating IBNR, actuaries consider all available information, including historical experience,claims, as well as changes in business mix and coverage limits, changesis the most important information for estimating its reserves. External data, available from organizations such as statistical bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate OneBeacon's own experience, and can be especially useful for estimating costs of new business. For some lines of business, such as "long-tail" coverages discussed below, claims data reported in claims handling practices, pricing, reinsurance protections, inflationthe most recent accident year is often too limited to provide a meaningful basis for analysis due to the typical delay in reporting of claims. For this type of business, OneBeacon uses a selected loss ratio method for the initial accident year or years. This is a standard and accepted actuarial reserve estimation method



in these circumstances in which the effects of legal, social and legislative trends on future claim payments. Management exercises judgmentloss ratio is selected based upon its knowledgeinformation used in pricing policies for that line of its business, review of the outcome of actuarial studies, historicalas well as any publicly available industry data, such as industry pricing, experience and other factors to record an estimate it believes reflects White Mountains' expectedtrends, for that line of business.

        Uncertainties in estimating ultimate unpaid loss and LAE and related reinsurance recoverables.

        Regardless of the techniques used, estimation is inherent in the process of establishing unpaid loss reserves and related reinsurance recoverables as of any given date. Uncertainties in projecting ultimate claim amounts are magnified by the time lag between when a claim actually occurs and when it becomesis reported and settled. This time lag is sometimes referred to as the "claim-tail". The claim-tail for most property coverages is typically short.short (usually a few days up to a few months). The claim-tail for liabilityliability/casualty coverages, such as automobile liability, general liability, products liability, multiple peril coverage, and product liability, directors and officers liability, medical malpractice and workers'workers compensation, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related occurrences.loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known whichand, as a result, OneBeacon may cause White Mountains to adjust its estimatereserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with GAAP. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of itsoperations would be negatively or positively impacted, respectively.

        In determining ultimate net loss and LAE, liability.the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment and is inherently uncertain.

69        OneBeacon's actuaries use several generally accepted actuarial methods to evaluate its loss reserves, each of which has its own strengths and weaknesses. OneBeacon places more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made. These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:


    Historical paid loss development methods: These methods use historical loss payments over discrete periods of time to estimate future losses. Historical paid loss development methods assume that the ratio of losses paid in one period to losses paid in an earlier period will remain constant. These methods necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use case reserves to estimate ultimate losses, they can be more reliable than the other methods discussed below that look to case reserves (such as actuarial methods that use incurred losses) in situations where there are significant changes in how case reserves are established by a company's claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes in payments have a larger impact on estimates of ultimate losses) than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical

      paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

    Historical incurred loss development methods: These methods, like historical paid loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. However, instead of using paid losses, these methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods can be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters' evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses can be less reliable than other methods.

    Expected loss ratio methods: These methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss ratios are typically developed based upon the information used in pricing, and are multiplied by the total amount of premiums written to calculate ultimate losses. Expected loss ratio methods are useful for estimating ultimate losses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available.

    Adjusted historical paid and incurred loss development methods: These methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes.

    Construction Defect Claims

        OneBeacon's general liability and multiple peril lines of business have been significantly impacted by an increasing number of construction defect claims. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. Such claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. Much of the increase in claims activity has been generated by plaintiffs' lawyers who approach new homeowners, and in many cases homeowner associations with large numbers of homeowners in multi-residential complexes, about defects or other flaws in their homes. The increasing number of claims for construction defects began with claims relating to exposures in California. Then, as plaintiffs' lawyers organized suits in other states with high levels of multi-residential construction, construction defect claims were reported in nearby western states, such as Colorado and Nevada, and eventually throughout the country. The reporting of such claims can be quite delayed as the statute of limitations can be up to ten years. Court decisions have expanded insurers' exposure to construction defect claims as well. For example, in 1995 California courts adopted a "continuous trigger" theory in which all companies that had ever insured a property that was alleged to have been damaged by defective construction must respond to the claimant, even if evidence of the alleged damage did not appear until after the insurance period had expired. As a result, claims may be reported more than ten years after a project has been completed as litigation can proceed for several years before an insurance company is identified as a potential contributor. Recently, claims have also emerged from parties claiming additional insured status on policies issued to other parties (e.g., such as contractors seeking coverage on a sub-contractor's policy).


        A large number of construction defect claims have been identified relating to coverages that OneBeacon had written in the past through Commercial Union and General Accident and their subsidiaries in California, Colorado, Nevada, Washington and Oregon. Management has sought to mitigate future construction defect risks in all states by no longer providing insurance to certain residential general contractors and sub-contractors involved in multi-habitational projects. Mitigating actions also included initiating the withdrawal from problematic sub-segments within OneBeacon's construction book of business, such as street and road construction, water, sewer and pipeline construction, and dam, waterway, railroad and subway construction. Management has undertaken actions to mitigate future risks related to construction defect claims and believes that the number of reported construction defect claims relating to coverages written in the past peaked in 2004 and will begin to decline. In addition, in reserving for these claims, there is additional uncertainty due to the potential for further unfavorable judicial rulings and regulatory actions.

    Asbestos and Environmental ("A&E") Reserves

        OneBeacon's reserves include provisions made for claims that assert damages from A&E related exposures. 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 cost obligations, particularly as mandated by federal and state environmental protection agencies. In addition to the factors described above under"Non-Asbestos and Environmental Reserves" 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. Due to the inherent difficulties in estimating ultimate A&E exposures, OneBeacon does not estimate a range for A&E incurred losses.

        OneBeacon's A&E losses resulted primarily from the operations of the Employers Group, an entity acquired by one of the legacy companies in 1971. These operations, including business of Employers Surplus Lines Insurance Company and Employers Liability Assurance Corporation, provided primary and excess liability insurance for commercial insureds, including Fortune 500-sized accounts, some of whom subsequently experienced claims for A&E losses. OneBeacon stopped writing such coverage in 1984.

        OneBeacon's liabilities for A&E losses from business underwritten in the recent past are substantially limited by the application of exclusionary clauses in the policy language that eliminated coverage of such claims. After 1987 for pollution and 1992 for asbestos, most liability policies contained industry-standard absolute exclusions of such claims. In earlier years, various exclusions were also applied, but the wording of those exclusions was less strict and subsequent court rulings have reduced their effectiveness.

        OneBeacon also incurred A&E losses via its participation in industry pools and associations. The most significant of these pools was Excess Casualty Reinsurance Association ("ECRA"), which provided excess liability reinsurance to U.S. insurers from 1950 until the early 1980s. ECRA incurred significant liabilities for A&E, of which OneBeacon bears approximately a 4.7% share, or $65 million at December 31, 2004 (compared to $66 million at December 31, 2003), which is fully reflected in OneBeacon's loss and LAE reserves.

        More recently, since the 1990s, OneBeacon has experienced an influx of claims from commercial insureds, including many non-Fortune 500-sized accounts written during the 1970s and 1980s, who are named as defendants in asbestos lawsuits. As a number of large well-known manufacturers of asbestos



        Loss and LAE reserve estimates atasbestos-containing products have gone into bankruptcy, plaintiffs have sought recoveries from peripheral defendants, such as installers, transporters or sellers of such products, or from owners of premises on which the plaintiffs' exposure to asbestos allegedly occurred. At December 31, 2004, 664 policyholders had asbestos-related claims against OneBeacon. In 2004, 112 new insureds with such peripheral involvement presented asbestos claims under prior OneBeacon policies.

        Historically, most asbestos claims have been asserted as product liability claims. Recently, insureds who have exhausted the available products liability limits of their insurance policies have sought payment for asbestos claims under the premises and operations coverage of their liability policies. It is more difficult for plaintiffs to establish losses as stemming from premises and operations exposures, which requires proof of the defendant's negligence, rather than products liability under which strict legal liability applies. Hence, there are subject to additional uncertainty asfewer of such claims and there is a consequencegreat deal of numerous factorsvariation in damages awarded for the actual injuries. Additionally, several accounts that occurredseek such coverage find that previously paid losses exhausted the aggregate limits under their policies. In these situations there is no coverage for these claims. There are currently 148 active claims against OneBeacon without product liability coverage asserting operations or premises coverage.

        Immediately prior to White Mountains' acquisition of OneBeacon, on June 1, 2001. As previously discussed,OneBeacon purchased a reinsurance contract with NICO under which OneBeacon is entitled to recover from NICO up to $2.5 billion in the future for asbestos claims arising from business written by OneBeacon in 1992 and prior, environmental claims arising from business written by OneBeacon in 1987 and prior, and certain other exposures. Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OneBeacon's third party reinsurers in existence at the time the NICO Cover was executed ("Third Party Recoverables"). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. Any amounts uncollectible from third party reinsurers due to dispute or the reinsurers' financial inability to pay are covered by NICO under its agreement with OneBeacon. Third Party Recoverables are typically for the amount of loss in excess of a stated level each year. Of claim payments in the past 11 years, approximately 63% of asbestos losses and 39% of environmental losses have been recovered under the historical third party reinsurance.

        OneBeacon estimates that on an incurred basis it has exhausted approximately $1.7 billion of the coverage provided by NICO at December 31, 2004. At December 31, 2004, $14.3 million of the $1.7 billion of exhausted coverage from NICO related to uncollectible Third Party Recoverables. Net losses paid totaled approximately $682 million as of December 31, 2004, with $95 million paid in 2004. Asbestos payments during 2004 reflect payments resulting from intensified efforts by claimants to resolve asbestos claims prior to enactment of potential Federal asbestos legislation. To the extent that OneBeacon's estimate of ultimate A&E losses as well as the estimate and collectibility of Third Party Recoverables differs from actual experience, the remaining protection under the NICO Cover may be more or less than the approximate $757 million that OneBeacon estimates remained at December 31, 2004.

        For purposes of determining available reinsurance, product liability asbestos claims typically are aggregated as a single loss within each policy period. As a result, losses often exceed the retention level under the reinsurance agreement and reinsurance recoveries are obtained. However, for claims being asserted under premises and operations coverage, the losses are generally not aggregated for purposes of determining reinsurance recoveries, so OneBeacon expects that in the future a smaller percentage of these losses will be covered as Third Party Recoverables than has been true historically of products liability asbestos losses.

        OneBeacon's reserves for A&E losses, net of Third Party Recoverables but prior to NICO recoveries, are $1.0 billion at December 31, 2004. An industry benchmark of reserve adequacy is the "survival ratio", computed as a company's reserves divided by its historical average yearly loss



payments. This ratio indicates approximately how many more years of payments the reserves can support, assuming future yearly payments are equal to historical levels. OneBeacon's survival ratio was approximately 21.0 at December 31, 2004, which was computed as the ratio of A&E reserves, net of Third Party Recoverables, of $1.0 billion plus the remaining unused portion of the NICO Cover of $757 million, to the average loss payments in the past three years. The average loss payments used to calculate OneBeacon's survival ratio were net of a large commutation ($64 million) in 2003 with a Third Party Reinsurer. White Mountains believes that as a result of the 1998 mergerNICO Cover and its historical third party reinsurance programs, OneBeacon should not experience material financial loss from old A&E exposures under current coverage interpretations and that its survival ratio compares favorably to industry survival ratios.

        OneBeacon's reserves for A&E losses at December 31, 2004 represent management's best estimate of its ultimate liability based on information currently available. OneBeacon believes the U.S. operationsNICO Cover will be adequate to cover all of General Accidentits A&E obligations. However, as case law expands, medical and Commercial Union,clean-up costs increase and industry settlement practices change, OneBeacon may be subject to asbestos and environmental losses beyond currently estimated amounts. Therefore, OneBeacon cannot guarantee that its A&E loss reserves, plus the remaining coverage under the NICO Cover, will be sufficient to cover additional liability arising from any such unfavorable developments. See Note 3 to the financial statements for more information regarding White Mountains' A&E reserves.

    OneBeacon A&E Claims Activity

        OneBeacon's A&E claim activity for the last two companies with different underwriting and claims management philosophies and practices. Beginningyears is illustrated in the mid-1990s,table below.

 
 Year Ended
December 31,

 
A&E Claims Activity

 
 2004
 2003
 
Asbestos     
Accounts with asbestos claims at the beginning of the year 642 615 
Accounts reporting asbestos claims during the year 112 178 
Accounts on which asbestos claims were closed during the year (90)(151)
  
 
 
Accounts with asbestos claims at the end of the year 664 642 
  
 
 
Environmental     
Accounts with environmental claims at the beginning of the year 674 596 
Accounts reporting environmental claims during the year 110 175 
Accounts on which environmental claims were closed during the year (140)(97)
  
 
 
Accounts with environmental claims at the end of the year 644 674 
  
 
 
Total     
Total accounts with A&E claims at the beginning of the year 1,316 1,211 
Accounts reporting A&E claims during the year 222 353 
Accounts on which A&E claims were closed during the year (230)(248)
  
 
 
Total accounts with A&E claims at the end of the year 1,308 1,316 
  
 
 

    OneBeacon's Loss and continuing through the Merger, the subsequent operational integrationLAE Reserves by Line of General Accident plc and Commercial Union plc and the Acquisition, OneBeacon experienced an environment of significant change, both in its business and operations. Generally accepted actuarial techniques used to estimate reserves rely in large degree on projecting historical trends (such as patterns of claim development (i.e., reported claims and paid losses)) into the future. Accordingly, estimating reserves becomes more uncertain if business mix, case reserve adequacy, claims payment rates, coverage limits and other factors change over time. The breadth and depth of the business and operational changes that occurred at OneBeacon (1) led to a wider range in the reserve estimates produced by a variety of actuarial loss reserving techniques, especially those that rely upon consistent claim development patterns, and (2) introduced greater complexity to the judgments required to be made by management in determining the impact of the business and operational changes on the development patterns used to estimate reserves.Business

        OneBeacon's net loss and LAE reserves by line of business at December 31, 20022004 and 20012003 were as follows:


 December 31,
 December 31, 2004
 December 31, 2003
Net loss and LAE reserves by line of business

2002
 2001
Net loss and LAE reserves by class of business

 December 31, 2004
 December 31, 2003

 ($ in millions)

 ($ in millions)

Workers compensation $977.3 $958.7 $362.1 $135.5 $497.6 $600.8 $176.6 $777.4
Personal automobile liability 909.4 847.0  530.7  244.1  774.8  512.0  227.3  739.3
Multiple peril 802.7 1,037.1  359.3  264.3  623.6  398.5  296.1  694.6
Commercial automobile liability 567.9 762.0  203.8  82.8  286.6  290.2  132.1  422.3
General liability 493.8 713.8  121.6  151.1  272.7  154.9  176.6  331.5
Homeowners/Farmowners 191.4 207.2  82.2  41.8  124.0  102.1  68.0  170.1
Other 127.4 289.7  97.5  84.0  181.5  63.8  58.2  122.0
 
 
 
 
 
 
 
 
Total $4,069.9 $4,815.5 $1,757.2 $1,003.6 $2,760.8 $2,122.3 $1,134.9 $3,257.2
 
 
 
 
 
 
 
 

        In establishing reserves, the Company's actuaries apply various generally accepted actuarial techniques to identify a reasonable range of reserve estimates.        For OneBeacon, the range of reserve estimates as ofat December 31, 20022004 was evaluated to consider the strengths and weaknesses of the actuarial methods applied against OneBeacon's historical claims'claims experience data. Reserves reflectedThe following table shows the recorded reserves and the high and low ends of OneBeacon's range of reasonable loss reserve estimates at December 31, 2004. The high and low ends of OneBeacon's range of reserve estimates in the accompanying consolidated financial statements represent management's best estimate of reservestable below are based on a composite of the results of the various actuarial methods as well as considerationdescribed above. The recorded reserve for each line is the result of the actuarial method that management believes to be most appropriate based on known facts and trends. Management

 
 December 31, 2004
OneBeacon net loss and LAE reserves by line of business
Range and recorded reserves

 Low
 Recorded
 High
 
 ($ in millions)

Workers compensation $475 $498 $555
Personal automobile liability  665  774  780
Multiple peril  590  624  835
Commercial automobile liability  265  286  310
General liability  240  273  295
Homeowners/Farmowners  105  124  125
Other  155  182  185
  
 
 
Total $2,495 $2,761 $3,085
  
 
 

        The probability that ultimate losses will fall outside of the ranges of estimates by line of business is higher for each line of business individually than it is for the sum of the estimates for all lines taken together due to the effects of diversification. Although management believes that OneBeacon's reserves are reasonably stated; however,stated, ultimate loss and LAE for past accident yearslosses may deviate, perhaps materially, from the recorded reserve amounts currently reflectedand could be above the high end of the range of actuarial projections.

        The recorded reserves represent management's best estimate of unpaid loss and LAE by line of business. In its selection of recorded reserves, management has generally given greater weight to adjusted paid loss development methods, which are not dependent on the consistency of case reserving practices, rather than methods that rely on incurred losses, because of the increased adequacy of case reserving by OneBeacon's claim staff in the reserve balance. Further adverserecent past. For multiple peril this resulted in OneBeacon recording reserves nearer the low end of the range. For some types of claims, such as workers compensation and construction defect, management also considered special purpose forecasting models that its claims and actuarial staff have created that consider the unique loss development if any, would impact OneBeacon's future resultscharacteristics of operations. See "these types of claims. For personal automobile liability, homeowners and "other" (principally shorter



tailed lines of business such as ocean and inland marine insurance) recorded reserves remain rather high in the respective ranges, as management's selections reflect a conservative approach to recognition of recent favorable development experienced in our ongoing businesses.

White Mountains Re

    White Mountains Re A&E Reserves

        White Mountains Re has a specialized unit that handles claims emanating from A&E exposures. The issues presented by these types of claims require specialization, expertise and an awareness of the various trends and jurisdictional developments.

        White Mountains Re's A&E exposure is primarily from reinsurance contracts written between 1974 through 1985 by predecessor companies (MONY Reinsurance and Christiania General). The exposures are predominately higher layer excess of loss treaty and facultative coverages with relatively low limits exposed for each claim. Net incurred loss activity for asbestos and environmental in the last two years was as follows:

 
 December 31,
Net incurred loss and LAE activity

 2004
 2003
 
 ($ in millions)

Asbestos $2.6 $32.0
Environmental  .1  3.7
  
 
Total $2.7 $35.7
  
 

        In recent years, most of White Mountains Re's reported activity in the asbestos area has related to (1) higher layer excess policies that are being reached by larger target defendants, (2) new notices for smaller regional defendants that are now exposed because of the larger defendant bankruptcies, and (3) new notices on "premises" and "non-products" cases, where coverage is being sought by insureds against the non-aggregating portion of the underlying policy. WM Re expects to see a smaller percentage of these losses exceed the retention level under reinsurance agreements.

        Approximately $25.0 million of White Mountains Re's 2003 loss development for asbestos exposures was a bulk increase in IBNR resulting from the completion of a detailed A&E market share study. This study compared White Mountains Re's share of industry paid losses to estimated industry carried reserves.

        White Mountains Re sets up claim files for each reported claim by each cedent for each individual insured. In many instances, a single claim notification from a cedent could involve several years and layers of coverage resulting in a file being set up for each involvement. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to pursue coverage under the reinsurance contract. Such notices do not contain an incurred loss amount to White Mountains Re, accordingly, an open claim file is not established. As of December 31, 2004, White Mountains Re had approximately 1,368 open claim files for asbestos and 786 open claim files for environmental exposures.

        The costs associated with administering the underlying A&E claims by White Mountains Re's clients tend to be higher than non-A&E claims due to generally higher legal costs incurred by ceding companies in connection with A&E claims ceded to White Mountains Re under the reinsurance contracts.



    White Mountains Re A&E Claims Activity

        White Mountains Re's A&E claim activity for the last two years is illustrated in the table below.

 
 Year ended
December 31,

 
A&E Claims Activity

 
 2004
 2003
 
Asbestos     
Total asbestos claims at the beginning of the year 1,185 1,069 
Incoming asbestos claims due to Sirius Acquisition 199  
Asbestos claims reported during the year 292 224 
Asbestos claims closed during the year (308)(108)
  
 
 
Total asbestos claims at the end of the year 1,368 1,185 
  
 
 
Environmental     
Total environmental claims at the beginning of the year 743 768 
Incoming environmental claims due to Sirius Acquisition 106  
Environmental claims reported during the year 138 47 
Environmental claims closed during the year (201)(72)
  
 
 
Total environmental claims at the end of the year 786 743 
  
 
 
Total     
Total A&E claims at the beginning of the year 1,928 1,837 
Incoming A&E claims due to Sirius Acquisition 305  
A&E claims reported during the year 430 271 
A&E claims closed during the year (509)(180)
  
 
 
Total A&E claims at the end of the year 2,154 1,928 
  
 
 

    Loss and Loss Adjustment ExpenseLAE Reserves" within the "ONEBEACON" section by Class of Item 1 and "I. Summary of Operations By Segment" in Item 7 of this report.Business

    Reinsurance

        White Mountains' reinsurance subsidiaries establishMountains Re establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for reinsured events that have already occurred. White Mountains'The estimation of net reinsurance subsidiaries also obtain reinsurance whereby another reinsurer contractually agrees to indemnify White Mountains for all or a portion of the reinsurance risks underwritten by White Mountains. Such arrangements, where one reinsurer provides reinsurance to

70



another reinsurer, are usually referred to as "retrocessional reinsurance" arrangements. White Mountains establishes estimates of amounts recoverable from retrocessional reinsurance in a manner consistent with the loss and LAE liability associated with reinsurance contracts offered to its customers (the "ceding companies"), net of an allowance for uncollectible amounts. Net reinsurance loss reserves represent loss and LAE reserves reduced by retrocessional reinsurance recoverable on unpaid losses.

        Reinsuranceis subject to the same risk as the estimation of insurance loss and LAE reserve estimates reflectreserves. In addition to those risk factors which give rise to inherent uncertainties in establishing insurance loss and LAE reserves, the judgementinherent uncertainties of bothestimating such reserves are even greater for the reinsurer, due primarily to: (1) the claim-tail for reinsurers being further extended because claims are first reported to the ceding company and then through one or more intermediary insurers or reinsurers, (2) the diversity of loss development patterns among different types of reinsurance treaties or facultative contracts, (3) the necessary reliance on the ceding companies for information regarding reported claims and (4) the differing reserving practices among ceding companies.

        As with insurance reserves, the process of estimating reinsurance reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. Based on the above, such uncertainty may be larger relative to the reserve for a reinsurer compared to an insurance company, and may take a longer time to emerge.

        In order to reduce the potential uncertainty of loss reserve estimation, White Mountains based onRe obtains information from numerous sources to assist in the experienceprocess. White Mountains Re's pricing actuaries devote considerable effort to understanding and knowledge of their respective claims personnel, regardinganalyzing a ceding company's operations and loss history during the nature and valueunderwriting of the claims. Thebusiness, using a combination of ceding companies may periodically adjustcompany and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting



and payment patterns, and rate change history. This analysis is used to project expected loss ratios for each treaty during the amount ofupcoming contract period. These expected ultimate loss ratios are aggregated across all treaties and are input directly into the case reserves as additional information becomes known or partial paymentsloss reserving process to generate the expected loss ratios that are made.used to estimate IBNR.

        Upon notification of a loss from a ceding company, White Mountains Re establishes case reserves, including LAE reserves, based upon White Mountains'Mountains Re's share of the amount of reserves established by the ceding company and White Mountains'our independent evaluation of the loss. In cases where available information indicates that reserves established by the ceding company are inadequate, White Mountains Re establishes case reserves or IBNR in excess of its share of the reserves established by the ceding company. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert us to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of business, and significant changes in the frequency or severity of individual claims. Such information is often used to supplement estimates of IBNR.

        As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases. This lag can be due to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant's physical condition many years after an accident occurs, etc. In its loss reserving process, White Mountains Re assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in its actuarial methods. This means that, as a reinsurer, White Mountains Re must rely on such actuarial estimates for a longer period of time after reserves are first estimated than does a primary insurance company.

        Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, 2004, there were no significant backlogs related to the processing of assumed reinsurance information at White Mountains Re.

        White Mountains uses a combination of actuarial methodsRe relies heavily on information reported by ceding companies, as discussed above. In order to determine its reinsurance IBNR reserves. These methods fall into two general categories: (1) methods by which ultimate claims are estimated based upon historical patternsthe accuracy and completeness of paid and reported claim development experienced bysuch information, White Mountains as supplemented by reported industry patterns,Re's U.S. underwriters, actuaries, and (2) methodsclaims personnel perform regular audits of Folksamerica's ceding companies. While regular ceding company audits are not customary outside the United States, Sirius International's staff regularly reviews information from ceding companies for unusual or unexpected results. Any material findings are discussed with the ceding companies. White Mountains Re sometimes encounters situations where we determine that a claim presentation from a ceding company is not in whichaccordance with contract terms. In these situations, White Mountains Re attempts to resolve the level ofdispute directly with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, White Mountains' reinsurance IBNR claim reserves are established based upon the application of expected loss ratios relative to earned premium by accident year, line of business and type of reinsurance written.Mountains Re will vigorously defend our position in such disputes.

        The estimation of net reinsuranceAlthough loss and LAE reserves is subjectare initially determined based on underwriting and pricing analysis, White Mountains Re constantly tests the accuracy of reserves using a variety of generally accepted actuarial methods, including historical incurred and paid loss development methods. If actual loss activity differs substantially from expectations based on historical information, an adjustment to loss reserves may be warranted. As time passes, loss reserve estimates for a given accident year will rely more on actual loss activity and historical patterns than on initial assumptions based on pricing indications.

        White Mountains Re also obtain reinsurance whereby another reinsurer contractually agrees to indemnify White Mountains Re for all or a portion of the same factorsreinsurance risks underwritten by White Mountains Re. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as "retrocessional reinsurance" arrangements. White Mountains Re establishes estimates of amounts recoverable from retrocessional reinsurance in a manner consistent with the estimation of insurance loss



and LAE reserves. In additionliability associated with reinsurance contracts offered to those factors which give rise to inherent uncertainties in establishing insuranceits customers (the "ceding companies"), net of an allowance for uncollectible amounts, if any. Net reinsurance loss reserves represent loss and LAE reserves the claim-tail for reinsurers is further extended because claims are first reported through one or more intermediary insurers or reinsurers.reduced by retrocessional reinsurance recoverable on unpaid losses.

        Reserves reflected in the accompanying consolidated financial statements representWhite Mountains Re's net loss and LAE reserves by class of business at December 31, 2004 and 2003 were as follows:

 
 December 31, 2004
 December 31, 2003
Net loss and LAE reserves by class of business
($ in millions)

 Case
 IBNR
 Total
 Case
 IBNR
 Total
Liability (excluding A&E) $920.4 $900.0 $1,820.4 $364.6 $276.4 $641.0
Property  143.3  318.0  461.3  68.5  149.0  217.5
Accident & Health and Other  279.5  187.5  467.0  25.9  66.4  92.3
A&E  50.2  24.8  75.0  35.0  44.2  79.2
  
 
 
 
 
 
Total $1,393.4 $1,430.3 $2,823.7 $494.0 $536.0 $1,030.0
  
 
 
 
 
 

        White Mountains Re establishes loss reserves based on a single point estimate, which is management's best estimate of reserves based onultimate losses and loss expenses. This "best estimate" is derived from a compositecombination of methods as described above. Once a point estimate is established, White Mountains Re's actuaries estimate loss reserve ranges to measure the sensitivity of the resultsactuarial assumptions used to set the point estimates. These ranges are calculated using similar methods to the point estimate calculation, but with different expected loss ratio and loss reporting pattern assumptions. For the low estimate, more optimistic loss ratios and faster reporting patterns are assumed, while the high estimate uses more conservative loss ratios and slower reporting patterns. These variable assumptions are derived from historical variations in loss ratios and reporting patterns by class and type of various actuarial methods, as well as consideration of known facts and trends. As a result ofbusiness. Due to the uncertaintiesinherent difficulties in the determination of insurance and reinsuranceestimating ultimate A&E exposures, White Mountains Re does not estimate ranges for these reserves. The growth in reserves from 2003 to 2004 was driven by acquisitions made during 2004.

        The following table illustrates White Mountains Re's recorded net loss and LAE reserves and related reinsurance recoverables described above,high and low estimates for those classes of business for which a range is calculated, at December 31, 2004.

 
 December 31, 2004
Net loss and LAE reserves by class of business
($ in millions)

 Low
 Recorded
 High
Liability (excluding A&E) $1,670 $1,821 $1,990
Property  420  461  490
Accident & Health and Other  400  467  550
  
 
 
 Sub-total $2,490 $2,749 $3,030
  
 
 
A&E     75   
     
   
Total    $2,824   
     
   

        The probability that ultimate losses will fall outside of the ranges of estimates by class of business is higher for each class of business individually than it is for the sum of the estimates for all classes taken together due to the effects of diversification. Although management believes reserves for White Mountains' actual net loss and LAE paidMountains Re are reasonably stated, ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be above the high end of the range of actuarial projections.


2.    White Mountains Re Reinsurance Estimates

        There is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company, through its reinsurance intermediary, to White Mountains Re. This time lag can vary from one to



several contractual reporting periods (i.e. quarterly/monthly). This lag is common in the broker market reinsurance business.

        As a result of this time lag in reporting, White Mountains Re estimates a portion of its written premium and related commissions and expenses. Given the nature of White Mountains Re's business, estimated premium balances, net of related commissions and expenses, comprise a large portion of total premium balances receivable. The estimation process begins by identifying which major accounts have not reported activity at the most recent period end. In general, premium estimates for excess of loss business are based on minimum deposit information included in the contractual terms. For proportional business, White Mountains Re's estimates are derived based on a variety of factors and assumptions, including: prior reporting from the broker or ceding company, historical reporting patterns, expected premium volume based on contractual terms or ceding company reports and other correspondence and communication with underwriters, brokers, intermediaries and ceding companies. Once premium estimates are determined, related commission and expense estimates are derived using contractual terms.

        White Mountains Re closely monitors its estimation process on a quarterly basis and adjusts its estimates as more information and actual amounts become known. There is no assurance that the amounts estimated by White Mountains Re will not deviate from the amounts reported by the ceding company or reinsurance broker. Any such deviations are reflected in the consolidated financial statements. Changes to prior year net reserves are booked in the current accounting period in accordance with GAAP. Accordingly, if net loss and LAE reserves develop adversely from amounts currently established, future results of operations wouldwhen they become known.

        The following table summarizes White Mountains Re's premium estimates and related commissions and expenses:

 
 December 31, 2004
Millions

 Liability
 Property
 Accident &
Health

 Other
 Total
Gross premium estimates $150.7 $234.8 $41.9 $72.9 $500.3
Net premium estimates  148.5  129.1  33.6  65.5  376.7
Net commission and expense estimates  43.3  12.9  8.4  15.9  80.5
  
 
 
 
 
Net amount included in reinsurance balances receivable $105.2 $116.2 $25.2 $49.6 $296.2
  
 
 
 
 
 
 December 31, 2003
Millions

 Liability
 Property
 Accident &
Health

 Other
 Total
Gross premium estimates $126.6 $159.1 $22.5 $21.0 $329.2
Net premium estimates  126.6  75.5  22.5  10.4  235.0
Net commission and expense estimates  41.5  6.0  7.1  2.1  56.7
  
 
 
 
 
Net amount included in reinsurance balances receivable $85.1 $69.5 $15.4 $8.3 $178.3
  
 
 
 
 

        The net amounts recorded in reinsurance balances receivable may not yet be negatively impacted.due from the ceding company at the time of the estimate since actual reporting from the ceding company has not yet occurred. Therefore, based on the process described above, White Mountains Re believes all of its estimated balances are collectible, and as such no allowance has been recorded.


3.    Reinsurance Transactions

        White Mountains' insurance and reinsurance subsidiaries enter into cededpurchase reinsurance contracts from time to time to protect their businesses from losses due to poor risk diversification,exposure aggregation, to manage their operating leverage ratios and to limit ultimate losses arising from catastrophic events. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured



policies. Amounts related to reinsurance contracts are recorded in accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113").

        The collectibility of reinsurance recoverables is subject to the solvency and willingness to pay of the reinsurers.reinsurer. The Company is selective in regard tochoosing its reinsurers, placing reinsurance principally with those reinsurers with a strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis. See "Note 4—Third Party Reinsurance Protection" within in the "ONEBEACON" and "REINSURANCE" sections of Item 1 of this reportaccompanying Consolidated Financial Statements for additional information on White Mountains' reinsurance programs.

71



4.    Pension and Post-retirementPost-Retirement Medical Plans

        White Mountains accounts for its pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87") and accounts for its retiree medical plan in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS No. 87 and SFAS No. 106 require that the cost of pension/retiree medical benefits be accrued over the period during which an employee provides service.

        Through December 31, 2002, OneBeacon provided pension and retiree medical plans for the benefit of its employees. The majority of OneBeacon's pension and retiree medical plans were curtailed in the fourth quarter of 2002. The OneBeacon Pension Plan will no longer addadds new participants or increaseincreases benefits for existing participants. Non-vested participants already in the plan will continue to vest during their employment with OneBeacon, this effectively causes the projected benefit obligation to equal the accumulated benefit obligation.OneBeacon. Retirees are also eligible for medical benefits if they meet certain age and service requirements. However, due to the curtailment, the plan will no longer acceptaccepts new participants after a transition period ending May 31, 2003.participants. The majority of retiree medical costs are capped at defined dollar amounts, with retirees contributing the remainder.

        The projected benefit obligation as of a particular date represents the actuarial present value of all benefits attributed by the plan's benefit formula to employee service rendered prior to that date. Therefore, future cash payments from pension and retiree medical plans are discounted using a discount rate based on published investment grade, long-term corporate bond yields. Many of the factors which are used to determine a plan's projected benefit obligation as of a particular date and the cost of pension/retiree medical benefits for a particular period are dependent upon future events, such as how long the employee and any survivors live, how many years of service the employee is expected to render and the employee's compensation in the years immediately before retirement or termination. Accordingly, the effects of such future factors are estimated. Further, since the projected benefit obligation and the periodic cost of pension/retiree medical benefits are based on actuarial present values, they are also sensitive to changes in the discount rate used to determine such amounts.

        A hypothetical 1% increase in the discount rate would result in a decrease in pension and retiree medical projected benefit obligations of approximately $55 million and $4 million, respectively, and would result in an increase in OneBeacon's total pretax pension/post-retirement expense of approximately $.4$63 million. A hypothetical 1% decrease in the discount rate would result in an increase in pension and retiree medical projected benefit obligations of approximately $55 million and $4 million, respectively, and would result in$63 million. The impact of a decrease in OneBeacon's total pretaxhypothetical 1% change to the discount rate on periodic cost of pension/post-retirement expense of approximately $.5 million.retiree medical benefits is not significant.

        Additionally, the rate of return that is assumed on plan assets affects OneBeacon's pension expense during a particular period. Since the retiree medical plan is unfunded, it is not affected by changes in the rate of return assumption. OneBeacon performed an analysis of expected long-term rates of return based on the allocation of its pension plan assets as of both December 31, 20012004 and December 31, 20022003 to develop expected rates of return for each significant asset class or economic indicator. A range of returns was developed based both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. Although the expected investment return assumption is long-term in nature, the range of reasonable returns has dropped over the past few years as a consequence of lower inflation and lower bond yields. As a result of the most



recent review, for 20032004 OneBeacon has reduced itselected to keep the expected return on its pension assets toat 7.0%, from 7.5%as was used in 2002.2003. At December 31, 2002, greater than half2004, 36% of the plan assets were invested in fixed maturity securities, one-third45% in equities and the remainder in cash, cash equivalents and convertible securities. A hypothetical 1% increase or decrease in the assumed rate of return would result in a pretax change in OneBeacon's pension expense (or income as the case may be) for 20032004 of approximately $5.0$4.7 million.

72        During 2004, OneBeacon recognized pension expense of $3.3 million, which was comprised of net periodic benefit cost of $.4 million and special termination benefits of $2.9 million. Included in the net periodic benefit cost is $32.2 million of expected return on pension plan assets. OneBeacon contributed $4.2 million to the pension plan in 2004. No unrecognized losses on pension assets were recorded since the Company uses the market value method to value plan assets.



5.    Purchase Accounting and Related Deferred Credits and Goodwill

        As of December 31, 2001,When White Mountains had unamortized deferred creditsacquires another company, management must estimate the fair values of the assets and goodwillliabilities acquired, as prescribed by SFAS No. 141, "Business Combinations" ("SFAS 141"). Certain assets and liabilities require little judgment to estimate their fair values, particularly those that are quoted on a market exchange, such as publicly-traded investment securities. Other assets and liabilities, however, require a substantial amount of $682.5 millionjudgment to estimate their fair values. The most significant of these is the estimation required to fair value loss and $22.3 million, respectively. Deferred credits representLAE reserves.

        White Mountains estimates the excessfair value of loss and LAE reserves obtained in an acquisition following the principles contained within FASB Statement of Financial Accounting Concepts No. 7: "Using Cash Flow Information and Present Value in Accounting Measurements" ("CON 7"). Under CON 7, the fair value of a particular asset or liability essentially contains five elements: (1) an estimate of the future cash flows, (2) expectations about possible variations in the amount or timing of those cash flows; (3) the time value of money, represented by the risk-free rate of interest; (4) the price for bearing the uncertainty inherent in the asset or liability; and (5) other, sometimes unidentifiable, factors including illiquidity and market imperfections.

        White Mountains' actuaries estimate the fair value of loss and LAE reserves obtained in an acquisition by taking the acquired company's recorded reserves and discounting them based on expected reserve payout patterns using the current risk-free rate of interest. Then, White Mountains' actuaries develop additional cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. In each scenario, the risk-free rate of interest is used to discount future cash flows. These scenarios are put in a statistical model that assigns a probability to each cash flow scenario. White Mountains' actuaries then choose the scenario that best represents the price for bearing the uncertainty inherent within the acquired company's recorded reserves. The "price" for bearing the uncertainty inherent within the acquired company's reserves is measured as the difference between the selected cash flow scenario and the expected cash flow scenario. The scenario selected has typically been between 1.5 and 2 standard deviations from the expected cash flow outcome. The fair value of the acquired company's loss and LAE reserves is determined to be the sum of the expected cash flow scenario (i.e., the acquired company's discounted loss and LAE reserves) and the uncertainty "price".

        The difference between an acquired company's loss and LAE reserves and White Mountains' best estimate of the fair value of such reserves at the net assetsacquisition date is amortized ratably over the purchase price paid. Goodwill represents the excesspayout period of the purchase price overacquired loss and LAE reserves. Historically, the fair value of an acquired company's loss and LAE reserves has been less than the net assets of companies acquired. These deferred creditsit's recorded reserves at acquisition. Accordingly, the amortization has been and goodwill resulted from White Mountains' pre-July 1, 2001 acquisition activities which were accounted for in accordance with the treatment of a purchase business combination under Accounting Principles Board ("APB") No. 16, "Business Combinations". APB No. 16 calls for the net assets of the operations acquiredwill continue to be recorded byas an expense on White Mountains at their fair values on the date of acquisition.

        All acquisitions occurring subsequent to July 1, 2001 were accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations". Under this newly-issued accounting standard, White Mountains recognized a $16.6 million extraordinary gain during 2001 relating to two acquisitions andMountains' income statement until fully recognized its existing unamortized deferred credit balance of $682.5 million on January 1, 2002 as a change in accounting principle.amortized.

        In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", White Mountains will amortize its existing and prospective goodwill only when the asset acquired is deemed to have been impaired rather than systematically over a perceived period of benefit.




FORWARD-LOOKING STATEMENTS

        The information contained in this report release may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act.Act of 1934. All statements, other than statements of historical facts, included or referenced in this report which address activities, events or developments which White Mountains expects or anticipates will or may occur in the future are forward-looking statements. The words "will", "believe," "intend," "expect," "anticipate," "project," "estimate," "predict" and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to White Mountains':

    future growth in tangible book value per share or return on equity;

    business strategy;

    financial and operating targets or plans;

    incurred losses and the adequacy of its loss and LAE reserves;

    projections of revenues, income (or loss), earnings (or loss) per share, dividends, market share or other financial forecasts;

    expansion and growth of ourits business and operations; and

    future capital expenditures.

        These statements are based on certain assumptions and analyses made by White Mountains in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform with ourits expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including:

    claims arising from catastrophic events, such as hurricanes, earthquakes, floods or terrorist attacks;

    the continued availability of capital and financing;

    general economic, market or business conditions;

73


      business opportunities (or lack thereof) that may be presented to it and pursued;

      competitive forces, including the conduct of other property and casualty insurers and reinsurersreinsurers;

      changes in domestic or foreign laws or regulations applicable to White Mountains, its competitors or its clients;

      an economic downturn or other economic conditions adversely affecting its financial position;

      loss reserves established subsequently proving to have been inadequate; and

      other factors, most of which are beyond White Mountains' control.

            Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by White Mountains will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, White Mountains or its business or operations. White Mountains assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.




    Item 7A.    Quantitative and Qualitative Disclosures aboutAbout Market Risk

            White Mountains' consolidated balance sheet includes a substantial amount of assets and liabilities whose fair values are subject to market risk. The term market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices. Due to White Mountains' sizable balances of interest rate sensitive instruments, market risk can have a significant effect on White Mountains' consolidated financial position.


    Interest Rate Risk

            Fixed Maturity Portfolio.    In connection with the Company's consolidated insurance and reinsurance subsidiaries, White Mountains invests in interest rate sensitive securities, primarily debt securities. White Mountains' strategy is to purchase fixed maturity investments that are attractively priced in relation to perceived credit risks. White Mountains' fixed maturity investments are held as available for sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), whereby these investments are carried at fair value on the balance sheet with net unrealized gains or losses reported net of tax in a separate component of common shareholders' equity. White Mountains generally manages its interest rate risk associated with its portfolio of fixed maturity investments by monitoring the average duration of the portfolio, which allows White Mountains to achieve an adequate yield without subjecting the portfolio to an unreasonable level of interest rate risk. White Mountains' fixed maturity portfolio is comprised of primarily investment grade corporate securities, U.S. government and agency securities, municipal obligations and mortgage-backed securities (e.g., those receiving aan investment grade rating from the National Association of Insurance Commissioners of 1S&P or 2)Moody's).

    74


            Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity investments, respectively. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

            Indebtedness.    White Mountains utilized a significant amount of variable rate debt financing (the Bank Facility and the Seller Note) in connection with the Acquisition. Increases and decreases in prevailing interest rates will translate into increases and decreases in the future interest expense associated with this indebtedness although the carrying value of such liabilities will not be affected. At December 31, 2002, White Mountains also had $5.1 million in fixed rate indebtedness outstanding which was prepaid in connection with the Acquisition by the Debt Escrow transaction, therefore, its fair value is not subject to future changes in prevailing interest rates.

            During 2001 White Mountains entered into a ten-year, $200.0 million notional interest rate swap and three separate three-year interest rate swaps at an aggregate $500.0 million notional with two large financial institutions. The interest rate swaps were undertaken to achieve a fixed interest rate on a portion of the Bank Facility. Pursuant to SFAS No. 133, these contracts are carried at fair value in other investments on the balance sheet (which constituted an obligation by White Mountains of $52.2 million at December 31, 2002) with changes in their fair value reported directly through the income statement as they do not qualify for hedge accounting since their duration is dissimilar to that of the Bank Facility.

            The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on White Mountains' fixed maturity portfolio and the interest rate swaps.pension plan.

     
     Fair Value at December 31, 2002
     Assumed Change in Relevant Interest Rate
     Estimated Fair Value After Change in Interest Rate
     After-tax Increase (Decrease) in Carrying Value
     
     
     Dollars in Millions

     
    Fixed maturity investments $6,669.1 100 bp decrease $6,962.1 $190.5 
         50 bp decrease  6,817.3  96.3 
         50 bp increase  6,533.6  (88.1)
         100 bp increase  6,392.2  (180.0)

    Pension fixed maturity investments

     

    $

    297.8

     

    100 bp decrease

     

    $

    314.2

     

    $

    10.7

     
         50 bp decrease  305.7  5.1 
         50 bp increase  288.7  (5.9)
         100 bp increase  280.0  (11.6)

    Interest rate swaps(1) 

     

    $

    (52.2

    )

    100 bp decrease

     

    $

    (77.5

    )

    $

    (16.4

    )
         50 bp decrease  (64.7) (8.3)
         50 bp increase  (40.1) 7.9 
         100 bp increase  (28.4) 15.5 

    (1)
    The relevant interest rate for the assumed change in
    $ in millions

     Fair Value at
    December 31,
    2004

     Assumed Change in
    Relevant Interest Rate

     Estimated Fair Value
    After Change in
    Interest Rate

     After-Tax Increase
    (Decrease) in Carrying
    Value

     
    Fixed maturity investments $7,900.0 100 bp decrease $8,110.6 $142.8 
         50 bp decrease  8,005.8  71.7 
         50 bp increase  7,795.8  (70.7)
         100 bp increase  7,706.0  (132.1)
    Pension fixed maturity investments $259.4 100 bp decrease $267.5 $5.3 
         50 bp decrease  263.5  2.7 
         50 bp increase  255.3  (2.7)
         100 bp increase  251.2  (5.3)

            Long-term obligations.    As of December 31, 2004, White Mountains' interest rate swaps is predicated upon assumed changes in the three-year or the ten-year U.S. Treasury yield, depending on the durationand dividend bearing long-term obligations consisted primarily of the swap contract.

    Senior Notes and the Berkshire and Zenith Preferred Stock obligations, which have fixed interest and dividend rates. As a result, White Mountains exposure to interest rate risk resulting from variable interest rate obligations is insignificant.

    75        The Senior Notes were issued in 2003 and mature on May 15, 2013. At December 31, 2004, the fair value of White Mountains' Senior Notes was approximately $714 million, which compared to a carrying value of $698 million.




            The Berkshire and Zenith Preferred Stock obligations were issued in 2001 and mature on May 31, 2008 and May 31, 2011, respectively. At the Company's option, the Zenith Preferred Stock may be redeemed on June 30, 2007. At December 31, 2004, the fair values of the Berkshire and Zenith Preferred Stock were approximately $341 million and $23 million, respectively, which compared to carrying values of $192 million and $20 million, respectively.

            The fair values of these obligations were estimated by discounting future cash flows using current market rates for similar obligations or using quoted market prices.


    Equity Price Risk

            The carrying values of White Mountains' common equity securities and its other investments are based on quoted market prices or management's estimates of fair value (which is based, in part, on quoted market prices) as of the balance sheet date. Market prices of common equity securities, in general, are subject to fluctuations which could cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.


    Foreign Currency Exchange Rates

            A small portion of White Mountains' foreign assets and liabilities are valued using period-end exchange rates and its foreign revenues and expenses are valued using average exchange rates. Foreign currency exchange rate risk is the risk that White Mountains will incur losses on a U.S. Dollar basis due to adverse changes in foreign currency exchange rates.

            At December 31, 2004, OneBeacon held approximately $384 million in bonds denominated in foreign currencies. Net unrealized foreign currency translation gains and losses are reported, after-tax, ascurrencies, mostly those denominated in British Pounds. Assuming a net amount in a separate component of common shareholders' equity. Changeshypothetical 10% increase or decrease in the valuesrate of theseexchange from the British Pound to the U.S. Dollar as of December 31, 2004, the carrying value of OneBeacon's foreign currency-denominated bond portfolio would have respectively decreased or increased by approximately $37 million.

            As a result of the Sirius Acquisition during 2004, White Mountains has a higher concentration of assets, liabilities, revenues and liabilities due to currency fluctuations, after-tax, are reported on the income statement as a component of other comprehensive income. White Mountains' assets and liabilitiesexpenses denominated in foreign currencies than in prior periods. The functional currency are not material.of Sirius International is the Swedish Krona. Assuming a hypothetical 10% increase or decrease in the rate of exchange from the Swedish Krona to the U.S. Dollar as of December 31, 2004, the carrying value of White Mountains' net assets denominated in Swedish Kronor would have respectively decreased or increased by approximately $40 million.


    Item 8.    Financial Statements and Supplementary Data

            The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8588 of this report.


    Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

            None.

    76



    PART III


    Item 9A.    Controls and Procedures

            The Principal Executive Officer ("PEO") and the Principal Financial Officer ("PFO") of White Mountains have evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2004. Based on that evaluation, the PEO and



    PFO have concluded that White Mountains' disclosure controls and procedures are adequate and effective.

            The PEO and the PFO of White Mountains have evaluated the effectiveness of its internal control over financial reporting as of December 31, 2004. Based on that evaluation, the PEO and PFO have concluded that White Mountains' internal control over financial reporting is effective. Management's annual report on internal control over financial reporting is included on page F-71 of this report. The attestation report on management's assessment of its internal control over financial reporting by PricewaterhouseCoopers LLP is contained on page F-72 of this report.

            There have been no significant changes in White Mountains' internal controls, or in factors that could significantly affect internal controls, subsequent to their most recent evaluation of such controls.


    Item 9B. Other Information

            None.


    PART III

    Item 10. Directors and Executive Officers

      a.
      DirectorsDirectors (as of March 21, 2003)

            Reported under the caption "Election of the Company's Directors" on pages 3 through 6 of the Company's 20032005 Proxy Statement, herein incorporated by reference.

      b.
      Executive Officers (as

            Reported in Part I pursuant to General Instruction G to Form 10-K.

      c.
      Audit Committee Financial Expert

            Reported under the caption "Committees of March 21, 2003)the Board—Audit Committee" of the Company's 2005 Proxy Statement, herein incorporated by reference.

    Name

     Position
     Age
     Executive officer since(a)
    Raymond Barrette President and CEO 52 1997
    John D. Gillespie Deputy Chairman and President of WM Advisors 44 2001
    Dennis P. Beaulieu Treasurer and Corporate Secretary 55 2001
    John P. Cavoores Managing Director, President and Chief Operating Officer of OneBeacon 45 2002
    Charles B. Chokel Managing Director and Chief Administrative Officer of OneBeacon 49 2002
    Steven E. Fass President and CEO of Folksamerica 57 2002
    J. Brian Palmer Chief Accounting Officer 30 2001
    James J. Ritchie Managing Director and Chief Financial Officer of OneBeacon 48 2001
    Robert L. Seelig General Counsel 34 2002
        
     

      (a)d.
      All executiveCode of Business Conduct and Ethics

            The Company's Code of Business Conduct, which applies to all directors, officers and employees in carrying out their responsibilities to and on behalf of the Company, and its subsidiaries, are elected by the Board for a term of one-year or until their successors havehas been elected and have duly qualified.


    filed herein as Exhibit 14.

            Reported under the insurance business, mostly at Fireman's Fund. He is also Chairman of Folksamerica Reinsurance and serves as a director of Montpelier and other White Mountains subsidiaries and affiliates.

            Mr. Gillespie has served as Deputy Chairmancaption "Compliance with Section 16(a) of the Company since January 2003, as Chairman and President of WM Advisors since March 2003 and has been a director of the Company since 1999. Previously, Mr. Gillespie was Managing Director of OneBeacon since June 2001. He is also the founder and Managing Partner of his own investment firm, Prospector Partners, LLC, in Hartford, Connecticut. Prior to forming Prospector, Mr. Gillespie was President of the T. Rowe Price Growth Stock Fund and the New Age Media Fund, Inc. Mr. Gillespie is a manager of OneBeacon and also serves as a director of Folksamerica and Montpelier.

            Mr. Beaulieu has served as Secretary and Treasurer of the Company since June 1, 2001. Mr. Beaulieu previously served as Vice President and Secretary of the Company from January 1995 to May 2001. He also served as secretary for a numberExchange Act" of the Company's subsidiaries from January 1995 to May 2001 and as Chief Financial Officer of White Mountains Insurance Company from March 1995 to June 1999. Prior to joining White Mountains, Mr. Beaulieu was Chief Financial Officer of New Dartmouth Bank from October 1991 to June 1994.2005 Proxy Statement, herein incorporated by reference.

    77



            Mr. Cavoores was appointed Managing Director, President and Chief Operating Officer of OneBeacon in December 2001 and formerly served as a Managing Director of Fund American from 2000 to June 2001 and as a Managing Director of OneBeacon from June 2001 to December 2001. Prior to joining White Mountains in 2001, Mr. Cavoores served as Chief Underwriting Officer of worldwide specialty business at Chubb Corporation. Mr. Cavoores was with Chubb since 1981. Mr. Cavoores is a member of OneBeacon.

            Mr. Chokel has served as Managing Director and Chief Administrative Officer of OneBeacon since January 2003 and as Managing Director since March 2002. Prior to joining OneBeacon, Mr. Chokel served as Executive Vice President and Chief Financial Officer of Conseco, Inc. from March 2001 to March 2002 and as Co-CEO of The Progressive Corporation from January 1999 to January 2001. Mr. Chokel was with Progressive since 1978. Mr. Chokel is a member of OneBeacon.

            Mr. Fass has served as President and Chief Executive Officer of Folksamerica and its subsidiaries including Folksamerica Reinsurance Company since 1984 and has been a director of the Company since 2000. He joined Folksamerica as its Vice President, Treasurer and Chief Financial Officer in 1980. Mr. Fass also serves as Chairman of Fund American Re and WMU.

            Mr. Palmer has served as Chief Accounting Officer since June 2001 and previously served as Controller of a subsidiary of White Mountains from 1999 to 2001. Prior to joining White Mountains in 1999, Mr. Palmer was with PricewaterhouseCoopers LLP.

            Mr. Ritchie was appointed Chief Financial Officer of FAC in March 2001 and was named a Managing Director and Chief Financial Officer of OneBeacon in June 2001. Prior to joining White Mountains in 2001, Mr. Ritchie served as Senior Vice President and Chief Financial Officer of CIGNA Corporation's International Division. Mr. Ritchie was with CIGNA since 1986. Mr. Ritchie is a member of OneBeacon and serves as a director of Folksamerica.

            Mr. Seelig is the General Counsel of the Company. Prior to joining White Mountains in September 2002, Mr. Seelig was with the law firm of Cravath, Swaine & Moore.


    Item 11.    Executive Compensation

            Reported under the captions "Compensation of Executive Officers" on pages 11 through 14,, "Reports of the Compensation CommitteesCommittee on Executive Compensation" on pages 16 through 20,, "Member Return Graph" on page 21, and "Compensation Plans" on page 15 of the Company's 20032005 Proxy Statement, herein incorporated by reference.


    Item 12.    Security Ownership of Certain Beneficial Owners and Management

            Reported under the caption "Voting Securities and Principal Holders Thereof" on pages 7 through 9 of the Company's 20032005 Proxy Statement, herein incorporated by reference.



    Item 13.    Certain Relationships and Related Transactions

            Reported under the captions "Other Compensation Arrangements" on page 15,, "Certain Relationships and Related Transactions" on pages 15 through 16 and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" on page 22 of the Company's 20032005 Proxy Statement, herein incorporated by reference.


    Item 14.    Principal Accountant Fees and Services

            Reported under the caption "Independent Registered Public Accountant Fees and Services" of the Company's 2005 Proxy Statement, herein incorporated by reference.


    PART IV


    Item 14. Controls and Procedures

            The Principal Executive Officer ("PEO") and the Principal Financial Officer ("PFO") of White Mountains have evaluated the effectiveness of its disclosure controls and procedures (as defined in

    78



    Rule 13a-14 of the Exchange Act) within 90 days prior to the filing of this report. Based on that evaluation, the PEO and PFO have concluded that White Mountains' disclosure controls and procedures are adequate and effective. There have been no significant changes in White Mountains' internal controls, or in factors that could significantly affect internal controls, subsequent to their most recent evaluation of such controls.


    Part IV


    Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K


            The financial statements and financial statement schedules and reports of independent auditors have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8588 of this report. A listing of exhibits filed as part of the report appear on pages 7983 through 8285 of this report.


    Exhibit Numbernumber

     Name
    2 Plan of Reorganization (incorporated by reference herein to the Company's Registration Statement on S-4 (No. 333-87649) dated September 23, 1999)

    3(a)3.1

     

    Memorandum of Continuance of the Company (incorporated by reference herein to the Company's Registration Statement on S-4 (No. 333-87649) dated September 23, 1999)

    3(b)3.2

     

    By-LawsBye-Laws of the Company (incorporated by reference herein to the Company's Registration Statement on S-4 (No. 333-87649) dated September 23, 1999)

    10(a)4

     

    Amended and Restated Certificate of Designation of Series A Preferred Stock Purchase Agreement among CGU International Holdings Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company,of Fund American Enterprises Holdings, Inc. and Fund American Companies, Inc. dated as of September 24, 2000 (incorporated by reference herein to Exhibit 99(a)99.1 of the Company's Report on Form 8-K dated September 24, 2000)December 3, 2004)

    10(b)10.1

     

    Amendment No. 1 dated October 15, 2000 to the Stock Purchase Agreement among CGU International Holdings Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company, Fund American Enterprises Holdings, Inc. and Fund American Companies,  Inc. dated as of September 24, 2000November 30, 2004, between General Reinsurance Corporation, a Delaware corporation, the Company and Fund American (incorporated by reference herein to Exhibit 99(c)99.2 of the Company's Report on Form 8-K dated October 19, 2000)December 3, 2004)

    10.2

     

    79



    10(c)


    Amendment No. 2 dated February 20, 2001 to the Stock PurchaseKeep-Well Agreement, among CGU International Holdings Luxembourg S.A., CGU Holdings LLC, CGNU PLC, the Company, Fund American Enterprises Holdings, Inc. and Fund American Companies,  Inc. dated as of September 24, 2000November 30, 2004, by and between the Company and Fund American (incorporated by reference herein to Exhibit 99(i)99.3 of the Company's Report on Form 8-K dated February 20, 2001)December 3, 2004)

    10(d)10.3

     

    Convertible Preferred Stock Term Sheet relating to the Company's acquisitionPurchase Agreement by and among Safeco Corporation, General America Corporation, The Company, Occum Acquisition Corp. dated as of OneBeaconMarch 31, 2004 (incorporated by reference herein to Exhibit 99(e)10 of the Company's Report on Form 8-K dated October 19, 2000)March 15, 2004)

    10(e)10.4

     

    Berkshire Preferred Stock$400,000,000 Credit Agreement, dated as of August 26, 2004, among the Company and Warrants Term Sheet relatingFund American, as the borrowers, the several lenders from time to the Company's acquisitiontime parties hereto, JP Morgan Chase Bank, as Syndication Agent, and Bank of OneBeaconAmerica, NA as Administrative Agent. (incorporated by reference herein to Exhibit 99(f)10 of the Company's Report on Form 8-K10-Q dated October 19, 2000)November 2, 2004)

    10(f)

     

    $875 million Credit Agreement among Fund American Enterprises Holdings, Inc., Fund American Companies, Inc. and the Company (as borrowers), Lehman Brothers, Inc. (as arranger) and the several lenders as parties thereto relating to the Company's acquisition of OneBeacon dated March 16, 2001 (incorporated by reference herein to Exhibit 10(f) of the Company's Report on Form 10-K dated March 26, 2001)



    10(g)


    Amended and Restated Credit Agreement dated as of October 20, 2002, among Fund American Enterprises Holdings, Inc. and Fund American Companies, Inc. (as borrowers), Lehman Brothers, Inc. (as arranger), Fleet National Bank (as syndication agent), Bank of America, N.A. and Bank One, N.A. (as co-documentation agent), Lehman Commercial Paper Inc. (as administration agent) and the several lenders as parties thereto (incorporated by reference herein to Exhibit 99(a) of the Company's Report on Form 8-K dated October 31, 2002)

    10(h)10.5

     

    Adverse Development Agreement of Reinsurance No. 8888 between Potomac Insurance Company and GRC dated April 13, 2001 (incorporated by reference herein to Exhibit 99(m) of the Company's Report on Form 8-K dated June 1, 2001)

    10(i)10.6

     

    Adverse Development Agreement of Reinsurance between NICO (and certain of its affiliates) and Potomac Insurance Company dated April 13, 2001 and related documents (incorporated by reference herein to Exhibits 99(n), 99(o), 99(p) and 99(q) of the Company's Report on Form 8-K dated June 1, 2001)

    10(j)10.7

     

    WarrantPurchase Agreement among the Registrantbetween ABB Holding AG, as Seller, and BerkshireFund American Holdings AB, as Purchaser, dated May 30, 2001December 8, 2003 (incorporated by reference herein to Exhibits 99(s)Exhibit 99(a) of the Company's Report on Form 8-K dated June 1, 2001)December 8, 2003)

    10(k)10.8

     

    Subscription Agreement among Berkshire, Fund American Companies, Inc. and the Registrant dated May 30, 2001 (incorporated by reference herein to Exhibits 99(t) of the Company's Report on Form 8-K dated June 1, 2001)

    10(l)


    Form of Subordinated Note Due 2002 issued to CGU International Holdings Luxembourg S.A. and CGU Holdings LLC dated June 1, 2001 (incorporated by reference herein to Exhibits 99(u) of the Company's Report on Form 8-K dated June 1, 2001)

    10(m)


    Note Purchase Option Agreement among CGU International Holdings Luxembourg S.A. and CGU Holdings LLC and the Registrant dated June 1, 2001 (incorporated by reference herein to Exhibits 99(v) of the Company's Report on Form 8-K dated June 1, 2001)



    80



    10(n)10.9

     

    Master Agreement by and among the Company, OneBeacon and Liberty Mutual including the Renewal Rights AgreementLiberty RRA and related documents (incorporated by reference herein to Exhibits 99(d), 99(e), 99(f), 99(g) and 99(h) of the Company's Report on Form 8-K dated November 1, 2001)

    10(o)


    Asset Purchase Agreement dated as of December 4, 2001 between Folksam International Insurance Company, Ltd., Folksam Mutual General Insurance Company and Fund American Reinsurance Company, Ltd. and related documents (incorporated by reference herein to Exhibits 99(a), 99(b), 99(c) and 99(d) of the Company's Report on Form 8-K dated January 3, 2002)

    10(p)


    VGI Stock Acquisition Agreement dated February 10, 1999 between Unitrin, Inc. and the Company (incorporated by reference herein to Exhibit 10(n) of the Company's 1998 Annual Report on Form 10-K)

    10(q)


    Subscription Agreement for the purchase of Convertible Preference Shares of the Company and the related terms and conditions thereto, each dated as of October 23, 2002, among the investment funds managed by Franklin Mutual Advisors, LLC and the Company (incorporated by reference herein to Exhibits 99(a) and 99(b) of the Company's Report on Form 8-K dated October 24, 2002)

    10(r)10.10

     

    Folksamerica Holding Company, Inc. Long-Term Incentive PlanPlan—2003 and Prior (*)(**)

    10(s)10.11


    White Mountains Re Group, Ltd. Long-Term Incentive Unit Plan (*)

    10.12

     

    Folksamerica Holding Company, Inc. White Mountains Performance Share Plan (incorporated by reference herein to Exhibit 10(s) of the Company's 2002 Annual Report on Form 10-K)

    10.13


    White Mountains Re Group Ltd./Folksamerica 2004 Bonus Plan (*)(**)

    10(t)10.14


    Folksamerica Holding Company, Inc. Voluntary Deferred Compensation Plan (*)

    10.15


    Folksamerica Holding Company, Inc. Deferred Benefit Plan (*)

    10.16

     

    White Mountains Long-Term Incentive Plan, as amended, (incorporated by reference to Appendix I of the Company's Notice of 20012003 Annual General Meeting of Shareholders and Proxy Statement dated July 5, 2001)April 7, 2003)

    10.17


    White Mountains Bonus Plan (**)

    10(u)10.18


    The Company's Voluntary Deferred Compensation Plan (incorporated by reference herein to Exhibit 4(c) of the Company's Report on Form S-8 dated October 19, 1999)

    10.19

     

    White Mountains Insurance Group Executive SavingsDeferred Compensation Plan (incorporated by reference herein to Exhibit 10(v)10.14 of the Company's 20012003 Annual Report on Form 10-K)(**)

    10(v)10.20

     

    OneBeacon Insurance Executive SavingsFund American Deferred Compensation Plan (incorporated by reference herein to Exhibit 10(w)10.15 of the Company's 20012003 Annual Report on Form 10-K)(**)

    10(w)10.21


    OneBeacon Insurance Performance Unit Plan (incorporated by reference herein to Exhibit 10.16 of the Company's 2003 Annual Report on Form 10-K)

    10.22

     

    OneBeacon Insurance Supplemental Plan (incorporated by reference herein to Exhibit 4(c) of the Company's Report on Form S-8 dated August 27, 2001)

    10.23


    OneBeacon's 2004 Management Incentive Plan (**)


    10(x)10.24


    OneBeacon Insurance Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.18 of the Company's 2003 Annual Report on Form 10-K)

    10.25

     

    Employment Agreement dated January 1, 2001 among John D. Gillespie and Fund American Companies, Inc. (incorporated by reference herein to Exhibit 10(y) of the Company's 2001 Annual Report on Form 10-K)(**)

    10(y)10.26

     

    Amended and Restated Revenue Sharing Agreement among John D. Gillespie, Fund American Companies, Inc. and Folksamerica Reinsurance Company (incorporated by reference herein to Exhibit 10(z) of the Company's 2001 Annual Report on Form 10-K)(**)

    11

     

    Statement Re Computation of Per Share Earnings (***)

    12


    Statement Re Computation of Ratio of Earnings to Fixed Charges (*)

    14


    The Company's Code of Business Conduct, which applies to all directors, officers and employees in carrying out their responsibilities to and on behalf of the Company (*)

    21

     

    Subsidiaries of the Registrant (*)

    23

     

    Consent of PricewaterhouseCoopers LLP dated March 27, 2003(*1, 2005 (*)

    24

     

    Powers of Attorney(*Attorney (*)

    99(a)31.1

     

    PEOPrincipal Executive Officer Certification Pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934 (*)

    31.2


    Principal Financial Officer Certification Pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934 (*)

    32.1


    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*2002 (*)

    32.2

     

    81



    99(b)


    PFOPrincipal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(*2002 (*)

    99(c)99

     

    Text entitled "Non-Asbestos and Environmental Reserves" under the caption "Loss and Loss Adjustment Expense Reserves" (incorporated by reference herein to pages 31 through 43 of the Company's Form S-3 dated March 14, 2003)



    d.c.
    Financial Statement Schedules

            The financial statement schedules and report of independent auditorsregistered public accounting firm have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 8588 of this report.

    82




    SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


     

     

    White Mountains Insurance Group,WHITE MOUNTAINS INSURANCE GROUP, LTD.


    Date: March 27, 20032, 2005


     


    By:


    /s/  
    J. BRIAN PALMER      

    Chief Accounting Officer

            Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

    Signature
     Title
     Date

     

     

     

     

     

    /s/  
    RAYMOND BARRETTE      
    Raymond Barrette

     

    Director, President and CEO
    (Principal (Principal Executive Officer)

     

    March 27, 20032, 2005

    /s/  
    DENNIS P. BEAULIEUBRUCE R. BERKOWITZ*      
    Dennis P. BeaulieuBruce R. Berkowitz

     

    Treasurer and Corporate Secretary
    (Principal Financial Officer)Director

     

    March 27, 20032, 2005

    /s/  
    JOHN J. BYRNE*      
    John J. Byrne

     

    Director

     

    March 27, 2003

    /s/  
    MARK J. BYRNE*      
    Mark J. Byrne


    Director


    March 27, 20032, 2005

    /s/  
    HOWARD L. CLARK, JR.*      
    Howard L. Clark, Jr.

     

    Director

     

    March 27, 20032, 2005

    /s/  
    ROBERT P. COCHRAN*      
    Robert P. Cochran

     

    Director

     

    March 27, 20032, 2005

    /s/  
    STEVEN E. FASS*      
    Steven E. Fass

     

    Director

     

    March 27, 20032, 2005

    /s/  
    DAVID T. FOY      
    David T. Foy


    Executive Vice President and CFO (Principal Financial Officer)


    March 2, 2005


    /s/  
    GEORGE J. GILLESPIE, III*      
    George J. Gillespie, III

     

    DirectorChairman

     

    March 27, 20032, 2005





    83



    /s/  
    JOHN D. GILLESPIE*      
    John D. Gillespie

     

    Director

     

    March 27, 20032, 2005

    /s/  
    K. THOMAS KEMP*EDITH E. HOLIDAY*      
    K. Thomas KempEdith E. Holiday

     

    Director

     

    March 27, 2003

    /s/  
    GORDON S. MACKLIN*      
    Gordon S. Macklin


    Director


    March 27, 20032, 2005

    /s/  
    FRANK A. OLSON*      
    Frank A. Olson

     

    Director

     

    March 27, 20032, 2005

    /s/  
    J. BRIAN PALMER      
    J. Brian Palmer

     

    Chief Accounting Officer (Principal Accounting Officer)

     

    March 27, 20032, 2005

    /s/  
    LOWNDES A. SMITH*      
    Lowndes A. Smith


    Director


    March 2, 2005

    /s/  
    JOSEPH S. STEINBERG*      
    Joseph S. Steinberg

     

    Director

     

    March 27, 20032, 2005

    /s/  
    ARTHUR ZANKEL*      
    Arthur Zankel

     

    Director

     

    March 27, 20032, 2005

    *By:

     

    /s/  
    RAYMOND BARRETTE    

    Raymond Barrette,
    Attorney-in-Fact

     

     

     

     

    84




    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

    Index to Consolidated Financial Statements and Financial Statement Schedules

     
     
    Form
    10-k 10-K
    page(s)

    Consolidated Financial Statements:financial statements:  
    Consolidated balance sheets as of December 31, 20022004 and 20012003 F-1
    Consolidated statements of income and comprehensive income for each of the years ended December 31, 2002, 20012004, 2003 and 20002002 F-2
    Consolidated statements of common shareholders' equity for each of the years ended December 31, 2002, 20012004, 2003 and 20002002 F-3
    Consolidated statements of cash flows for each of the years ended December 31, 2002, 20012004, 2003 and 20002002 F-4
    Notes to consolidated financial statements F-5

    Other Financial Information:financial information:

     

     
    Report on management's responsibilitiesManagement's responsibility for financial statements F-61F-71
    Management's annual report on internal control over financial reportingF-71
    Report of independent accountantsregistered public accounting firm F-62F-72
    Selected quarterly financial data (unaudited) F-63F-74

    Financial Statement Schedules:statement schedules:

     

     
    I. Summary of investments investments—other than investments in related parties FS-1
    II. Condensed financial information of the Registrant FS-2
    III. Supplementary insurance information FS-4
    IV. Reinsurance FS-5
    V. Valuation and qualifying accounts FS-6
    VI. Supplemental information concerningfor property and casualty insurance underwriters FS-7

    85




    CONSOLIDATED BALANCE SHEETS



     December 31,
     
     December 31,
     

     2002
     2001
     

     Dollars in millions,
    except share amounts


     
    ASSETS     
    Fixed maturity investments, at fair value (cost $6,407.5 and $6,156.5) $6,669.1 $6,128.3 
    Short-term investments, at amortized cost (which approximated fair value) 1,790.6 2,545.8 
    Common equity securities, at fair value (cost $252.3 and $155.1) 275.0 173.6 
    Other investments (cost $142.3 and $150.0) 164.7 158.0 
    in millions, except share amounts

    in millions, except share amounts

     December 31,
     
     
    AssetsAssets     
    Fixed maturity investments, at fair value (cost $7,684.1 and $6,010.2)Fixed maturity investments, at fair value (cost $7,684.1 and $6,010.2) $7,900.0 $6,248.1 
    Short-term investments, at amortized cost (which approximates fair value)Short-term investments, at amortized cost (which approximates fair value) 1,058.2 1,546.6 
    Common equity securities, at fair value (cost $775.9 and $396.2)Common equity securities, at fair value (cost $775.9 and $396.2) 1,043.9 513.6 
    Other investments (cost $442.7 and $184.0)Other investments (cost $442.7 and $184.0) 527.4 239.2 
     
     
       
     
     
    Total investments 8,899.4 9,005.7  Total investments 10,529.5 8,547.5 
    CashCash 121.5 67.4 Cash 243.1 89.9 
    Reinsurance recoverable on unpaid lossesReinsurance recoverable on unpaid losses 1,461.5 1,486.7 Reinsurance recoverable on unpaid losses 2,036.2 1,629.0 
    Reinsurance recoverable on unpaid losses - Berkshire Hathaway Inc. 2,610.4 2,716.8 
    Reinsurance recoverable on unpaid losses—Berkshire Hathaway Inc.Reinsurance recoverable on unpaid losses—Berkshire Hathaway Inc. 1,761.2 1,844.8 
    Reinsurance recoverable on paid lossesReinsurance recoverable on paid losses 159.8 138.5 Reinsurance recoverable on paid losses 92.0 121.7 
    Funds held by ceding companiesFunds held by ceding companies 943.8 144.1 
    Securities lending collateralSecurities lending collateral 593.3 911.0 
    Accounts receivable on unsettled investment salesAccounts receivable on unsettled investment sales 19.9 9.1 
    Insurance and reinsurance premiums receivableInsurance and reinsurance premiums receivable 830.5 1,103.5 Insurance and reinsurance premiums receivable 942.2 779.0 
    Accounts receivable on unsettled investment sales 160.8 75.2 
    Investments in unconsolidated insurance affiliatesInvestments in unconsolidated insurance affiliates 466.6 515.9 
    Deferred tax assetDeferred tax asset 430.0 696.4 Deferred tax asset 271.5 260.0 
    Deferred acquisition costsDeferred acquisition costs 244.9 313.3 Deferred acquisition costs 308.2 233.6 
    Investments in unconsolidated insurance affiliates 399.9 311.1 
    Ceded unearned premiumsCeded unearned premiums 224.1 185.3 
    Investment income accruedInvestment income accrued 91.4 99.9 Investment income accrued 102.4 73.0 
    Ceded unearned premiums 163.9 174.1 
    Other assetsOther assets 459.6 420.9 Other assets 481.1 538.1 
     
     
       
     
     
    Total assets $16,033.6 $16,609.5 Total assets $19,015.1 $15,882.0 
     
     
       
     
     
    LIABILITIES     
    Loss and LAE reserves $8,875.3 $9,527.6 
    LiabilitiesLiabilities     
    Loss and loss adjustment expense reservesLoss and loss adjustment expense reserves $9,398.5 $7,728.2 
    Reserves for structured contractsReserves for structured contracts 375.9  
    Unearned insurance and reinsurance premiumsUnearned insurance and reinsurance premiums 1,514.4 1,814.5 Unearned insurance and reinsurance premiums 1,739.4 1,409.4 
    Securities lending payableSecurities lending payable 593.3 911.0 
    DebtDebt 783.3 743.0 
    Deferred tax liabilityDeferred tax liability 316.3 .4 
    Ceded reinsurance payableCeded reinsurance payable 201.4 158.3 
    Accounts payable on unsettled investment purchasesAccounts payable on unsettled investment purchases 495.2 311.2 Accounts payable on unsettled investment purchases 30.9 371.6 
    Debt 793.2 1,125.4 
    Deferred credits  682.5 
    Funds held under reinsurance treatiesFunds held under reinsurance treaties 262.4 361.7 Funds held under reinsurance treaties 155.4 211.9 
    Other liabilitiesOther liabilities 1,285.3 1,171.7 Other liabilities 1,324.9 1,174.5 
    Preferred stock subject to mandatory redemption:Preferred stock subject to mandatory redemption:     
     
     
     Held by Berkshire Hathaway Inc. (redemption value $300.0) 191.9 174.5 
    Total liabilities 13,225.8 14,994.6 Held by others (redemption value $20.0) 20.0 20.0 
     
     
       
     
     
    CONVERTIBLE PREFERENCE SHARES (677,966 shares issued and outstanding) 219.0  
    MINORITY INTEREST - MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARIES     
     Total liabilities 15,131.2 12,902.8 
    Common shareholders' equityCommon shareholders' equity     
    Common Shares at $1 par per share—authorized 50,000,000 Shares; issued and outstanding 10,772,789 and 9,007,195 SharesCommon Shares at $1 par per share—authorized 50,000,000 Shares; issued and outstanding 10,772,789 and 9,007,195 Shares 10.8 9.0 
    Paid-in surplusPaid-in surplus 1,719.2 1,399.6 
    Retained earningsRetained earnings 1,695.9 1,286.4 
    Accumulated other comprehensive income, after-tax:Accumulated other comprehensive income, after-tax:     
    Berkshire Hathaway Inc. (redemption value $300.0) 160.9 150.3 Unrealized gains on investments 416.1 286.0 
    Other mandatorily redeemable preferred stock of subsidiaries (redemption value $20.0) 20.0 20.0 Unrealized foreign currency translation gains (losses) 48.5 (.3)
     
     
     Minimum pension liability (2.4)  
    COMMON SHAREHOLDERS' EQUITY     
    Common Shares at $1 par per share- authorized 50,000,000 Common Shares, issued and outstanding 8,351,387 and 8,264,681 Common Shares 8.4 8.3 
    Paid-in surplus 1,126.2 1,098.3 
    Retained earnings 1,071.9 355.1 
    Accumulated other comprehensive income, after-tax 206.7 4.4 
    Unearned compensation - Restricted Share awards (5.3) (21.5)
    Unearned compensation—restricted Common Share awardsUnearned compensation—restricted Common Share awards (4.2) (1.5)
     
     
       
     
     
    Total common shareholders' equity 2,407.9 1,444.6  Total common shareholders' equity 3,883.9 2,979.2 
     
     
       
     
     
    Total liabilities, convertible preference shares, minority interest and common shareholders' equity $16,033.6 $16,609.5  Total liabilities and common shareholders' equity $19,015.1 $15,882.0 
     
     
       
     
     

    See Notes to Consolidated Financial Statements including Note 1718 for Commitments and Contingencies.

    F-1




    CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     (Millions, except per
    share amounts)

     
    Revenues          
     Earned insurance and reinsurance premiums $3,576.4 $2,656.1 $334.4 
     Net investment income  352.7  284.5  85.9 
     Net realized gains (losses) on investments  156.0  173.1  (8.8)
     Amortization of deferred credits and other benefits    91.6  41.4 
     Other revenue  100.3  29.1  398.0 
      
     
     
     
      Total revenues  4,185.4  3,234.4  850.9 
      
     
     
     
    Expenses          
     Losses and LAE  2,638.2  2,493.9  287.7 
     Insurance and reinsurance acquisition expenses  806.3  531.0  101.1 
     General and administrative expenses  469.9  476.5  87.9 
     Accretion of fair value adjustment to loss and LAE reserves  79.8  56.0   
     Interest expense  71.8  45.7  16.1 
     Share appreciation expense for Series B Warrants    58.8   
      
     
     
     
      Total expenses  4,066.0  3,661.9  492.8 
      
     
     
     
    Pretax earnings (loss)  119.4  (427.5) 358.1 
     Tax benefit (provision)  (11.7) 179.2  (43.1)
      
     
     
     
    Net income (loss) before minority interest and equity in earnings of affiliates  107.7  (248.3) 315.0 
     Accretion of preferred stock of subsidiaries to face value  (10.6) (5.1)  
     Dividends on mandatorily redeemable preferred stock of subsidiaries  (30.3) (18.1)  
     Equity in earnings (loss) of unconsolidated affiliates  14.0  .4  (2.1)
      
     
     
     
    Net income (loss) from continuing operations  80.8  (271.1) 312.9 
     Net income from discontinued operations      95.0 
      
     
     
     
    Net income (loss) before extraordinary items and changes in accounting principles  80.8  (271.1) 407.9 
     Cumulative effect of changes in accounting principles  660.2     
     Excess of fair value of acquired net assets over cost  7.1  16.6   
     Loss on early extinguishment of debt    (4.8)  
      
     
     
     
    Net income (loss)  748.1  (259.3) 407.9 
      
     
     
     
     Net change in unrealized gains for investments held  301.8  (4.5) 56.3 
     Net change in foreign currency translation  (4.5) (2.0) (.7)
     Reclassification of net gains included in net realized gains (losses) on investments  (95.0) (36.0) (15.9)
      
     
     
     
    Comprehensive net income (loss) $950.4 $(301.8)$447.6 
      
     
     
     
    Computation of net income (loss) available to common shareholders          
     Net income (loss) $748.1 $(259.3)$407.9 
     Redemption value adjustment and dividends on Convertible Preference Shares  (19.4) (305.4)  
      
     
     
     
    Net income (loss) available to common shareholders $728.7 $(564.7)$407.9 
      
     
     
     
    Basic earnings per share          
     Net income (loss) from continuing operations $7.47 $(86.52)$53.08 
     Net income (loss)  88.61  (84.75) 69.19 
    Diluted earnings per share          
     Net income (loss) from continuing operations $6.80 $(86.52)$52.84 
     Net income (loss)  80.75  (84.75) 68.89 
      
     
     
     
     
     Year Ended December 31,
     
    Millions, except per share amounts

     
     2004
     2003
     2002
     
    Revenues          
     Earned insurance and reinsurance premiums $3,820.5 $3,137.7 $3,576.4 
     Net investment income  360.9  290.9  366.0 
     Net realized investment gains  181.1  162.6  156.0 
     Other revenue  190.5  202.6  109.5 
      
     
     
     
      Total revenues  4,553.0  3,793.8  4,207.9 
      
     
     
     
    Expenses          
     Losses and loss adjustment expenses  2,591.1  2,138.1  2,638.2 
     Insurance and reinsurance acquisition expenses  743.5  615.0  804.3 
     Other underwriting expenses  521.3  347.1  401.7 
     General and administrative expenses  309.3  201.8  92.7 
     Accretion of fair value adjustment to loss and loss adjustment expense reserves  43.3  48.6  79.8 
     Interest expense on debt  49.1  48.6  71.8 
     Interest expense—dividends and accretion on preferred stock subject to mandatory redemption  47.6  22.3   
      
     
     
     
      Total expenses  4,305.2  3,421.5  4,088.5 
      
     
     
     
    Pretax income  247.8  372.3  119.4 
     Income tax provision  (47.0) (127.6) (11.7)
      
     
     
     
    Net income before minority interest, equity in earnings of affiliates, accounting changes and extraordinary items  200.8  244.7  107.7 
     Dividends on mandatorily redeemable preferred stock of subsidiaries    (15.1) (30.3)
     Accretion of preferred stock of subsidiaries to face value    (6.4) (10.6)
     Equity in earnings of unconsolidated affiliates  37.4  57.4  14.0 
      
     
     
     
    Net income before accounting changes and extraordinary items  238.2  280.6  80.8 
     Cumulative effect of changes in accounting principles      660.2 
     Excess of fair value of acquired net assets over cost  180.5    7.1 
      
     
     
     
    Net income  418.7  280.6  748.1 
      
     
     
     
     Net change in unrealized gains and losses for investments held  218.0  163.1  298.7 
     Net change in foreign currency translation  48.8  3.2  (1.4)
     Recognition of unrealized gains and losses for investments sold  (87.9) (87.3) (95.0)
     Net change in minimum pension liability  (2.4)    
      
     
     
     
    Comprehensive net income $595.2 $359.6 $950.4 
      
     
     
     
     Computation of net income available to common shareholders          
     Net income $418.7 $280.6 $748.1 
     Redemption value adjustment—Convertible Preference Shares    (49.5) (19.0)
     Dividends declared on Convertible Preference Shares      (.4)
      
     
     
     
    Net income available to common shareholders $418.7 $231.1 $728.7 
      
     
     
     
    Basic earnings per Common Share          
     Net income before accounting changes and extraordinary items $24.05 $26.48 $7.47 
     Net income  42.28  26.48  88.61 
    Diluted earnings per Common Share          
     Net income before accounting changes and extraordinary items $22.67 $23.63 $6.80 
     Net income  39.92  23.63  80.75 
      
     
     
     
    Dividends declared and paid per Common Share $1.00 $1.00 $1.00 
      
     
     
     

    See Notes to Consolidated Financial Statements.

    F-2




    CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY


     Total
     Common
    Shares and
    paid-in
    surplus

     Retained
    earnings

     Accumulated
    other
    comprehensive
    income

     Unearned
    compensation

     

     (Millions)

     
    Balances at January 1, 2000 $614.3 $72.9 $534.2 $7.2 $ 
     
     
     
     
     
     
    Net income 407.9  407.9   
    Net change in unrealized investment gains 40.4   40.4  
    Net change in foreign currency translation (.7)   (.7)  
    Dividends declared on Common Shares (7.1)  (7.1)   
    Repurchases and retirements of Common Shares (8.3) (.8) (7.5)   
     
     
     
     
     
     
    Balances at December 31, 2000 1,046.5 72.1 927.5 46.9  
     
     
     
     
     
     
    Net loss (259.3)  (259.3)   
    Net change in unrealized investment gains (40.5)   (40.5)  
    Net change in foreign currency translation (2.0)   (2.0)  
    Dividends declared on Convertible Preference Shares (.3)  (.3)   
    Dividends declared on Common Shares (5.9)  (5.9)   
    Issuances of Common Shares 779.6 779.6   ��
    Redemption value adjustment—Convertible Preference Shares (305.1)  (305.1)   
    Repurchases and retirements of Common Shares (1.9) (.1) (1.8)   
    Issuance of Warrants 213.6 213.6    
    Issuance of Restricted Shares  31.9   (31.9)
    Amortization of Restricted Shares 10.4    10.4 
    Accrued Option expense 9.5 9.5    
     
     
     
     
     
     
    Balances at December 31, 2001 1,444.6 1,106.6 355.1 4.4 (21.5)
    Millions

     Total
     Common
    Shares and
    paid-in
    surplus

     Retained
    earnings

     Accumulated
    other
    comprehensive
    income

     Unearned
    compensation

     
    Balances at January 1, 2002 $1,444.6 $1,106.6 $355.1 $4.4 $(21.5)
     
     
     
     
     
      
     
     
     
     
     
    Net income 748.1  748.1    748.1  748.1   
    Net change in unrealized investment gains 206.8   206.8   203.7   203.7  
    Net change in foreign currency translation (4.5)   (4.5)   (1.4)   (1.4)  
    Dividends declared on Convertible Preference Shares (.4)  (.4)    (.4)  (.4)   
    Dividends declared on Common Shares (8.3)  (8.3)    (8.3)  (8.3)   
    Issuances of Common Shares 30.2 30.2     30.2 30.2    
    Redemption value adjustment—Convertible Preference Shares (19.0)  (19.0)    (19.0)  (19.0)   
    Repurchases and retirements of Common Shares (6.5) (2.9) (3.6)    (6.5) (2.9) (3.6)   
    Amortization of Restricted Shares 16.2    16.2 
    Amortization of Restricted Share awards 16.2    16.2 
    Accrued Option expense .7 .7     .7 .7    
     
     
     
     
     
      
     
     
     
     
     
    Balances at December 31, 2002 $2,407.9 $1,134.6 $1,071.9 $206.7 $(5.3) 2,407.9 1,134.6 1,071.9 206.7 (5.3)
     
     
     
     
     
      
     
     
     
     
     
    Net income 280.6  280.6   
    Net change in unrealized investment gains 75.8   75.8  
    Net change in foreign currency translation 3.2   3.2  
    Dividends declared on Common Shares (8.3)  (8.3)   
    Issuances of Common Shares 270.1 270.1    
    Repurchases and retirements of Common Shares (13.8) (5.5) (8.3)   
    Issuance of Restricted Shares  2.0   (2.0)
    Amortization of Restricted Share awards 5.8    5.8 
    Redemption value adjustment—Convertible Preference Shares (49.5)  (49.5)   
    Accrued Option expense 7.4 7.4    
     
     
     
     
     
     
    Balances at December 31, 2003 2,979.2 1,408.6 1,286.4 285.7 (1.5)
     
     
     
     
     
     
    Net income 418.7  418.7   
    Net change in unrealized investment gains 130.1   130.1  
    Net change in foreign currency translation 48.8   48.8  
    Net change in minimum pension liability (2.4)   (2.4)  
    Dividends declared on Common Shares (9.1)  (9.1)   
    Exercise of warrants held by Berkshire Hathaway, Inc. 294.0 294.0    
    Issuances of Common Shares 13.7 13.7    
    Repurchases and retirements of Common Shares (.2) (.1) (.1)   
    Issuances of Restricted Shares  4.7   (4.7)
    Amortization of Restricted Share awards 2.0    2.0 
    Accrued Option expense 9.1 9.1    
     
     
     
     
     
     
    Balances at December 31, 2004 $3,883.9 $1,730.0 $1,695.9 $462.2 $(4.2)
     
     
     
     
     
     

    See Notes to Consolidated Financial StatementsStatements.

    F-3




    CONSOLIDATED STATEMENTS OF CASH FLOWS



     Year Ended December 31,
     
     Year Ended December 31,
     

     2002
     2001
     2000
     

     (Millions)

     
    Net income (loss) $748.1 $(259.3)$407.9 

    Charges (credits) to reconcile net income to cash flows from operations:

     

     

     

     

     

     

     
    Cumulative effect of changes in accounting principles (660.2)   
    Excess of fair value of acquired net assets over cost (7.1) (16.6)  
    Loss on early extinguishment of debt  4.8  
    Millions

    Millions

     Year Ended December 31,
     
     
    Net incomeNet income $418.7 $280.6 $748.1 
    Charges (credits) to reconcile net income to net cash used for operating activities:Charges (credits) to reconcile net income to net cash used for operating activities:       
    Dividends on mandatorily redeemable preferred stock of subsidiaries 30.3 18.1  Cumulative effect of changes in accounting principles   (660.2)
    Net realized (gains) losses on investments (156.0) (173.1) 8.8 Excess of fair value of acquired net assets over cost (180.5)  (7.1)
    Share appreciation expense for Series B Warrants  58.8  Net realized investment gains (181.1) (162.6) (156.0)
    Share expense for Options and Restricted Shares 16.9 20.0  Undistributed equity in earnings from unconsolidated insurance affiliates, after-tax (37.4) (57.4) (14.0)
    Amortization of deferred credits and other benefits  (91.6) (41.4)Deferred income tax (benefit) provision (59.0) 105.0 163.9 

    Other operating items:

    Other operating items:

     

     

     

     

     

     

     
    Other operating items:       
    Net income tax receipts (payments) 189.6 (8.4) (54.5)Net Federal income tax (payments) receipts (86.5) 27.4 189.6 
    Net change in insurance and reinsurance balances receivable 273.0 261.3 1.4 Net change in insurance and reinsurance balances receivable 90.0 51.5 273.0 
    Net change in reinsurance recoverable on paid and unpaid losses 110.3 (1,410.1) (367.2)Net change in reinsurance recoverable on paid and unpaid losses 300.8 636.2 110.3 
    Net change in deferred acquisition costs 68.4 58.3 18.3 Net change in deferred acquisition costs (33.5) 11.3 68.4 
    Net change in loss and LAE reserves (652.3) 1,500.4 (72.4)Net change in loss and LAE reserves and reserves for structured contracts (806.7) (1,147.1) (652.3)
    Net change in unearned insurance and reinsurance premiums (300.1) (247.0) (19.9)Net change in unearned insurance and reinsurance premiums (54.0) (105.0) (300.1)
    Net change in other assets and liabilities, net 63.4 (16.3) 5.0 Net change in other assets and liabilities, net 72.5 (148.4) (137.7)
     
     
     
       
     
     
     
    Net cash used for operating activitiesNet cash used for operating activities (275.7) (300.7) (114.0)Net cash used for operating activities (556.7) (508.5) (374.1)
     
     
     
       
     
     
     
    Cash flows from investing activities:Cash flows from investing activities:       Cash flows from investing activities:       
    Net decrease (increase) in short-term investments 755.2 (979.2) (614.6)Net decrease in short-term investments 768.2 244.0 755.2 
    Sales of fixed maturity investments 13,531.9 7,603.6 315.1 Sales of fixed maturity investments 5,905.1 17,290.5 13,531.9 
    Maturities of fixed maturity investments 411.9 1,121.1 63.0 Maturities of fixed maturity investments 1,561.7 1,372.0 411.9 
    Sales of common equity securities and other investments 98.4 246.9 204.0 Sales of common equity securities and other investments 557.3 160.1 98.4 
    Proceeds from sales of subsidiaries and affiliates, net of cash acquired  23.6 570.4 Sales of consolidated and unconsolidated affiliates, net of cash sold 220.9 25.0  
    Purchases of fixed maturity investments (14,066.6) (6,897.3) (159.0)Purchases of fixed maturity investments (7,157.3) (18,248.2) (14,066.6)
    Purchases of common equity securities and other investments (244.5) (233.8) (205.6)Purchases of common equity securities and other investments (378.8) (354.4) (244.5)
    Purchases of consolidated and unconsolidated affiliates (.5) (1,979.8) 60.1 Purchases of consolidated and unconsolidated affiliates, net of cash acquired (659.8)  (.5)
    Net (acquisitions) dispositions of property and equipment (12.8) (7.7) 1.0 Net change in unsettled investment purchases and sales (337.2) 28.1 98.4 
     
     
     
     Net (acquisitions) dispositions of property and equipment (13.6) 43.4 (12.8)
    Net cash provided from (used for) investing activities 473.0 (1,102.6) 234.4 
     
     
     
     
    Net cash provided from investing activitiesNet cash provided from investing activities 466.5 560.5 571.4 
     
     
     
       
     
     
     
    Cash flows from financing activities:Cash flows from financing activities:       Cash flows from financing activities:       
    Proceeds from issuances of Common Shares and Convertible Preference Shares 226.4 444.4  Proceeds from issuances of Common Shares and Convertible Preference Shares 307.8 1.5 226.4 
    Proceeds from issuances of debt 8.0 832.0 15.0 Proceeds from issuances of debt  693.4 8.0 
    Proceeds from issuances of preferred stock of subsidiaries  245.0  Repayments of debt (25.0) (739.9) (338.6)
    Proceeds from the issuance of Warrants  75.0  Dividends paid on mandatorily redeemable preferred stock of subsidiaries (30.3) (30.3) (30.3)
    Repayments of debt (338.6) (103.9) (119.0)Dividends paid on Common Shares (9.1) (8.3) (8.3)
    Dividends paid on mandatorily redeemable preferred stock of subsidiaries (30.3) (18.1)  Dividends paid on Convertible Preference Shares   (.4)
    Dividends paid on Common Shares (8.3) (5.9) (7.1)  
     
     
     
    Net cash provided from (used for) financing activitiesNet cash provided from (used for) financing activities 243.4 (83.6) (143.2)
    Dividends paid on Convertible Preference Shares (.4) (.3)    
     
     
     
    Common Shares repurchased and retired  (1.9) (8.8)
     
     
     
     
    Net cash (used for) provided from financing activities (143.2) 1,466.3 (119.9)
     
     
     
     
    Net increase in cash during year 54.1 63.0 .5 
    Net increase (decrease) in cash during yearNet increase (decrease) in cash during year 153.2 (31.6) 54.1 
    Cash balance at beginning of yearCash balance at beginning of year 67.4 4.4 3.9 Cash balance at beginning of year 89.9 121.5 67.4 
     
     
     
       
     
     
     
    Cash balance at end of yearCash balance at end of year $121.5 $67.4 $4.4 Cash balance at end of year $243.1 $89.9 $121.5 
     
     
     
       
     
     
     

    See Notes to Consolidated Financial Statements.

    F-4




    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    NoteNOTE 1. Summary of Significant Accounting Policies

    Basis of Presentationpresentation

            The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with GAAP in the United States. Previously defined terms used within these financial statements have the same meaning as they appearhave elsewhere within this report. The Company is a Bermuda limited liability company with its headquarters located at Crawford House, 23 ChurchThe Bank of Butterfield Building, 42 Reid Street, 6th Floor, Hamilton Bermuda HM 11.12, Bermuda. The Company's principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11.

            The Company's reportable segments are OneBeacon, White Mountains' consolidatedMountains Re, Esurance and Other Operations.

            The OneBeacon family of companies are U.S.-based property and casualty insurance operations are conducted primarily through OneBeaconwriters, which waswere acquired by White Mountains from Aviva plc ("Aviva", formerly CGNU plc) on June 1, 2001. Therefore, the Company's 2001 consolidated financial results include OneBeacon's results only for the seven months ended December 31, 2001. In connection with the acquisition of OneBeacon, the insurance and reinsurance operations of Folksamerica, Peninsula, American Centennial, British Insurance Company and Esurance were contributed by the Company to OneBeacon. OneBeacon and Folksamerica are run as separate entities, with distinct operations, management and business strategies.(the "OneBeacon Acquisition").

            White Mountains' internationally-based reinsurance operations are conducted primarily through its recently formed global reinsurance organization ("White Mountains Re"), which oversees the operations of Folksamerica, Sirius, and WMU, as described below.

            Folksamerica Reinsurance Company, together with its parent, Folksamerica Holding Company, ("Folksamerica") became a wholly-owned subsidiary of White Mountains in 1998. In connection with the OneBeacon Acquisition, Folksamerica was contributed to OneBeacon. On November 30, 2004, White Mountains completed a significant corporate reorganization and, as part of the reorganization, ownership of Folksamerica was transferred to White Mountains Re.

            On April 16, 2004, White Mountains acquired Sirius Insurance Holding Sweden AB and its subsidiaries ("Sirius"), a group of international insurers and reinsurers that focuses mainly on property and other short-tailed lines, from ABB Ltd. (See Note 2). Subsequent to White Mountains' acquisition of Sirius, Fund American Reinsurance Company Ltd. ("Fund American Re") was sold to Sirius by the Company. Accordingly, the results of Fund American Re which is commercially domiciledare included in Bermuda, maintainsSirius' results throughout this report. White Mountains' reinsurance operations also include its executive office and an operating branch in Stockholm, Sweden, and operates through an additional branch in Singapore. In December 2001,wholly owned subsidiaries, White Mountains formedUnderwriting Limited (domiciled in Ireland) and White Mountains Underwriting (Bermuda) Limited (collectively, "WMU"). WMU is an Ireland-domiciled consulting services providerreinsurance advisory company specializing in international property and marine excess reinsurance. In addition, through its holdings

            Esurance has been a unit of common shares and warrants, White Mountains owns approximately 21%, on a fully-converted basis,since October 2000. Esurance markets personal auto insurance directly to customers and through select online agents.

            White Mountains' Other Operations consists of Montpelier, a Bermuda-domiciled insurancethe Company and reinsuranceits intermediate holding company.companies, as well as the International American Group, Inc. (the "International American Group"). The International American Group, which was acquired by White Mountains in 1999, consists of American Centennial Insurance Company ("American Centennial") and British Insurance Company of Cayman ("British Insurance Company") and, prior to its sale in January 2004, also included Peninsula Insurance Company ("Peninsula").

            White Mountains has completed numerous significant transactions during the periods presented which have affected the comparability of the financial statement information presented herein. White Mountains' consolidated statements of income and comprehensive income include the results of acquired businesses beginning as of the date each respective acquisition was completed. Net changes in



    assets and liabilities reported in the consolidated statements of cash flows exclude those assets and liabilities acquired or sold during the periods presented.

            All significant intercompany transactions have been eliminated in consolidation. The financial statements include all adjustments considered necessary by management to fairly present the Company's financial position, its results of operations and its cash flows.

            The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the prior period financial statements have been reclassified to conform with the current presentation. White Mountains has completed numerous significant transactions during the periods presented that have affected the comparability of the financial statement information presented herein.

    Investment Securitiessecurities

            White Mountains' portfolio of fixed maturity investments and common equity securities are classified as available for sale and are reported at fair value as of the balance sheet date as determined by quoted market values. Other investments principally include investments in limited partnership interests which are recorded using the equity method of accounting. Net unrealized investment gains and losses, after-tax, associated with such investments are reported as a net amount as a separate component of shareholders' equity. Changes in net unrealized investment gains and losses, after-tax, are reported as a component of other comprehensive income. Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial health of and specific prospects for the issuer.

    F-5



    issuer and the ability and intent to hold the investment to maturity. Investment losses that are other than temporary are recognized in earnings. Realized gains and losses resulting from sales of investment securities are accounted for using the specific identificationweighted average method.

            Premiums and discounts on fixed maturity investments are accreted to income over the anticipated life of the investment.

            Short-term investments consist of money market funds, certificates of deposit and other securities which mature or become available for use within one year. Short-term investments are carried at amortized cost, which approximated fair value as of December 31, 20022004 and 2001.2003.

            OneBeaconWhite Mountains participates in a securities lending program whereby certain of its fixed maturity investments are loaned to other institutions for short periods of time through a lending agent. OneBeaconWhite Mountains maintains control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the asset. Collateral, in the form of cash and United States government securities, is required at a rate of 102% of the fair value of the loaned securities and is monitored and maintained by the lending agent. The fair value of the securities lending collateral is recorded as both an asset and liability on the balance sheet. An indemnification agreement with the lending agent protects OneBeaconWhite Mountains in the event a borrower becomes insolvent or fails to return any of the securities on loan.

            The Company does not use derivatives for hedging, but does own convertible bonds with embedded derivatives. In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company bifurcates all equity option derivatives that are embedded in its convertible bonds. The original host instruments are reported, at fair value, in fixed maturity investments and the embedded derivatives are reported, at fair value, in other investments. Because these derivatives do not qualify as hedging instruments, changes in fair values of derivatives are included in realized gains and losses. The fair value of derivatives included in other investments was $33.9 million at December 31, 2004 and realized gains (losses) on derivatives was $7.3 million for the period ending December 31, 2004.



    Cash

            Cash includes amounts on hand and demand deposits with banks and other financial institutions. Amounts presented in the statement of cash flows are shown net of balances acquired and sold in the purchase or sale of the Company's consolidated subsidiaries.

    Insurance and Reinsurance Operationsreinsurance operations

            White Mountains accounts for insurance and reinsurance policies whichthat it writes in accordance with SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("SFAS No. 60"). Premiums written are recognized as revenues and are earned ratably over the term of the related policy or reinsurance treaty. Unearned premiums represent the portion of premiums written that are applicable to future insurance or reinsurance coverage provided by policies or treaties in force. AutoOne Insurance'sInsurance, which acts as a limited assigned distribution ("LAD") servicing carrier, enters into contractual arrangements with insurance companies to assume private passenger automobile assigned risk exposures in the state of New York. AutoOne Insurance receives LAD servicing fees for assuming these risks. LAD servicing fees are included intypically a percentage of the total premiums that AutoOne Insurance must write to fulfill the obligation of the transferor company. LAD servicing carriers may choose to write certain policies voluntarily by taking risks out of the NYAIP. These policies generate takeout credits which can be "sold" for fees to the transferor company ("takeout fees"). These fees are also typically a percentage of the transferor company's NYAIP premium assignments. AutoOne Insurance's LAD servicing and takeout fees are recorded as written premium when billed and are earned premiums.ratably over the term of the related policy to which the fee relates.

            Deferred acquisition costs represent commissions, premium taxes, brokerage expenses and other costs which are directly attributable to and vary with the production of new business. These costs are deferred and amortized over the applicable premium recognition period as insurance and reinsurance acquisition expenses. Deferred acquisition costs are limited to the amount expected to be recovered from future earned premiums and anticipated investment income. This limitation is referred to as a premium deficiency. A premium deficiency is recognized if the sum of expected loss and LAE, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums. A premium deficiency is recognized by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency. During 2002, OneBeacon recognized a $22.8 million premium deficiency charge on deferred acquisition costs associated with its business subject to the Renewal Rights Agreement.

            Losses and LAE are charged against income as incurred. Unpaid insurance losses and LAE are based on estimates (generally determined by claims adjusters, legal counsel and actuarial staff) of the ultimate costs of settling claims, including the effects of inflation and other societal and economic

    F-6



    factors. Unpaid reinsurance losses and LAE are based primarily on reports received from ceding companies and actuarial projections. Unpaid loss and LAE reserves represent management's best estimate of ultimate losses and LAE, net of estimated salvage and subrogation recoveries, if applicable. Such estimates are regularly reviewed and updated and any adjustments resulting therefrom are reflected in current operations. The process of estimating loss and LAE involves a considerable degree of judgment by management and the ultimate amount of expense to be incurred could be considerably greater than or less than the amounts currently reflected in the financial statements.

            OneBeacon discounts certain of its long-term workers compensation loss and LAE reserves when such liabilities constitute unpaid but settled claims under which the payment pattern and ultimate costs are fixed and determinable on an individual claim basis. OneBeacon discounts these reserves using aan average discount rate which is determined based on the facts and circumstances applicable at the time the claims are settled (4.7% at December 31, 2002)2004 and 2003). As of December 31, 2004 and 2003, the discount on OneBeacon's workers compensation loss and LAE reserves amounted to $259.4 million and $294.5 million, respectively.



            In connection with purchase accounting for the OneBeacon Acquisition, White Mountains was required to adjust to fair value OneBeacon's loss and LAE reserves and the related reinsurance recoverables by $646.9 million and $346.9 million, respectively, on OneBeacon's acquired balance sheet as of June 1, 2001. This net reduction to loss and LAE reserves of $300.0 million is being accreted through an income statement charge ratably over the period that the claims to which such reserves relate are expected to be settled. See Note 3.

            In connection with purchase accounting for the Sirius Acquisition, White Mountains was required to adjust to fair value the loss and LAE reserves on Sirius' acquired balance sheet by $58.1 million. This fair value adjustment is being recognized through an income statement charge ratably with and over the period the claims are settled. See Note 3.

            White Mountains' insurance and reinsurance subsidiaries enter into ceded reinsurance contracts from time to time to protect their businesses from losses due to concentration of risk, to manage their operating leverage ratios and to limit losses arising from catastrophic events. The majority of such reinsurance contracts are executed through excess of loss treaties and catastrophe contracts under which the reinsurer indemnifies for a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. White Mountains has also entered into quota share treaties with reinsurers under which all risks meeting prescribed criteria are covered on a pro-rata basis. The amount of each risk ceded by White Mountains is subject to maximum limits which vary by line of business and type of coverage. Amounts related to reinsurance contracts are recorded in accordance with SFAS No. 113 and Emerging Issues Task Force Topic No. D-54, as applicable.

            Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. The collectibility of reinsurance recoverables is subject to the solvency of the reinsurers. White Mountains is selective in regard to its reinsurers, principally placing reinsurance with those reinsurers with a strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis.

            Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies are reported as a reduction of premiums written. Expense allowances received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Funds held by ceding companies represent amounts due to White Mountains in connection with certain assumed reinsurance agreements in which the ceding company retains a portion of the premium to provide security against future loss payments. The funds held by ceding companies are generally invested by the ceding company and a contractually agreed amount is credited to the Company and recognized as investment income. Funds held under reinsurance treaties represent contractual payments due to the reinsurer that White Mountains has retained to secure obligations of the reinsurer. Such amounts are recorded as liabilities in the consolidated financial statements.

    F-7



    Accounting for Mandatory Shared Market Mechanisms

            As a condition to its licenses to do business in certain states, White Mountains' insurance operations must participate in various mandatory shared market mechanisms commonly referred to as "residual" or "involuntary" markets. These markets generally consist of risks considered to be undesirable from a standard or routine underwriting perspective. Each state dictates the levels of insurance coverage that is mandatorily assigned to participating insurers within these markets. The total amount of such business an insurer must accept in a particular state is generally based on that insurer's market share of voluntary business written within that state. In certain cases, White Mountains is obligated to write business from shared market mechanisms at a future date based on its historical market share of all voluntary policies written within that state. Involuntary business generated from



    mandatory shared market mechanisms is accounted for in accordance with SFAS No. 60 or as assumed reinsurance under SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (hereafter referred to as structured contracts) depending upon the structure of the mechanism.

            OneBeacon's market assignments are typically required to be written in the current period, however, in certain cases OneBeacon is required to accept policy assignments at a future date. OneBeacon's residual market assignments to be written in the future primarily relate to private passenger automobile assigned risk exposures within the State of New York where several of OneBeacon's insurance subsidiaries write voluntary automobile insurance. The share of involuntary written premium for policies assigned by the NYAIP to a particular insurer in a given year is based on the proportion of the total voluntary writings in New York two years prior. Anticipated losses associated with future market assignments are recognized in accordance with SFAS No. 5, "Accounting for Contingencies", when the amount of such anticipated losses is determined to be probable and can be reasonably estimable.estimated.

    Accounting for Insurance-relatedInsurance-Related Assessments

            Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. In accordance with Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3"), White Mountains' insurance subsidiaries record guaranty fund assessments when such assessments are billed by the respective guaranty funds. In addition, each insurance subsidiary's policy is to accrue for any significant insolvencies when the loss is probable and the assessment amount can be reasonably estimated.

    Federal and Foreign Income TaxesReserves for Structured Contracts

            As a resultThe reserve for structured contracts represents deposit liabilities for reinsurance contracts that do not satisfy the conditions for reinsurance accounting established in SFAS 113.

            For insurance and reinsurance contracts that transfer only significant timing risk or that transfer neither significant timing risk nor significant underwriting risk, the amount of the Redomestication,deposit asset or liability is adjusted at the balance sheet date by calculating the effective yield on the deposit to reflect actual payments to date and expected future payments. Changes in the carrying amounts are reported as a component of net investment income. Fees related to these contracts are recorded as investment income and are earned using the effective yield method or evenly over the life of the contract dependent upon contract terms.

    Deferred Software Costs

            White Mountains capitalizes costs related to computer software developed for internal use during the application development stage of software development projects in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". These costs generally consist of certain external, payroll and payroll-related costs. White Mountains begins amortization of these costs once the project is completed and ready for its intended use. Amortization is on a straight-line basis and over a useful life of three to five years. At December 31, 2004 and 2003, White Mountains had deferred software costs of $56.1 million and $51.7 million, respectively.



    Federal and foreign income taxes

            The majority of White Mountains' subsidiaries file consolidated tax returns in the United States. Income earned or losses incurredgenerated by companies outside the Bermuda and Barbados Companies willUnited States are generally be subject to an overall effective tax rate lower than that imposed by the United States. The U.S. Companies are subject to U.S. income taxes. Prior to the Redomestication, the Company filed a consolidated U.S. Federal income tax return with its subsidiaries. The U.S. Companies continue to file U.S. tax returns but may no longer do so on a group-wide consolidated basis. As a result, the aggregate U.S. income tax liability of the U.S. Companies may be higher than it otherwise would have been if part of a consolidated tax return.

            Deferred tax assets and liabilities are recorded when a difference between an asset or liability's financial statement value and its tax reporting value exists, and for other temporary differences as defined by SFAS No. 109, "Accounting for Income Taxes". The deferred tax asset or liability is recorded based on tax rates expected to be in effect when the difference reverses.

    F-8



    Foreign Currency Translationcurrency exchange

            Net after-tax unrealized losses fromThe U.S. dollar is the functional currency for all of the Company's businesses except for the foreign currency fluctuations associated with Fund American Re'sreinsurance operations WMU's operations, Folksamerica's Canadian operationsof Folksamerica, Sirius and WMU, foreign investment securities and certain other smaller international activities. The national currencies of British Insurance Company'sthe subsidiaries are their functional currencies since their business is primarily transacted in such local currency. Assets and liabilities recorded in these foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are converted using the average exchange rates for the period. Net foreign exchange gains and losses arising from the translation are generally reported in shareholders' equity, in accumulated other comprehensive income or loss, reserves totalled $7.2 millionnet of tax.

            Assets and $2.7 million at December 31, 2002liabilities relating to foreign operations are translated into the functional currency using current exchange rates; revenues and December 31, 2001, respectively. These net after-taxexpenses are translated into the functional currency using the exchange rate of the transaction day. The resulting exchange gains and losses are recorded in shareholders' equityreported as a component of accumulated other comprehensivenet income in the period in which they arise.    As of December 31, 2004 and changes in these values are2003, White Mountains had an after-tax unrealized foreign currency translation gain (loss) of $48.5 million and ($.3) million, respectively, recorded on its consolidated balance sheet. For the years ended December 31, 2004, 2003 and 2002, White Mountains' foreign currency gains and losses reported on its consolidated income statements were insignificant for all periods presented. The following rates of exchange for the Company's statement of income and comprehensive incomeU.S. dollar have been used for the most significant operations:

    Currency

     Opening Rate
    2004

     Closing Rate
    2004

    Swedish Krona 7.6466(1)6.6231
    British Pound .5600 .5218
    Canadian Dollar 1.2970 1.2132

    (1)
    Represents the exchange rate at April 16, 2004 as a component of other comprehensive income.

    this is the date that White Mountains acquired Sirius, whose functional currency is the Swedish krona.

    Earnings (Loss) Per Share(loss) per share

            Basic earnings (loss) per share amounts are based on the weighted average number of Common Shares outstanding. Diluted earnings per share amounts are based on the weighted average number of Common Shares and the net effect of potentially dilutive Common Shares outstanding, based on calculated using



    the treasury stock method. The following table outlines the Company's computation of earnings (loss) per share for the years ended December 31, 2002, 20012004, 2003 and 2000:2002:

     
     Year Ended December 31,
     
     2002
     2001
     2000
    Basic earnings (loss) per share numerators (in millions):         
    Net income (loss) from continuing operations $80.8 $(271.1)$312.9
     Redemption value adjustment and dividends on Convertible         
      Preference Shares  (19.4) (305.4) 
      
     
     
    Net income (loss) from continuing operations available to common shareholders $61.4 $(576.5)$312.9
      
     
     
     Cumulative effect of changes in accounting principles  660.2    
     Extraordinary income items  7.1  11.8  
     Net income from discontinued operations      95.0
      
     
     
    Net income (loss) available to common shareholders $728.7 $(564.7)$407.9
      
     
     
    Diluted earnings (loss) per share numerators (in millions):         
    Net income (loss) from continuing operations available to common shareholders $61.4 $(576.5)$312.9
     Other effects on diluted earnings(a)   (.1)   
      
     
     
    Net income (loss) from continuing operations available to common shareholders $61.3 $(576.5)$312.9
      
     
     
     Cumulative effect of changes in accounting principles  660.2    
     Extraordinary income items  7.1  11.8  
     Net income from discontinued operations      95.0
      
     
     
    Adjusted net income (loss) available to common shareholders $728.6 $(564.7)$407.9
      
     
     

    F-9

     
     Year Ended December 31,
     
     
     2004
     2003
     2002
     
    Basic earnings per share numerators (in millions):          
    Net income before accounting changes and extraordinary items $238.2 $280.6 $80.8 
    Redemption value adjustment and dividends on Convertible Preference Shares    (49.5) (19.4)
      
     
     
     
    Net income before accounting changes and extraordinary items available to common shareholders $238.2 $231.1 $61.4 
      
     
     
     
     Cumulative effect of changes in accounting principles      660.2 
     Extraordinary income items  180.5    7.1 
      
     
     
     
    Net income available to common shareholders $418.7 $231.1 $728.7 
      
     
     
     
    Diluted earnings per share numerators (in millions):          
    Net income before accounting changes and extraordinary items available to common shareholders $238.2 $231.1 $61.4 
     Other effects on diluted earnings(1)  (.9) (2.6) (.1)
      
     
     
     
    Net income before accounting changes and extraordinary items available to common shareholders $237.3 $228.5 $61.3 
      
     
     
     
     Cumulative effect of changes in accounting principles      660.2 
     Extraordinary income items  180.5    7.1 
      
     
     
     
    Adjusted net income available to common shareholders $417.8 $228.5 $728.6 
      
     
     
     
    Earnings per share denominators (in thousands):          
    Basic earnings per share denominator (average Common Shares outstanding)  9,902  8,725  8,225 
    Average outstanding dilutive warrants to acquire Common Shares(2)  565  944  799 
      
     
     
     
    Diluted earnings per share denominator  10,467  9,669  9,024 
      
     
     
     
    Basic earnings per share (in dollars):          
    Net income before accounting changes and extraordinary items $24.05 $26.48 $7.47 
     Cumulative effect of changes in accounting principles      80.27 
     Extraordinary income items  18.23    .87 
      
     
     
     
    Net income $42.28 $26.48 $88.61 
      
     
     
     
    Diluted earnings per share (in dollars):          
    Net income before accounting changes and extraordinary items $22.67 $23.63 $6.80 
     Cumulative effect of changes in accounting principles      73.16 
     Extraordinary income items  17.25    .79 
      
     
     
     
    Net income $39.92 $23.63 $80.75 
      
     
     
     

    Earnings (loss) per share denominators (in thousands):         
    Basic earnings (loss) per share denominator (average Common         
     Shares outstanding)  8,225  6,663  5,895
     Average outstanding dilutive Options and warrants to acquire         
      Common Shares(b)   799    26
      
     
     
    Diluted earnings (loss) per share denominator  9,024  6,663  5,921
      
     
     
    Basic earnings (loss) per share (in dollars):         
    Net income (loss) from continuing operations $7.47 $(86.52)$53.08
     Cumulative effect of changes in accounting principles  80.27    
     Extraordinary income items  .87  1.77  
     Net income from discontinued operations      16.11
      
     
     
    Net income (loss) $88.61 $(84.75)$69.19
      
     
     
    Diluted earnings (loss) per share (in dollars):         
    Net income (loss) from continuing operations $6.80 $(86.52)$52.84
     Cumulative effect of changes in accounting principles  73.16    
     Extraordinary income items  .79  1.77  
     Net income from discontinued operations      16.05
      
     
     
    Net income (loss) $80.75 $(84.75)$68.89
      
     
     

            (a) Includes

    (1)
    The diluted earnings per share numerators for certain periods presented include an adjustment to White Mountains' equity in earnings recorded onrelated to its investment in the common shares of Montpelier, which is reflective of dilution in Montpelier's earnings brought about by outstanding optionswarrants and warrantsoptions to acquire common shares of Montpelier that are currently in-the-money. As of March 31, 2004, White Mountains changed its method of accounting for this investment from equity accounting to

    (2)
    The following potentially dilutive Common Share equivalents are not included indiluted earnings per share denominators for the years ended December 31, 2004, 2003 and 2002 include the dilutive share calculation as the impacteffects of their inclusion would be anti-dilutive: (i) in 2002 and 2001, Optionsaverage outstanding warrants to acquire 61,965852,678, 1,724,200 and 80,6651,724,200 Common Shares, respectively, at an average exercisea strike price of $125.31 and $118.22, respectively,$173.99 per Common Share; (ii) in 2001,Share. The warrants to acquire 1,714,285were fully exercised on June 29, 2004. The diluted earnings per share denominators presented exclude the anti-dilutive effects of outstanding Options and unearned restricted Common Shares at an exercise price of $175.00 per Common Share; (iii) in 2002 and 2001, 73,500 and 94,500 Restricted Shares outstanding respectively. See Note 9 for detailed information concerning Restricted Shares outstanding and potentially dilutive Options and warrants to acquire Common Shares.

    that are being fully expensed over the vesting period.

    F-10



    Recently Adopted Changes in Accounting Principles

    Stock-basedVariable Interest Entities

            In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation issues surrounding special purpose entities and certain other entities, collectively termed variable interest entities ("VIE"), to which previous accounting guidance on consolidation does not apply. A VIE is an entity in which the equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Under FIN 46, the primary beneficiary of a VIE is required to consolidate the VIE in its financial statements. The primary beneficiary is an entity that has a variable interest that will absorb the majority of the VIE's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. White Mountains adopted the disclosure provisions of FIN 46 beginning with its December 31, 2002 Form 10-K and its consolidation provisions as of March 31, 2004. See Note 15.


    Mandatorily Redeemable Preferred Stock

            In July 2003, White Mountains adopted the provisions of SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150") and it subsequently adopted FASB Staff Position No. 150-3 ("FSP 150-3") in November 2003. SFAS 150, among other things, required an issuer of mandatorily redeemable financial instruments to classify such instruments as a liability and to initially measure the liability at its fair value. Subsequently, these instruments are to be measured at their present value, using the interest rate implicit at the inception of the contract. In addition, all future dividends paid to holders of those instruments, as well as any accretion related to those instruments, are to be reflected as interest expense. FSP 150-3 was released by the FASB in November 2003 and it indefinitely deferred the fair value measurement provisions of SFAS 150 for certain mandatorily redeemable noncontrolling interests. However, the presentation provisions of SFAS 150 are still applicable to those instruments.

            White Mountains has two classes of mandatorily redeemable preferred stock of subsidiaries, which were previously classified as minority interests, that fell within the scope of SFAS 150 and are considered noncontrolling interests under FSP 150-3. Upon adoption of SFAS 150 in 2003, White Mountains reclassified these instruments from mezzanine equity to liabilities at their historical carrying values. In addition, beginning in the third quarter of 2003, all dividends and accretion on White Mountains' mandatorily redeemable preferred stock have been recorded as interest expense. See Note 10.


    Stock-Based Compensation

            In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" ("SFAS 148"), an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Provisions ofAmong other things, SFAS No. 148 provide two additional alternative transition methods: modified prospective method and retroactive restatement method, for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Statement eliminates the use of the original SFAS No. 123 prospective method of transition alternative for those entities that change to the fair value based method in fiscal years beginning after December 15, 2003. It also amends the disclosure provisions



    of SFAS No. 123 to require prominent annual disclosure about the effects on reported net income in the Summary of Significant Accounting Policies and also requires disclosure about these effects in interim financial statements. These provisions are effective for financial statements for fiscal years ending after December 15, 2002. Accordingly, the Company has adopted the applicable disclosure requirements of this statement for year-end and interim reporting.

            White Mountains' share-based compensation plans, consisting primarily of performance shares with limited use of restricted Common Share awards ("Restricted Shares") and a one-time grant of incentive stock options to acquire Common Shares ("Options"), are designed to maximize shareholder value over long periods of time by aligning the financial interests of its management with those of its owners. Performance shares are payable only upon achievement of pre-defined business goals and are valued based on the market value of Common Shares at the time awards are earned. Performance shares are typically paid in cash, though they may be paid in Common Shares at the election of the Board of Directors, or may be deferred in accordance with the terms of the Company's deferred compensation plans.

            White Mountains expenses the full cost of all its share-based compensation, including its outstanding Options. White Mountains' share-based compensation plans, consisting primarily of performance shares, are designed to maximize shareholder value over long periods of time by aligning the financial interests of its management with those of its owners. See Note 9. White Mountains expenses all its share-based compensation, including its outstanding Options. White Mountains accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and related interpretations, including FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans ("FIN 28"). The accounting treatment for White Mountains' Restricted Share awards under APB 25 is identical to the method prescribed by SFAS No. 123, whereby the Restricted Shares are valued based upon fair value at the date of issuance and charged to compensation expense ratably over the vestingservice period. Compensation expense charged to earnings for Restricted Shares was $16.2$2.0 million, $5.8 million and $10.4$16.2 million for the years ended December 31, 2004, 2003 and 2002, and 2001, respectively. There were no Restricted Shares outstanding in 2000. The accounting treatment for White Mountains' performance share awards under APB 25 is also identical to the method prescribed by SFAS No. 123, whereby the liability for performance share awards is measured each period based upon the current market price of the underlying Common Shares. During 2002, 20012004, 2003 and 2000,2002, White Mountains recorded compensation charges of $63.5$215.0 million, $31.6$206.6 million and $25.8$63.5 million, respectively, for outstanding performance shares.

            In 2000, the Company issued a one-time award of 81,000 Options. The Options were issued at an exercise price equal to the market value of the underlying Common Shares on February 27, 2000 (the grant date). The exercise price escalates on a straight-line basis by 6% per annum over the ten-year life of the Options. As a result, the Company's outstanding Options are accounted for as variable options under FIN 28, with compensation expense charged to earnings over the service period based on the intrinsic value of the underlying Common Shares. Compensation expense charged to earnings for Options was $.7$9.0 million, $7.4 million and $9.5$.7 million for the years ended December 31, 2004, 2003 and 2002, and 2001, respectively. At December 31, 2004, the Company had 46,530 Options outstanding (10,530 of which were exercisable) with a weighted average exercise price of $140.80 per Common Share. During the year ended December 31, 2004, 4,035 Options were exercised at an average exercise price of $139.58 per Common Share.

            White Mountains has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" with respect to its outstanding Options and Restricted Shares. The following table illustrates the pro forma effect on net income (loss) and earnings per share for each

    F-11


    period indicated as if the Company applied the fair value recognition provisions of SFAS No. 123 to its employee Option incentive compensation program.

     
     Year Ended December 31,
     
     2002
     2001
     2000
     
     Millions, except per share amounts

    Net income (loss), as reported $748.1 $(259.3)$407.9
     Add: Stock-based employee compensation expense included in reported net income (loss), net of taxes  .7  9.5  
     Deduct: Stock-based employee compensation expense determined under fair value based method, net of taxes  (.1) (.1) 
      
     
     
    Net income (loss), pro forma $748.7 $(249.9)$407.9
      
     
     
    Earnings (loss) per share:         
      Basic—as reported $88.61 $(84.75)$69.19
      Basic—pro forma  88.67  (83.34) 69.19
      Diluted—as reported  80.75  (84.75) 68.89
      Diluted—pro forma  80.81  (83.34) 68.89
      
     
     

            White Mountains' compensation The effects of Restricted Share and performance share expense related to its Options was higher in 2002 and 2001 than it would have been hadare not included below because the



    accounting treatment that the Company accounted for its Optionsfollows under SFAS No. 123 dueAPB 25 is identical to the following factors: (i) compensation expense under SFAS No. 123 is based on the fair value of the Options at the date of grant and subsequent changes in the market value of the underlying stock are not considered. Since the date the Options were granted, the market price of Common Shares has increased from $106.19 at February 27, 2000 (the date of grant) to $348.00 at December 31, 2001 and $323.00 at December 31, 2002. The intrinsic value method of accounting for compensation expense under FIN 28, which the Company follows, captured this increase in market value and resulted in increased compensation expense as compared to SFAS No. 123. (ii) variable plan accounting under FIN 28 prescribes that compensation expense be recognized over the service period, which results in an accelerated recognition of the expense as compared to using the vesting period prescribed by SFAS No. 123.123 for these instruments.

     
     Year Ended December 31,
     
    Millions, except per share amounts

     
     2004
     2003
     2002
     
    Net income, as reported $418.7 $280.6 $748.1 
     Add: Option expense included in reported net income  9.0  7.4  .7 
     Deduct: Option expense determined under fair value based method  (.1) (.1) (.1)
      
     
     
     
    Net income, pro forma $427.6 $287.9 $748.7 
      
     
     
     
    Earnings per share:          
     Basic—as reported $42.28 $26.48 $88.61 
     Basic—pro forma  43.18  27.32  88.67 
     Diluted—as reported  39.92  23.63  80.75 
     Diluted—pro forma  40.77  24.39  80.81 
      
     
     
     


    Business Combinations

            In 2001, White Mountains adopted the provisions of SFAS No. 141, "Business Combinations", which required the recognition of all existing deferred credits (defined as the excess of fair value of acquired assets over cost) arising from business combinations prior to July 1, 2001 through the income statement as a change in accounting principle on the first day of the fiscal year beginning after December 15, 2001. In accordance with SFAS No. 141, White Mountains recognized its entire December 31, 2001 unamortized deferred credit balance of $682.5 million on January 1, 2002 as a cumulative effect of a change in accounting principle. SFAS No. 141 also requires deferred credits arising from business combinations on or after July 1, 2001 to be immediately recognized through the income statement as an extraordinary gain. In accordance with SFAS No. 141, White Mountains recognized an extraordinary gain of $7.1 million during the second quarter of 2002 in connection with Folksamerica's acquisition of Imperial in April 2002 and recognized extraordinary gains of $13.6 million and $3.0 million during 2001 in connection with Folksamerica's acquisition of C-F and the acquisition of certain net assets of Folksam.See Note 2.

            On January 1, 2002, White Mountains adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", which calls for the amortization of existing and prospective goodwill (defined

    F-12


    as the excess of cost over the fair value of acquired assets) only when the assets acquired are deemed to have been impaired rather than systematically over a perceived period of benefit. SFAS 142 specifically defines impairment as the condition that exists when the carrying amount of goodwill exceeds its implied fair value and requires goodwill to be evaluated for impairment periodically. Prior to the issuance of SFAS No. 142, little guidance existed as to how to determine and measure goodwill impairment. As a result of the issuance of SFAS No. 142, White Mountains performed a discounted cash flow analysis to determine the fair value of the net assets supporting its unamortized goodwill relating primarily to its 2000 acquisition of substantially all the reinsurance operations of Risk Capital Reinsurance Company ("Risk Capital") and recognized a transitional impairment loss of $22.3 million on January 1, 2002 as a cumulative effect of a change in accounting principle.

            Net income (loss) from continuing operations, net income (loss)
    Employer's Disclosures about Pensions and earnings (loss) per Common Share amountsOther Post Retirement Benefits

            In December 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employer's Disclosures about Pensions and Other Post Retirement Benefits," ("SFAS 132(R)"). This statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which it replaces. Additionally, SFAS 132(R) requires more detailed disclosures about pension plan assets, benefit obligations, cash flows, benefit costs and related information. White Mountains has included the disclosures required by SFAS 132(R) for the years ended December 31, 20012004 and 2000, adjusted2003. See Note 8.




    Other-Than-Temporary Impairment Disclosures

            In December of 2003, White Mountains adopted FASB Emerging Issues Task Force ("EITF") Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to exclude charges from goodwill amortizationCertain Investments" ("EITF 03-01"). EITF 03-01 provides new disclosure requirements for other-than-temporary impairments on debt and revenues from deferred credit amortization,equity investments. Investors are as follows:required to disclose quantitative information about: (i) the aggregate amount of unrealized losses, and (ii) the aggregate related fair values of investments with unrealized losses, segregated into time periods during which the investment has been in an unrealized loss position of less than 12 months and greater than 12 months. In addition, investors are required to disclose the qualitative information that supports their conclusion that the impairments noted in the quantitative disclosures are not other-than temporary. See Note 5.

     
     Year Ended December 31, 2001
     Year Ended December 31, 2000
     
    Millions, except per share amounts

     Net loss before
    extraordinary
    items

     Net loss
     Net income (loss)
    before
    extraordinary items

     Net Income
     
    Net income (loss)             
    Reported net income (loss) $(271.1)$(259.2)$312.9 $407.9 
     Amortization of deferred credits  (91.6) (91.6) (41.4) (41.4)
     Amortization of goodwill  3.1  3.1  3.5  3.5 
      
     
     
     
     
    Adjusted net income (loss) $(359.6)$(347.8)$275.0 $370.0 
      
     
     
     
     
    Basic earnings (loss) per share             
    Reported net income (loss) per Share $(86.52)$(84.75)$53.08 $69.19 
     Amortization of deferred credits  (13.75) (13.75) (7.02) (7.02)
     Amortization of goodwill  .47  .47  .60  .60 
      
     
     
     
     
    Adjusted net income (loss) per Share $(99.80)$(98.03)$46.66 $62.77 
      
     
     
     
     
    Diluted earnings (loss) per share             
    Reported net income (loss) per Share $(86.52)$(84.75)$52.84 $68.89 
     Amortization of deferred credits  (13.75) (13.75) (6.99) (6.99)
     Amortization of goodwill  .47  .47  .60  .60 
      
     
     
     
     
    Adjusted net income (loss) per Share $(99.80)$(98.03)$46.45 $62.50 
      
     
     
     
     

    RecentRecently Issued Accounting Pronouncements

            In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation issues surrounding special purpose entities, often termed variable interest entities ("VIE"), to which the usual condition for consolidation does not apply because the VIE either has no voting interests or otherwise is not subject to financial control through ownership of voting interests. Under FIN 46, the primary beneficiary of a VIE is required consolidate the VIE. FIN 46 is required to be adopted for financial periods ending after June 15, 2003. At December 31, 2002, White Mountains held certain investments that, for purposes of FIN 46, are being evaluated to determine whether such investments should be consolidated or disclosed as a variable interest entity in the Company's future financial statements. Such investments include limited partnerships currently accounted for under the equity method and OneBeacon's surplus note investment in New Jersey Skylands.

    F-13


            In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), which expands the disclosures to be made by a guarantor in the consolidated financial statements and generally requires recognition of a liability for the fair value of a guarantee at its inception. The disclosure requirements of this interpretation are effective for the Company for fiscal periods ending after December 15, 2002. The measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This interpretation does not apply to guarantees issued by insurance companies accounted for under insurance-specific accounting literature. White Mountains is currently evaluating the impact of the adoption of the measurement provisions of FIN 45 and does not expect the adoption of FIN 45 to have material impact.

            In June 2002,2004, the FASB issued SFAS No. 146,123 (Revised 2004), "Share-Based Payment," "(SFAS 123(R)". SFAS 123(R) is a revision of FASB Statement 123, "Accounting for Costs Associated with Exit or Disposal Activities.Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which an employee is required to provide service in exchange for the award. This statement replaces Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires companies to recognize a liability for costs associated with exit or disposal activities at fair value when they are incurred, as defined in SFAS No. 146, rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exitas of the beginning of the first interim or disposal activities initiatedannual reporting period that begins after December 31, 2002. Accordingly, SFAS 146June 15, 2005 and the Company will impact all exit or disposal activities initiated byadopt the standard in the third quarter of fiscal 2005. White Mountains after December 31, 2002.does not expect a material effect on its financial condition, results of operations or cash flows

    Note
    NOTE 2. Significant Transactions

    Equity Issuance and Debt RefinancingSirius

            On October 24, 2002, White Mountains sold $225.0 million of its equity securities in private transactions. Investment funds managed by Franklin Mutual, which were existing shareholders of White Mountains, purchased $200.0 million of convertible preference shares based on a value of $295.00 per common share. See Note 10. In addition, investment funds managed by Highfields Capital Management LP purchased 84,745 Common Shares for $25.0 million ($295.00 per Common Share).

            On October 31, 2002, FAC completed an amendment of the Bank Facility, which included the issuance of a new $143.8 million Tranche C term loan that was utilized to refinance a portion of the existing $228.8 million Tranche A term loan. See Note 6.

    OneBeacon

            On June 1, 2001,April 16, 2004, White Mountains acquired OneBeaconSirius from AvivaABB Ltd. (the "Sirius Acquisition") for $2,114.3SEK 3.27 billion (approximately $427.5 million based upon the foreign exchange spot rate at the date of acquisition), which includes $10.5 million of which $260.0 million consisted of the Seller Noteexpenses incurred in connection with the balance paidacquisition. The principal companies acquired were Sirius International Insurance Corporation ("Sirius International"), Sirius America Insurance Company ("Sirius America") and Scandinavian Reinsurance Company Ltd. ("Scandinavian Re"). Sirius International is domiciled in cash. Also,Sweden and has offices in Belgium, Hamburg, London, Singapore, Stockholm and Zurich. Sirius America is a U.S.-based insurer focused on primary insurance programs that was acquired by Folksamerica as part of the financing of the Acquisition, White Mountains issued $437.6 million oftransaction. Scandinavian Re is a new class of non-voting convertible preference shares of the Company, which were subsequently converted into Common Shares upon shareholder approval on August 23, 2001, and issued the Warrants to Berkshire to acquire 1,714,285 Common Shares at an exercise price of $175.00 per Common Share. See Note 11. Of the total Warrants purchased by Berkshire, the Series A Warrants to purchase 1,170,000 Common Shares were immediately exercisable and the Series B Warrants to purchase 544,285 Common Shares became exercisable upon shareholder approval at the 2001 Annual Meeting.

            On November 1, 2001, OneBeacon transferred its regional agency business, agents and operationsreinsurance company that has been in 42 states and the District of Columbia to Liberty Mutual pursuant to the Renewal Rights Agreement. This transfer amounted to approximately $1.5 billion in net written premiums, or approximately 45% of OneBeacon's total business at the time the agreement was put in place. A reinsurance agreement between OneBeacon and Liberty Mutual pro-rates results so that OneBeacon

    F-14


    shares in approximately two-thirds and one-third of the operating results of the transferred business corresponding to renewal premiums written in the first and second years following the execution of the Renewal Rights Agreement, respectively.

    Purchase Accounting Associated with the Acquisitionrun-off since 2002.

            The Sirius Acquisition was accounted for by the purchase method of accounting in accordance with the treatment of a purchase business combination under APB No. 16, "Business Combinations" and, therefore, the identifiable assets and liabilities of OneBeaconSirius were recorded by White Mountains at their fair values on June 1, 2001.April 16, 2004. The process of determining the fair value of such assets and liabilities acquired as required under purchase accounting, was undertaken as follows: (i)(1) the purchase price of OneBeaconSirius was preliminarily allocated to the acquired assets and liabilities, based on their respective estimated fair values at June 1, 2001; (ii)April 16, 2004; (2) the excess of the estimated fair value of acquired net assets over the purchase price was used to reduce the estimated fair values of all non-current, non-financial assets acquired to zero; and (iii)(3) the remaining $682.0 million excess of the estimated fair value of net assets over the purchase price was recorded as a deferred credit.

            In accordance with the purchase method of accounting, on June 1, 2001, White Mountains increased the net assets of OneBeacon by $134.0 million ($87.1 million after-tax) representing adjustments to reflect the estimated fair value of OneBeacon's assets and liabilities assumed. This increase was primarily comprised of a pretax adjustment of $300.0 million resulting from fair value adjustments made to OneBeacon's loss and LAE reserves and related reinsurance recoverables, offset by (i) $28.0 million of liabilities associated with the fair value of obligations under National Accounts and National Programs contracts, (ii) $15.3 million in liabilities associated with the expected costs to exit certain business activities of OneBeacon and (iii) $86.0 million to recognize the fair value of employee benefit obligations. White Mountains also decreased the net assets of OneBeacon by an additional $246.5 million ($175.0 million after-tax) representing an allocation of the excess of acquired net assets over the purchase price to OneBeacon's non-current, non-financial assets existing at the time of the Acquisition, primarily its property, plant and equipment.extraordinary gain.


            The fair value of identifiable assets and liabilities acquired on June 1, 2001April 16, 2004 were as follows ($ in(in millions):

    Fair value of assets acquired $11,895.1  $3,306.9 
    Fair value of liabilities acquired 9,098.8  2,768.0 
     
      
     
    Fair value of net assets acquired 2,796.3  538.9 
    Total purchase price, including expenses (2,114.3) (427.5)
     
      
     
    Resulting deferred credit $682.0 
    Resulting extraordinary gain $111.4 
     
      
     

            Significant assets and liabilities acquired through OneBeaconSirius included $34.0$1,851.9 million of cash $7,408.6and investments, $790.1 million of investments, $2,448.9funds held by ceding companies, $286.2 million of reinsurance recoverable on paid and unpaid losses, $1,267.3$245.8 million of insurance premiumsand reinsurance balances receivable, $6,364.2$1,612.7 million of loss and LAEloss adjustment expense reserves, and $1,897.7$432.2 million of reserves for structured settlements, $276.5 million of unearned insurance premiums.

            In conjunction with its adoptionpremiums and $289.4 million of SFAS No. 141, White Mountains recognized its entire unamortized deferred credit balance on January 1, 2002, including its unamortized deferred credit balance relating to OneBeacon of $625.1 million at December 31, 2001, as a change in accounting principle. Had the Acquisition occurred on or after July 1, 2001, White Mountains would have immediately recognized this deferred credit on its income statement as an extraordinary gain as with its acquisitions of C-F and the Folksam net assets.

    F-15


    Pro Forma Financial Information for the Acquisition—Years Ended December 31, 2001 and 2000tax liabilities.

            Supplemental unaudited pro forma condensed combined income statement information for the yearsyear ended December 31, 2001 and 2000,2004, which gives effect toassumes that the Sirius Acquisition as if it had occurred onas of January 1, 20012004, and 2000, respectively,for the year ended December 31, 2003, which assumes the Sirius Acquisition had occurred as of January 1, 2003, follows:

     
     Pro Forma
    Year Ended
    December 31,

     
     
     2001
     2000
     
     
     (Unaudited)
    Millions, except per share amounts

     
    Total revenues as reported $3,234.4 $850.9 
    Pro forma effect of the Acquisition  2,494.2  5,515.9 
      
     
     
    Total pro forma revenues $5,728.6 $6,366.8 
      
     
     
    Pro forma net loss from continuing operations $(254.4)$(59.0)
      
     
     
    Basic and diluted loss per share numerator:       
     Pro forma net loss from continuing operations available to common shareholders $(564.6)$(322.7)

    Basic and diluted loss per share:

     

     

     

     

     

     

     
     Pro forma net loss from continuing operations $(84.29)$(54.74)
      
     
     
     
     Pro Forma Twelve Months Ended December 31, 2004
     Pro Forma Twelve Months Ended December 31, 2003
     
     (Unaudited)
    Millions, except per share amounts

    Total revenues $4,699.7 $4,408.3
    Income before extraordinary items $273.4 $262.0
    Net income $453.9 $347.5
    Earnings per share:      
     Pro forma net income—basic $45.83 $34.15
     Pro forma net income—diluted $43.28 $30.55
      
     

            The unaudited pro forma information presented above for the years ended December 31, 20012004 and 20002003 has been supplied for comparative purposes only and does not purport to reflect the actual results that would have been reported had the Sirius Acquisition been consummated at January 1, 20012004 and 2000,2003, respectively. Additionally, such pro forma financial information isdoes not expectedpurport to be reflective ofrepresent results that may occur in the future, particularlyfuture.


    Symetra

            On August 2, 2004, White Mountains, Berkshire Hathaway Inc. ("Berkshire") and several other private investors capitalized Symetra Financial Corporation ("Symetra") in lightorder to purchase the life and investments operations of significant non-recurring transactions such asSafeco Corporation for $1.35 billion. The acquired companies, which are now operating under the NICO CoverSymetra brand, focus mainly on group insurance, individual life insurance, structured settlements and retirement services. Symetra had an initial capitalization of approximately $1.4 billion, consisting of $1,065 million of common equity and $315 million of bank debt. White Mountains invested $194.7 million in Symetra in exchange for 2.0 million common shares of Symetra. In addition, White Mountains and Berkshire each received warrants to acquire an additional 1.1 million common shares of Symetra at $100 per share. White Mountains owns approximately 19% of the



    outstanding common shares of Symetra, which are accounted for under the equity method, and approximately 24% of Symetra on a fully-converted basis including the warrants, which are accounted for under the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). Three White Mountains designees serve on Symetra's eight member board of directors.

            White Mountains recorded its initial investment in Symetra in accordance with GAAP by allocating the $194.7 million purchase price between the common shares and the GRC Cover, which are not included therein.warrants. The NICO Coverallocation was determined by recording the warrants at their fair value of $35.4 million, with the remaining $159.3 million allocated to the common shares. White Mountains then recognized an extraordinary gain of $40.7 million, representing the difference between the initial cost of the common shares and the GRC Cover would have reduced revenuesamount of White Mountains' equity in the underlying net assets of Symetra, as required by $1.5 billionAPB 18, "The Equity Method of Accounting for Investments in Common Stock".


    Sierra

            On March 31, 2004, Folksamerica acquired the Sierra Insurance Group companies (the "Sierra Group"), consisting of California Indemnity Insurance Company and increasedits three subsidiaries, from Nevada-based Sierra Health Services, Inc. Folksamerica paid $76.2 million for the Sierra Group, which included $14.2 million in cash and a $62.0 million purchase note (see Note 6), of which $58.0 million will be adjusted over its six-year term to reflect favorable or adverse loss reserve development on the acquired reserve portfolio and run-off of remaining policies in force (mainly workers compensation business) as well as certain other balance sheet protections. The acquired companies' net loss from continuing operations by $306.9 million duringassets at the pro forma periods presented. In addition, the pro forma results presented above do not reflect the effectstime of the Renewal Rights Agreement,close were $84.8 million, including $270.3 million of investments, $174.4 million of reinsurance balances recoverable, $406.9 million of loss and loss adjustment expense reserves and $25.1 million of unearned premium. The acquisition resulted in an $8.6 million extraordinary gain, which would have reduced revenues by $277.5 million and $474.5 million, respectively, and reduced expenses by $322.9 million and $547.5 million, respectively, duringWhite Mountains recognized in the 2001 and 2000 pro forma periods presented.first quarter of 2004.

    F-16



    Tryg-Baltica

            On November 11, 2004, Sirius International acquired 100% of Denmark-based Tryg-Baltica Forsikring, internationalt forsikringsselskab A/S ("Tryg Baltica"). Under the terms of the agreement, Sirius paid approximately DKK 316.3 million ($57.7 million) and an additional $0.3 million of expenses incurred in connection with the acquisition. Following the closing, White Mountains Re placed Tryg-Baltica into run-off, though it is anticipated that select business will be renewed by Sirius International. White Mountains Re did not acquire any infrastructure or employees and will manage the company's run-off administration. The acquired companies' net assets at closing were $77.5 million, including $144.3 million of cash and investments, $86.7 million of receivables, $20.8 million of deposits with insurance companies, $150.8 million of loss and LAE reserves and $36.9 million of unearned insurance premiums. The acquisition resulted in a $19.8 million extraordinary gain, which White Mountains recognized in the fourth quarter of 2004.


    Other Acquisitions and Dispositions

            During the fourth quarter of 2004, OneBeacon sold two of its subsidiaries, Potomac Insurance Company of Illinois ("Potomac") for $21.7 million and Western States Insurance Company ("Western States"), as well as its boiler inspection service business, for $15.1 million and recognized combined gains on the sales of $22.1 million through other revenues.

            During the third quarter of 2004, OneBeacon entered into an agreement to sell the renewal rights to most of its pre-Atlantic Mutual (defined below) New York commercial business to Tower Insurance Group. The transaction, effective with December 1, 2004 renewals, will impact approximately



    $110.0 million of premiums. OneBeacon will retain the commercial business acquired from Atlantic Mutual (defined below).

            On March 31, 2004, OneBeacon acquired Atlantic Specialty Insurance Company ("Atlantic Specialty"), a subsidiary of Atlantic Mutual Insurance Company ("Atlantic Mutual"), and the renewal rights to Atlantic Mutual's segmented commercial insurance business, including the unearned premiums on the acquired book (the "Atlantic Specialty Transaction"). The overall gross written premium for this book of business totals approximately $400 million. Under the terms of the agreement, OneBeacon will pay Atlantic Mutual a renewal commission on the premiums renewed. In connection with its acquisition of Atlantic Specialty, OneBeacon paid $30.1 million in cash and issued a $20.0 million note to the seller. See Note 6.

            During the first quarter of 2004, White Mountains purchased additional warrants to acquire 2,390,786 common shares of Montpelier Re Holdings Ltd. ("Montpelier") from an existing warrant holder for $54.1 million in cash. Also during the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier to third parties for net proceeds of $155.3 million. As a result of this sale, as well as changes to the composition of the Board of Directors of both Montpelier and White Mountains, White Mountains changed the method of accounting for its remaining common share investment in Montpelier as of March 31, 2004 from an equity method investment in an unconsolidated affiliate to a common equity security classified as available for sale and carried at fair value. See Note 5.

            In January 2004, Folksamerica sold Peninsula to the Donegal Group for $23.3 million, or 107.5% of its GAAP book value, resulting in a pretax gain of $2.1 million, which White Mountains recognized in the first quarter of 2004.

            Effective October 1, 2003, Folksamerica acquired renewal rights to the property and casualty treaty reinsurance business of CNA Reinsurance ("CNA Re"), a division of CNA Financial Corporation. Under the terms of the transaction, Folksamerica will compensate CNA Re based upon the amount of premiums renewed by Folksamerica over the next two contract renewals. No reserves or liabilities were transferred. In connection with this transaction, Folksamerica established an underwriting office in Chicago staffed with a number of reinsurance professionals previously employed by CNA Re.

            In December 2003, OneBeacon sold one of its wholly-owned subsidiaries, NFU Standard, to Quanta U.S. Holdings, Inc., an indirect subsidiary of Quanta Capital Holdings Ltd. OneBeacon received total proceeds of $22.4 million and recorded an $8.7 million gain on the sale, which is included in other revenues. Concurrently, OneBeacon entered into an assumption reinsurance agreement to assume all in-force insurance contracts of NFU Standard, subject to regulatory and other approvals.

            In April 2002, Folksamerica acquired Imperial Casualty and Indemnity Insurance Company ("Imperial") for $4.2 million including related expenses ($.5 million net of cash acquired). Significant assets and liabilities acquired included investments of $22.8 million and gross loss and LAE reserves of $11.9 million. In accordance with SFAS No. 141, White Mountains recognized a $7.1 million extraordinary gain during 2002 representing the excess of the fair value of Imperial's net assets over its cost.

            In December 2001, White Mountains, through OneBeacon, invested $180.0 million in Montpelier. See Note 14.

            In December 2001, Fund American Re acquired substantially all of the international reinsurance operations of Folksam. The $64.0 million purchase price was paid in a combination of cash, a note and Common Shares. Additionally, in August 2002, $24.2 million of total assets and total liabilities of Folksam's Singapore-based reinsurance operations were transferred to Fund American Re. At December 31, 2002, Fund American Re had $149.9 million of total assets and $58.1 million of shareholder's equity. In accordance with SFAS No. 141, White Mountains recognized a $3.0 million extraordinary gain during 2001 representing the excess of the fair value of Folksam's net assets over its cost.

            In September 2001, Folksamerica acquired C-F for total consideration of $49.2 million plus related expenses. The purchase consideration included the issuance of a $25.0 million, four-year note by Folksamerica which may be reduced by adverse loss development experienced by C-F post-acquisition. In accordance with SFAS No. 141, White Mountains recognized a $13.6 million extraordinary gain during 2001 representing the excess of the fair value of C-F's net assets over its cost.

            In January 2001, the Company sold Waterford to a third party for consideration of $23.6 million in cash, net of transaction related expenses. White Mountains recognized a $12.4 million pretax gain on the sale of Waterford in 2001.

            In October 2000, Folksamerica purchased 80% of Esurance for $9.0 million. During the fourth quarter of 2001, Folksamerica purchased the remaining outstanding stock for $1.4 million. At and for the year ended December 31, 2002, Esurance had total assets of $38.2 million, total revenues of $10.9 million and an accumulated shareholder's deficit of $24.9 million.

            In October 2000, the Company was informed that the Internal Revenue Service agreed with its position taken in its 1991 tax return concerning the sale of Fireman's Fund and, accordingly, released a $95.0 million reserve during 2000 to income which is presented as a gain from discontinued operations.

            In July 2000, White Mountains sold its indirect, wholly-owned subsidiary, White Mountains Holdings, Inc. (which controlled a substantial amount of its holdings of FSA) and all its other holdings of FSA Common Stock to Dexia for proceeds of $620.4 million. White Mountains recognized a $391.2 million pretax gain on the Dexia Sale in 2000.

            In May 2000, Folksamerica completed its acquisition of Risk Capital for $20.3 million in cash plus related expenses. Because the cost of Risk Capital was more than the fair value of its net identifiable assets at that date, White Mountains recorded $24.9 million in goodwill at acquisition, which was being amortized to income over the estimated period of benefit of ten years prior to the adoption of SFAS 142.

            In March 2000, Folksamerica acquired PCA for $122.3 million in cash. Because the cost of PCA was less than the fair value of its net identifiable assets acquired at that date, White Mountains

    F-17



    recorded a $37.9 million deferred credit at acquisition, which was being amortized to income over the estimated period of benefit of six years prior to the adoption of SFAS No. 141 on January 1, 2002.

    Note
    NOTE 3. Reserves for Unpaid Losses and Loss Adjustment Expenses

    Insurance

            White Mountains' insurance subsidiaries establish loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. White Mountains establishes estimates of amounts recoverable from its reinsurers in a manner consistent with the claim liability covered by the reinsurance contracts, net of an allowance for uncollectible amounts. Net insurance loss reserves represent loss and LAE reserves reduced by reinsurance recoverable on unpaid losses The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

            Reserve estimates at OneBeacon are subject to additional uncertainty as a consequence of a number of factors that occurred prior to and since the Acquisition. As previously discussed, OneBeacon is the result of the merger of the U.S. operations of General Accident and Commercial Union. While relatively the same size, the legacy companies had different underwriting and claims management practices, which produced different business and underwriting results. The operational integration of the two companies was complex and included changes in underwriting and claims operations. Beginning in the mid-1990s, and continuing through the Merger, the subsequent operational integration of the legacy companies and the Acquisition, OneBeacon experienced an environment of significant change, both in its business and operations. Generally accepted actuarial techniques used to estimate reserves rely in large degree on projecting historical trends, such as patterns of claim development (i.e., reported claims and paid losses), into the future. Accordingly, estimating reserves becomes more uncertain if business mix, coverage limits, case reserve adequacy, claims payment rates and other factors change over time. The breadth and depth of the business and operational changes that occurred at OneBeacon (1) led to a wider range in the reserve estimates produced by a variety of actuarial loss reserving techniques, especially those that rely upon consistent claim development patterns, and (2) introduced greater complexity to the judgments required to be made by management in determining the impact of the business and operational changes on the development patterns.



            Reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported ("IBNR") reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are regarded as the most uncertain reserve segment and are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

            Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. White Mountains' own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, is the most important information for estimating its reserves. External data, available from organizations such as statistical

    F-18



    bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate White Mountains' own experience, and can be especially useful for estimating costs of new business. For some lines of business, such as "long-tail" coverages discussed below, claims data reported in the most recent accident year is often too limited to provide a meaningful basis for analysis due to the typical delay in reporting of claims. For this type of business, White Mountains uses a selected loss ratio method for the initial accident year or years. This is a standard and accepted actuarial reserve estimation method in these circumstances in which the loss ratio is selected based upon information used in pricing policies for that line of business, as well as any publicly available industry data, such as industry pricing, experience and trends, for that line of business.

            In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. Often the factors influencing changes in claim costs are difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from past. A key objective of actuaries in developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment.

    Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the "claim-tail". The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for liability/casualty coverages, such as automobile liability, general liability, products liability, D&O, multiple peril coverage, and workers compensation, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known and, as a result, White Mountains may adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with GAAP. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.

            In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in



    developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment and is inherently uncertain.

    Reinsurance

            White Mountains' reinsurance subsidiaries establish loss and LAE reserves that are estimates of future amounts needed to pay claims and related expenses in the future for insuredreinsured events that have already occurred. The process of estimating reserves for White Mountains' reinsurance subsidiaries is similaralso obtain reinsurance whereby another reinsurer contractually agrees to indemnify White Mountains for all or a portion of the process described abovereinsurance risks underwritten by White Mountains. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as "retrocessional reinsurance" arrangements. White Mountains establishes estimates of amounts recoverable from retrocessional reinsurance in a manner consistent with the loss and LAE liability associated with reinsurance contracts offered to its customers (the "ceding companies"), net of an allowance for White Mountains' insurance subsidiariesuncollectible amounts. Net reinsurance loss reserves represent loss and as of any given date, is inherently uncertain. ReserveLAE reserves reduced by retrocessional reinsurance recoverable on unpaid losses.

            Reinsurance loss and LAE reserve estimates reflect the judgment of both the ceding companycompanies and White Mountains, based on the experience and knowledge of their respective claims personnel, regarding the nature and value of the claim.claims. The ceding companycompanies may periodically adjust the amount of the case reserves as additional information becomes known or partial payments are made. Upon notification of a loss from a ceding

    F-19



    company, White Mountains establishes case reserves, including LAE reserves, based upon White Mountains' share of the amount of reserves established by the ceding company and White Mountains' independent evaluation of the loss. In cases where available information indicates that reserves established by the ceding company are inadequate, White Mountains establishes case reserves in excess of its share of the reserves established by the ceding company.

            The estimation of net reinsurance loss and LAE reserves is subject to the same factors as the estimation of insurance loss and LAE reserves. In addition to those factors which give rise to inherent uncertainties in establishing insurance loss and LAE reserves, the claim-tail for reinsurers is further extended because claims are first reported through one or more intermediary insurers or reinsurers.

    White Mountains' reinsurance subsidiaries useMountains establishes loss reserves for White Mountains Re based on a single point estimate, which is management's best estimate of ultimate losses and loss expenses. This "best estimate" is derived from a combination of actuarial methods to determine IBNR reserves. These methods fall into two general categories: (1) methods by which ultimate claims are estimatedmethods. For current accident year business the estimate is based upon historical patterns of paid and reported claim development experienced, as supplemented by reported industry patterns, and (2) methods in which the level of IBNR reserves are established based upon the application ofon an expected loss ratios relative to earned premiumratio method. The parameters underlying this method are developed during the underwriting and pricing process. Loss ratio expectations are derived for each contract and these are aggregated by accident year, lineclass of business and type of reinsurance written.

            As described previously, uncertainties in projecting estimatescontract. These loss ratios are then applied to the actual earned premiums by class and type of business to estimate ultimate losses. Paid losses are deducted to determine loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled, i.e., the "claim-tail". During the long claims reporting and settlement period, additional facts regarding coverages written inloss expense reserves.

            For prior accident years, as well as about claims and trends may become known and, as a result, White Mountains may adjust itsRe gradually replaces this expected loss ratio approach with estimates based on historical loss reporting patterns. For both current and LAE reserves. If management determines that an adjustmentprior accident years estimates change when new information becomes available, such as changing loss emergence patterns, or claim and underwriting audits.

            Once a point estimate is appropriate, the adjustment is bookedestablished, in the accounting period in which such determination is made in accordancecase of White Mountains Re, actuaries estimate loss reserve ranges to measure the sensitivity of the actuarial assumptions used to set the point estimates. These ranges are calculated using similar methods to the point estimate calculation, but with GAAP. Management believes thatdifferent expected loss ratio and LAE reserves as of December 31, 2002loss reporting pattern assumptions. For the low estimate, more optimistic loss ratios and faster reporting patterns are reasonably stated; however, ultimateassumed, while the high estimate uses more conservative loss ratios and LAE may deviate, perhaps materially,slower reporting patterns. These variable assumptions are derived from the amounts currently reflected in the reserve balance. Adverse development, if any, would impact White Mountains' future results of operations.historical variations

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    in loss ratios and reporting patterns by class and type of business. Due to the inherent difficulties in estimating ultimate A&E exposures, White Mountains Re does not estimate ranges of these reserves.


    Loss and loss adjustment expense reserve summary

            The following table summarizes the loss and LAE reserve activities of White Mountains' insurance and reinsurance subsidiaries for the years ended December 31, 2002, 20012004, 2003 and 2000:2002:



     Year Ended December 31,
     
     Year Ended December 31,
     

     2002
     2001
     2000
     

     (Millions)

     
    Millions

    Millions

     Year Ended December 31,
     
     
    Gross beginning balanceGross beginning balance $9,527.6 $1,556.3 $851.0 Gross beginning balance $7,728.2 $8,875.3 $9,527.6 
    Less beginning reinsurance recoverable on unpaid losses (4,203.5) (726.5) (169.0)Less beginning reinsurance recoverable on unpaid losses (3,473.8) (4,071.9) (4,203.5)
     
     
     
       
     
     
     
    Net loss and LAE reservesNet loss and LAE reserves 5,324.1 829.8 682.0 Net loss and LAE reserves 4,254.4 4,803.4 5,324.1 
    Loss and LAE reserves acquired—Sirius(1)Loss and LAE reserves acquired—Sirius(1) 1,328.9   
    Loss and LAE reserves acquired—Sierra Group(1)Loss and LAE reserves acquired—Sierra Group(1) 244.4   
    Loss and LAE reserves acquired—Tryg-Baltica(1)Loss and LAE reserves acquired—Tryg-Baltica(1) 136.8   
    Loss and LAE reserves consolidated—NJ Skylands ReciprocalLoss and LAE reserves consolidated—NJ Skylands Reciprocal 62.1   
    Loss and LAE reserves sold—PeninsulaLoss and LAE reserves sold—Peninsula (17.0)   
    Loss and LAE reserves acquired—ImperialLoss and LAE reserves acquired—Imperial 11.0   Loss and LAE reserves acquired—Imperial   11.0 
    Loss and LAE reserves acquired—Fund American Re(1)  17.5 4.4  
    Loss and LAE reserves acquired—OneBeacon(1)   4,394.4  
    Loss and LAE reserves acquired—C-F(1)   2.3  
    Loss and LAE reserves acquired—Fund American ReLoss and LAE reserves acquired—Fund American Re   17.5 
    Loss and LAE reserves transferred(2) Loss and LAE reserves transferred(2)  (22.4) (22.2) (270.6)Loss and LAE reserves transferred(2)  (5.0) (22.4)
    Loss and LAE reserves acquired—PCA(1)    253.8 
    Loss and LAE reserves acquired—Risk Capital Operations(1)    312.6 
    Losses and LAE incurred relating to:Losses and LAE incurred relating to:       
    Losses and LAE incurred relating to:

     

     

     

     

     

     

     

     

     
    Current year losses 2,548.2 2,390.6 264.1 Current year losses 2,476.0 1,948.7 2,548.2 
    Prior year losses 90.0 103.3 23.6 Prior year losses 115.1 189.4 90.0 
     
     
     
       
     
     
     
    Total incurred losses and LAETotal incurred losses and LAE 2,638.2 2,493.9 287.7 Total incurred losses and LAE 2,591.1 2,138.1 2,638.2 
    Accretion of fair value adjustment to loss and LAE reservesAccretion of fair value adjustment to loss and LAE reserves 79.8 56.0  
    Accretion of fair value adjustment to loss and LAE reserves

     

     

    43.3

     

     

    48.6

     

    79.8

     
    Foreign currency translation adjustment to loss and LAE reservesForeign currency translation adjustment to loss and LAE reserves 48.0   
    Loss and LAE paid relating to:Loss and LAE paid relating to:       
    Loss and LAE paid relating to:

     

     

     

     

     

     

     

     

     
    Current year losses (1,072.9) (1,093.4) (16.0)Current year losses (926.3) (825.3) (1,072.9)
    Prior year losses (2,171.9) (1,341.1) (419.7)Prior year losses (2,164.6) (1,905.4) (2,171.9)
     
     
     
       
     
     
     
    Total loss and LAE paymentsTotal loss and LAE payments (3,244.8) (2,434.5) (435.7)Total loss and LAE payments (3,090.9) (2,730.7) (3,244.8)
    Net ending balanceNet ending balance 4,803.4 5,324.1 829.8 Net ending balance 5,601.1 4,254.4 4,803.4 
    Plus ending reinsurance recoverable on unpaid losses 4,071.9 4,203.5 726.5 Plus ending reinsurance recoverable on unpaid losses 3,797.4 3,473.8 4,071.9 
     
     
     
       
     
     
     
    Gross ending balanceGross ending balance $8,875.3 $9,527.6 $1,556.3 Gross ending balance $9,398.5 $7,728.2 $8,875.3 
     
     
     
       
     
     
     

    (1)
    Reinsurance recoverables on unpaid losses acquired in the OneBeacon, Fund American Re, Risk Capital Operations, PCASirius, Sierra Group and USF ReTryg-Baltica acquisitions were $1,969.8totalled $283.8 million, $21.0 million, $59.1 million, $153.3$162.5 million and $21.8$14.0 million, respectively.

    (2)
    Represents $22.2 million and $270.6 million ofretroactive loss reserves ceded to Imagine Re during 2001 and 2000, respectively.Re. See Note 4.

    Loss and LAE development—2004

            White Mountains experienced $115.1 million of net unfavorable development on prior accident year loss and LAE reserves during 2004, of which approximately $100.3 million (relating primarily to 2002 and prior accident years) was experienced by OneBeacon and approximately $10.8 million was experienced by White Mountains Re.

            The 2004 development related primarily to personal auto liability, general liability and multiple peril reserves due in part to emerging trends in claims experienced in OneBeacon's run-off operations,



    as well as national account and program claims administered by third parties. These claim trends principally included higher defense costs and higher damages from liability assessments.

            The majority of the unfavorable development recorded at White Mountains Re resulted from certain discontinued lines at Folksamerica as well as run-off operations acquired as part of the Sirius Acquisition. This unfavorable development was partially offset by favorable development in the Sirius International reserve portfolio, mainly from the three most recent underwriting years, and is indicative of the favorable terms and conditions that have existed in the global reinsurance marketplace during that time. Additionally, White Mountains Re recorded $10.0 million of unfavorable loss development on its workers compensation reserves acquired as part of the Sierra Group acquisition in 2004. This unfavorable development was offset by a reduction to the purchase note issued in connection with the acquisition of the Sierra Group.

    Loss and LAE development—2003

            White Mountains recorded $189.4 million of net unfavorable loss reserve development on prior accident year loss and LAE reserves during 2003, of which approximately $146.9 million (relating primarily to 2000 and prior accident years) was experienced by OneBeacon and $45.5 million was experienced by White Mountains Re.

            The majority of the net unfavorable development at OneBeacon in 2003 was due to a $97.7 million increase related to construction defect claims in its run-off operations. The development at OneBeacon in 2003 also included approximately $12.0 million for a significant 1995 property claim from a pool in which OneBeacon had participated (the Industrial Risk Insurers pool) which was settled through an arbitration decision during 2003.

            White Mountains Re experienced approximately $45.5 million of unfavorable loss reserve development during 2003, primarily due to strengthening of A&E reserves and reserves on Risk Capital casualty lines. White Mountains Re's 2003 loss development for A&E exposures was due to the completion of a detailed A&E market share study. This study was based on White Mountains Re's share of industry paid losses to estimated industry carried reserves.

    Loss and LAE development—2002

            Prior accident year losses of $90.0 million incurred in 2002 consisted primarily of $57.4 million recorded during the fourth quarter of 2002 at OneBeacon, $17.0 million recorded at Folksamerica,White Mountains Re, $10.5 million recorded at Fund American Re and $5.1 million recorded at White Mountains' other insurance subsidiaries.

            OneBeacon's prior year development recorded in 2002 was comprised of a $97.4 million increase related to accident years 2000 and prior, while reserves for accident year 2001 were reduced by $40.0 million. Reserve increases for 2000 and prior accident years primarily relate to increases in reserves for workers compensation coverages reduced by decreases in reserves for unallocated LAE. Workers compensation reserves for accident years 2000 and prior increasedof $155.3 million (on reserves as of December 31, 2001 of $1.2 billion) reduced primarily by favorable development in general liability coverages and decreases in reserves for unallocated LAE totaling approximately $57.9 million. These reserve increases Workers compensation reserves for accident year 2000 and prior increased related primarily to a continuing unfavorable trend of

    F-21



    increases in workers compensation medical claims and indemnity costs. Based on a study provided by the NCCI, workers compensation medical claims costs rose an average of 14% during 2002, compared with an average of 12% during 2001. Average workers compensation indemnity costs rose 11% during 2002 compared with an increase of 9% during 2001. Decreases in reserves for unallocated LAE resulted from completion of an activity-based-cost study which indicated future claim servicing costs were less than originally projected. This decrease primarily related to multiple peril and general liability coverages. The reduction in reserves for accident year 2001 was due in large part to favorable development on property losses from the Attacks.



            The prior year development recorded in 2002 at FolksamericaWhite Mountains Re consisted primarily of (i) additional losses of $9.7 million relating to the Attacks, (ii) additional losses of $7.3 million from aviation insurance coverage, in relation to the Risk Capital business, (iii) reserve additions relating to asbestos and environmental losses of $11.4 million, (iv) $3.5 million of adverse development relating to the remaining business from the USF Re acquisition, offset by (v) $17.0 million of net income recorded during the first quarter relating to the reversal of an allowance for doubtful reinsurance recoveries related to PCA. These losses, with exception of the those relating to the Attacks, are covered under the Imagine Cover, and were partially offset by amortization of the deferred gain related to retroactive reinsurance.

            Included in the prior accident year losses of $103.3 million incurred in 2001 was $64.6 million recorded at OneBeacon. OneBeacon's increases in net reserves related to long-tail lines of business, primarily for accident years 1998 through 2000. Reserve increases before recoveries under the GRC Cover were $205.4 million for workers compensation (on reserves as of December 31, 2000 of $998.2 million), $34.0 million for general liability (on reserves as of December 31, 2000 of $1.2 billion million), $152.2 million for multiple peril (on reserves as of December 31, 2000 of $1.3 billion) and $58.9 million for commercial automobile liability (on reserves as of December 31, 2000 of $676.1 million).

            Prior accident year losses reported in 2001 also included $22.2 million in reserve increases recorded by Folksamerica on business ceded under the Imagine Cover during the 2000 fourth quarter - See Note 4 for details of this agreement. Because the Imagine Cover was retroactive, the offsetting benefit (reinsurance recoverable) of $22.2 million has been deferred and is being recognized into underwriting income over the expected settlement period of the underlying claims. An additional $16.5 million in prior accident year losses incurred in 2001 were primarily due to higher than expected reported losses in Folksamerica's property excess line.

            Incurred losses for the year ended December 31, 2000 related to prior accident years of $23.6 million were principally from the portfolios acquired with USF Re and Risk Capital. In connection with the USF Re acquisition, Folksamerica issued the USF Re Seller Note for $20.8 million under which Folksamerica was not required to repay the loan should loss and LAE acquired in the acquisition develop adversely. In response to adverse development experienced on reserves acquired in the USF Re acquisition, the USF Re Seller Note was reduced by $6.8 million during the year ended December 31, 2000.Fair value adjustment

            In connection with purchase accounting for the OneBeacon Acquisition, White Mountains was required to adjust to fair value OneBeacon's loss and LAE reserves and the related reinsurance recoverables by reducing them by $646.9 million and $346.9 million, respectively, on OneBeacon's acquired balance sheet. This reduction to net loss and LAE reserves of $300.0 million is being accreted through an income statement charge ratably over the period that the claims are expected to be settled. As a result, White Mountains recognized $79.8$33.2 million, $48.6 million and $56.0$79.8 million of accretion to loss and LAE reserves during 20022004, 2003 and 2001,2002, respectively. White Mountains will accrete the remaining $164.2$82.4 million over the future periods in which the claims are settled, which is expected to be seven or eight years from the OneBeacon Acquisition.

    F-22        In connection with purchase accounting for the Sirius Acquisition, White Mountains was required to adjust to fair value the loss and LAE reserves on Sirius' acquired balance sheet by $58.1 million. This fair value adjustment is being recognized through an income statement charge ratably with and over the period the claims are settled. As such, White Mountains recognized $10.1 million of such charges for the year ended December 31, 2004.



            The fair values of OneBeacon's loss and LAE reserves and related reinsurance recoverables acquired on June 1, 2001 and Sirius' loss and LAE reserves and related reinsurance recoverables acquired on April 16, 2004 were based on the present value of their expected cash flows with consideration for the uncertainty inherent in both the timing of, and the ultimate amount of, future payments for losses and receipts of amounts recoverable from reinsurers. In estimating fair value, management adjusted OneBeacon'sthe nominal loss reserves of OneBeacon (net of the effects of reinsurance obtained from the NICO Cover and the GRC Cover) and Sirius and discounted them to their present value using an applicable risk-free discount rate. The series of future cash flows related to such loss payments and reinsurance recoveries were developed using OneBeacon's and Sirius' historical loss data. The resulting discount was reduced by the "price" for bearing the uncertainty inherent in OneBeacon's and Sirius' net loss reserves in order to estimate fair value. This was assumed to be approximately 11% and 12% of the present value of the expected underlying cash flows of the loss reserves and reinsurance recoverables of OneBeacon and Sirius, respectively, which is believed to be reflective of the cost OneBeacon and Sirius would incur if itthey had attempted to reinsure the full amount of its net loss and LAE reserves with a third party reinsurer.


    Asbestos and environmental loss and loss adjustment expense reserve activity

            White Mountains' reserves include provisions made for claims that assert damages from A&E related exposures. 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 costs obligations, particularly as mandated by federal and state environmental protection agencies. In addition to the factors described above regarding the reserving process, White Mountains 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. Due to the inherent difficulties in estimating ultimate A&E exposures, OneBeacon does not estimate a range for A&E incurred losses.

            Immediately prior to the Acquisition, Aviva causedWhite Mountains' acquisition of OneBeacon, to purchaseOneBeacon purchased a reinsurance contract with NICO for a premium of $1.3 billion under which OneBeacon is entitled to recover from NICO up to $2.5 billion in the future for asbestos claims arising from business written by OneBeacon in 1992 and prior, environmental claims arising from business written by OneBeacon in 1987 and prior, and certain other exposures. Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OneBeacon's third party reinsurers in existence at the time the NICO Cover was executed ("Third Party Recoverables"). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. Any amounts uncollectible from third party reinsurers due to dispute or the reinsurers' financial inability to pay are covered by NICO under its agreement with OneBeacon. Third Party Recoverables are typically for the amount of loss in excess of a stated level each year. Of claim payments in the past 11 years, approximately 58%63% of asbestos losses and 40%39% of environmental losses have been recovered under the historical third party reinsurance.

            White MountainsOneBeacon estimates that on an incurred basis it has exhausted approximately $1,771 million$1.7 billion of the coverage provided by NICO at December 31, 2002. Approximately $4192004. At December 31, 2004, $14.3 million of the estimated $1,771$1.7 billion of exhausted coverage from NICO related to uncollectible Third Party Recoverables. Net losses paid totaled approximately $682 million as of incurred losses have been paid by NICO through December 31, 2002.2004, with $95 million paid in 2004. Asbestos payments during 2004 reflect payments resulting from intensified efforts by claimants to resolve asbestos claims prior to enactment of potential Federal asbestos legislation. To the extent that actual experience differs from White Mountains'OneBeacon's estimate of ultimate A&E losses as well as the estimate and collectibility of Third Party Recoverables future losses could utilize some or all ofdiffers from actual experience, the $729 millionremaining protection remaining under the NICO Cover.Cover may be more or less than the approximate $757 million that OneBeacon estimates remained at December 31, 2004.

            For purposes of determining available reinsurance, product liability asbestos claims typically are aggregated as a single loss within each policy period. As a result, losses often exceed the retention level under the reinsurance agreement and reinsurance recoveries are obtained. However, for claims being asserted under premises and operations coverage, the losses are generally not aggregated for purposes of determining reinsurance recoveries, so OneBeacon expects that in the future a smaller percentage of these losses will be covered as Third Party Recoverables than has been true historically of products liability asbestos losses.

            White Mountains' reserves for A&E losses at December 31, 20022004 represent management's best estimate of its ultimate liability based on information currently available. However, as case law expands, medical and clean-up costs increase and industry settlement practices change, OneBeaconWhite Mountains may be subject to asbestos and environmental losses beyond currently estimated amounts. White Mountains cannot reasonably estimate at the present time loss reserve additions arising from any such future unfavorable developments and cannot be sure that allocated loss reserves, plus the remaining capacity

    F-23



    under the NICO Cover and other reinsurance contracts, will be sufficient to cover additional liability arising from any such unfavorable developments.

            The following table summarizestables summarize reported asbestos and environmental loss and LAE reserve activities (gross and net of reinsurance) for OneBeacon, White Mountains Re and White Mountains' consolidated insuranceother operations, consisting of American Centennial and reinsurance operationsBritish Insurance Company, for the years ended December 31, 2004, 2003 and 2002, 2001respectively.



    OneBeacon

     
     Period Ended December 31,
     
     
     2004
     2003
     2002
     
    Net Asbestos and Environmental Loss Reserve Activity
    (in millions)

     
     Gross
     Net
     Gross
     Net
     Gross
     Net
     
    Asbestos:                   
    Beginning balance $969.5 $4.2 $1,137.0 $4.9 $1,194.8 $5.8 
     Incurred losses and LAE  6.7  5.9  (.6)      
     Paid losses and LAE  (107.3) (1.6) (166.9) (.7) (57.8) (.9)
      
     
     
     
     
     
     
    Ending balance  868.9  8.5  969.5  4.2  1,137.0  4.9 
      
     
     
     
     
     
     
    Environmental:                   
    Beginning balance  559.8  8.6  701.3  17.1  749.8  18.4 
     Incurred losses and LAE  9.6  6.7  (11.1)      
     Paid losses and LAE  (56.4) (5.1) (130.4) (8.5) (48.5) (1.3)
      
     
     
     
     
     
     
    Ending balance  513.0  10.2  559.8  8.6  701.3  17.1 
      
     
     
     
     
     
     
    Total asbestos and environmental:                   
    Beginning balance  1,529.3  12.8  1,838.3  22.0  1,944.6  24.2 
     Incurred losses and LAE  16.3  12.6  (11.7)      
     Paid losses and LAE  (163.7) (6.7) (297.3) (9.2) (106.3) (2.2)
      
     
     
     
     
     
     
    Ending balance $1,381.9 $18.7 $1,529.3 $12.8 $1,838.3 $22.0 
      
     
     
     
     
     
     

    White Mountains Re

     
     Year Ended December 31,
     
     
     2004
     2003
     2002
     
    Net Asbestos and Environmental Loss Reserve Activity
    (in millions)

     
     Gross
     Net
     Gross
     Net
     Gross
     Net
     
    Asbestos:                   
    Beginning balance $69.7 $64.1 $52.7 $39.5 $48.9 $37.5 
     Incoming reserves due to the Sirius Acquisition  9.7  6.9         
     Incurred losses and LAE  8.0  2.6  27.7  32.0  9.7  6.5 
     Paid losses and LAE  (19.3) (14.3) (10.7) (7.4) (5.9) (4.5)
      
     
     
     
     
     
     
    Ending balance  68.1  59.3  69.7  64.1  52.7  39.5 
      
     
     
     
     
     
     
    Environmental:                   
    Beginning balance  17.4  15.1  14.4  12.5  13.8  11.4 
     Incoming reserves due to the Sirius Acquisition  3.2  1.9         
     Incurred losses and LAE  2.8  .1  4.7  3.7  3.8  4.0 
     Paid losses and LAE  (1.5) (1.4) (1.7) (1.1) (3.2) (2.9)
      
     
     
     
     
     
     
    Ending balance  21.9  15.7  17.4  15.1  14.4  12.5 
      
     
     
     
     
     
     
    Total asbestos and environmental:                   
    Beginning balance  87.1  79.2  67.1  52.0  62.7  48.9 
     Incoming reserves due to the Sirius Acquisition  12.9  8.8         
     Incurred losses and LAE  10.8  2.7  32.4  35.7  13.5  10.5 
     Paid losses and LAE  (20.8) (15.7) (12.4) (8.5) (9.1) (7.4)
      
     
     
     
     
     
     
    Ending balance $90.0 $75.0 $87.1 $79.2 $67.1 $52.0 
      
     
     
     
     
     
     

    Other operations

     
     Year Ended December 31,
     
    Net Asbestos and Environmental Loss Reserve
    Activity(1)
    (in millions)

     2004
     2003
     2002
     
     Gross
     Net
     Gross
     Net
     Gross
     Net
     
    Asbestos:                   
    Beginning balance $27.0 $25.7 $29.4 $28.4 $23.0 $21.9 
     Incurred losses and LAE  15.3  7.6  1.3  (2.1) 10.2  10.1 
     Paid losses and LAE  (4.8) 3.2  (3.7) (.6) (3.8) (3.6)
      
     
     
     
     
     
     
    Ending balance  37.5  36.5  27.0  25.7  29.4  28.4 
      
     
     
     
     
     
     
    Environmental:                   
    Beginning balance  5.7  5.5  6.0  5.8  8.2  7.8 
     Incurred losses and LAE  2.0  .9  (.5) (.1) (1.5) (1.3)
     Paid losses and LAE  (.8) .4  .2  (.2) (.7) (.7)
      
     
     
     
     
     
     
    Ending balance  6.9  6.8  5.7  5.5  6.0  5.8 
      
     
     
     
     
     
     
    Total asbestos and environmental:                   
    Beginning balance  32.7  31.2  35.4  34.2  31.2  29.7 
     Incurred losses and LAE  17.3  8.5  .8  (2.2) 8.7  8.8 
     Paid losses and LAE  (5.6) 3.6  (3.5) (.8) (4.5) (4.3)
      
     
     
     
     
     
     
    Ending balance $44.4 $43.3 $32.7 $31.2 $35.4 $34.2 
      
     
     
     
     
     
     

    (1)
    The asbestos and 2000, respectively.

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     Gross
     Net
     Gross
     Net
     Gross
     Net
     
     
     (Millions)

     
    Asbestos:                   
    Beginning balance $1,246.9 $46.9 $51.0 $37.2 $53.4 $40.0 
     Loss and LAE reserves acquired      222.0  6.9     
     Incurred losses and LAE  21.5  16.6  1,064.5  12.8  5.5  4.3 
     Paid losses and LAE  (67.5) (12.6) (90.6) (10.0) (7.9) (7.1)
      
     
     
     
     
     
     
    Ending balance  1,200.9  50.9  1,246.9  46.9  51.0  37.2 
      
     
     
     
     
     
     
    Environmental:                   
    Beginning balance  766.5  33.5  18.6  16.9  20.1  18.1 
     Loss and LAE reserves acquired      779.7  25.4     
     Incurred losses and LAE  3.4  2.7  .4  .1  2.9  2.2 
     Paid losses and LAE  (52.4) (10.1) (32.2) (8.9) (4.4) (3.4)
      
     
     
     
     
     
     
    Ending balance  717.5  26.1  766.5  33.5  18.6  16.9 
      
     
     
     
     
     
     
    Total asbestos and environmental:                   
    Beginning balance  2,013.4  80.4  69.6  54.1  73.5  58.1 
     Loss and LAE reserves acquired      1,001.7  32.3     
     Incurred losses and LAE  24.9  19.3  1,064.9  12.9  8.4  6.5 
     Paid losses and LAE  (119.9) (22.7) (122.8) (18.9) (12.3) (10.5)
      
     
     
     
     
     
     
    Ending balance $1,918.4 $77.0 $2,013.4 $80.4 $69.6 $54.1 
      
     
     
     
     
     
     

    F-24


    environmental reserve activity for White Mountains' other operations is comprised of American Centennial and British Insurance Company, two insurance subsidiaries that have been in run-off since 1985. The majority of the A&E reserves from other operations are recorded at American Centennial. At December 31, 2004, American Centennial had 33 open asbestos and environmental claims of which 19 were asbestos related claims and 14 were environmental related claims.


    NoteNOTE 4. Third Party Reinsurance

            In the normal course of business, White Mountains' insurance and reinsurance subsidiaries seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. White Mountains remains liable for risks reinsured even if the reinsurer does not honor its obligations



    under reinsurance contracts. The effects of reinsurance on White Mountains' insurance and reinsurance subsidiaries' written and earned premiums and on loss and LAE were as follows:

     
     Year Ended December 31, 2002
     
     
     OneBeacon(1)
     Folksamerica
     Other
    Insurance
    Operations

     Total
     
     
     (Millions)

     
    Gross written premiums:             
     Direct $2,782.6 $7.2 $34.9 $2,824.7 
     Assumed  569.0  958.1  69.8  1,596.9 
     Ceded  (828.8) (286.6) (12.7) (1,128.1)
      
     
     
     
     
    Net written premiums $2,522.8 $678.7 $92.0 $3,293.5 
      
     
     
     
     
    Gross earned premiums:             
     Direct $3,181.8 $7.2 $34.8 $3,223.8 
     Assumed  504.6  901.1  62.0  1,467.7 
     Ceded  (815.5) (287.8) (11.8) (1,115.1)
      
     
     
     
     
    Net earned premiums $2,870.9 $620.5 $85.0 $3,576.4 
      
     
     
     
     
    Losses and LAE:             
     Direct $2,405.5 $(27.7)$31.1 $2,408.9 
     Assumed  389.0  589.5  51.2  1,029.7 
     Ceded  (663.2) (129.9) (7.3) (800.4)
      
     
     
     
     
    Net losses and LAE $2,131.3 $431.9 $75.0 $2,638.2 
      
     
     
     
     

    F-25


    Year ended December 31, 2004
    Millions

     OneBeacon
     White
    Mountains Re

     Esurance
     Other
    Insurance
    Operations

     Total
     
    Gross written premiums:                
     Direct $2,367.9 $367.4 $176.7 $ $2,912.0 
     Assumed  289.6  1,565.9  24.6    1,880.1 
     Ceded  (198.4) (687.0) (1.9)   (887.3)
      
     
     
     
     
     
    Net written premiums $2,459.1 $1,246.3 $199.4 $ $3,904.8 
      
     
     
     
     
     
    Gross earned premiums:                
     Direct $2,253.9 $310.4 $153.6 $ $2,717.9 
     Assumed  331.1  1,625.4  24.4    1,980.9 
     Ceded  (206.5) (670.3) (1.5)   (878.3)
      
     
     
     
     
     
    Net earned premiums $2,378.5 $1,265.5 $176.5 $ $3,820.5 
      
     
     
     
     
     
    Losses and LAE:                
     Direct $1,540.7 $196.3 $108.6 $2.4 $1,848.0 
     Assumed  681.7  1,159.7  14.0  11.0  1,866.4 
     Ceded  (677.2) (437.1) (.2) (8.8) (1,123.3)
      
     
     
     
     
     
    Net losses and LAE $1,545.2 $918.9 $122.4 $4.6 $2,591.1 
      
     
     
     
     
     
    Year ended December 31, 2003
    Millions

     OneBeacon(1)
     White
    Mountains Re

     Esurance
     Other
    Insurance
    Operations

     Total
     
    Gross written premiums:                
     Direct $2,016.2 $5.9 $87.4 $41.2 $2,150.7 
     Assumed  234.7  1,409.0  29.0    1,672.7 
     Ceded  (278.4) (529.2)   (8.1) (815.7)
      
     
     
     
     
     
    Net written premiums $1,972.5 $885.7 $116.4 $33.1 $3,007.7 
      
     
     
     
     
     
    Gross earned premiums:                
     Direct $2,234.2 $6.5 $69.2 $39.2 $2,349.1 
     Assumed  369.1  1,301.3  30.7  .1  1,701.2 
     Ceded  (443.0) (462.0)   (7.6) (912.6)
      
     
     
     
     
     
    Net earned premiums $2,160.3 $845.8 $99.9 $31.7 $3,137.7 
      
     
     
     
     
     
    Losses and LAE:                
     Direct $1,492.1 $(18.5)$55.6 $30.5 $1,559.7 
     Assumed  107.3  711.4  25.4  .1  844.2 
     Ceded  (123.8) (135.3)   (6.7) (265.8)
      
     
     
     
     
     
    Net losses and LAE $1,475.6 $557.6 $81.0 $23.9 $2,138.1 
      
     
     
     
     
     

     
     Year Ended December 31, 2001
     
     
     OneBeacon
     Folksamerica
     Other
    Insurance
    Operations

     Total
     
     
     (Millions)

     
    Gross written premiums:             
     Direct $2,104.6 $6.0 $32.0 $2,142.6 
     Assumed  174.7  636.4  1.3  812.4 
     Ceded  (401.1) (183.5) (5.0) (589.6)
      
     
     
     
     
    Net written premiums $1,878.2 $458.9 $28.3 $2,365.4 
      
     
     
     
     
    Gross earned premiums:             
     Direct $2,374.2 $6.0 $30.7 $2,410.9 
     Assumed  64.2  648.8  -  713.0 
     Ceded  (230.2) (233.3) (4.3) (467.8)
      
     
     
     
     
    Net earned premiums $2,208.2 $421.5 $26.4 $2,656.1 
      
     
     
     
     
    Losses and LAE:             
     Direct $3,379.5 $(5.4)$21.8 $3,395.9 
     Assumed  68.6  661.5  15.5  745.6 
     Ceded  (1,374.3) (271.1) (2.2) (1,647.6)
      
     
     
     
     
    Net losses and LAE $2,073.8 $385.0 $35.1 $2,493.9 
      
     
     
     
     
     
     Year Ended December 31, 2000
     
     
     OneBeacon
     Folksamerica
     Other
    Insurance
    Operations

     Total
     
     
     (Millions)

     
    Gross written premiums:             
     Direct $ $6.3 $25.9 $32.2 
     Assumed    484.7    484.7 
     Ceded    (158.4) (3.3) (161.7)
      
     
     
     
     
    Net written premiums $ $332.6 $22.6 $355.2 
      
     
     
     
     
    Gross earned premiums:             
     Direct $ $4.1 $28.4 $32.5 
     Assumed    476.1  .4  476.5 
     Ceded    (167.7) (6.9) (174.6)
      
     
     
     
     
    Net earned premiums $ $312.5 $21.9 $334.4 
      
     
     
     
     
    Losses and LAE:             
     Direct $ $(.6)$20.6 $20.0 
     Assumed    468.5  .3  468.8 
     Ceded    (197.1) (4.0) (201.1)
      
     
     
     
     
    Net losses and LAE $ $270.8 $16.9 $287.7 
      
     
     
     
     
    Year ended December 31, 2002
    Millions

     OneBeacon(1)
     White
    Mountains Re

     Esurance
     Other
    Insurance
    Operations

     Total
     
    Gross written premiums:                
     Direct $2,782.6 $7.2 $20.2 $34.9 $2,844.9 
     Assumed  569.0  974.8  32.8  .1  1,576.7 
     Ceded  (828.8) (293.8)   (5.5) (1,128.1)
      
     
     
     
     
     
    Net written premiums $2,522.8 $688.2 $53.0 $29.5 $3,293.5 
      
     
     
     
     
     
    Gross earned premiums:                
     Direct $3,181.8 $7.1 $9.9 $34.8 $3,233.6 
     Assumed  504.6  922.4  30.9    1,457.9 
     Ceded  (815.5) (294.5)   (5.1) (1,115.1)
      
     
     
     
     
     
    Net earned premiums $2,870.9 $635.0 $40.8 $29.7 $3,576.4 
      
     
     
     
     
     
    Losses and LAE:                
     Direct $2,405.5 $(25.9)$7.8 $31.1 $2,418.5 
     Assumed  389.0  601.1  28.8  1.1  1,020.0 
     Ceded  (663.2) (133.0)   (4.1) (800.3)
      
     
     
     
     
     
    Net losses and LAE $2,131.3 $442.2 $36.6 $28.1 $2,638.2 
      
     
     
     
     
     

    (1)
    Assumed amounts principally relate to business assumed under the Renewal RightsLiberty Agreement.

    F-26


    OneBeacon

            In the ordinary course of its business, OneBeacon purchases reinsurance from high-quality, highly rated third party reinsurers in order to provide diversification of its business and minimize loss from large risks or catastrophic events. OneBeacon uses PML forecasting to quantify its exposure to catastrophic losses.

            The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OneBeacon's operating results and financial position. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and terrorist acts. The extent of losses caused by catastrophes is both a function of the amount and type of insured exposure in an area affected by the event and the severity of the event. OneBeacon continually assesses and implements programs to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas, such as coastal regions. In addition, OneBeacon imposes wind deductibles on existing coastal windstorm exposures. OneBeacon's largest single natural catastrophe risk is a Northeast windstorm.

    OneBeacon seeks to further reduce its exposure to catastrophe losses through the purchase of catastrophe reinsurance. OneBeacon uses PML forecasting to quantify its exposure to catastrophic losses. PML is a statistical modeling technique that measures a company's catastrophic exposure as the maximum probable loss in a given time period.

            As a resultSince the terrorist attacks of the Attacks, OneBeacon incurred approximately $75.0 million of pretax loss and LAE net of reinsurance, or approximately $248.0 million gross of reinsurance. In light of the Attacks,September 11, 2001 (the "Attacks"), OneBeacon has sought to mitigate the risk associated with any future terrorist attacks by reducing the insured value of policies written in geographic areas with a high concentration of exposure to losses from terrorist attacks or by seeking to exclude coverage for such losses from their policies.

            On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act which established(the "Terrorism Act") establishing a federal "backstop" for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. The Terrorism Act requires primary commercial insurers to make terrorism coverage available


    immediately and provides Federal protection above individual company retention and aggregate industry retention levels. OneBeacon estimates its individual retention level underfor commercial policies subject to the Terrorism Act to be approximately $100$160.0 million in 2003.2005. Aggregate industry retention levels are $10.0 billion from the date the Terrorism Act was enacted through December 31, 2003, $12.5 billion for 2004 and $15.0 billion for 2005. The Federal government will pay 90% of covered terrorism losses that exceed either OneBeacon's or the industry's retention levels up to $100.0 billion. The Terrorism Act is in effect until December 31, 2004, at which time certain membersfate of the U.S. government have the authority to renew it for another year. Should the Terrorism Act be renewedbeyond 2005 remains uncertain. It is anticipated that Congress will likely rule on December 31, 2004, it willa possible extension during the summer of 2005; however, there is a chance that the Terrorism Act could expire on December 31, 2005.

            OneBeacon's 2002Effective July 1, 2004, OneBeacon renewed its normal property catastrophe reinsurance program wasto cover its full estimated PML (one-in-250 year) through a groupJune 30, 2005. Under that cover, the first $200.0 million of reinsurers, with a $125.0 million retention for losses resulting from any single catastrophe. Property catastrophe losses from a single event in excess of $125.0 millionare retained by OneBeacon and up to $200.0 million were reinsured for 75% of the loss. Property catastrophe losses from a single event in excess of $200.0 million and up to $750.0 million were reinsured for 95% of the loss. The 2002 catastrophe program was developed based on OneBeacon's exposure to a one-in-250 year Northeast windstorm.

            When evaluating its catastrophe reinsurance program for 2003, OneBeacon determined that its exposure to risks resulting from a catastrophic Northeast windstorm are mitigated in the early part of calendar years due to the seasonality of such storms. Accordingly, for the first four months of 2003, OneBeacon entered into a catastrophe reinsurance program under which (1) the first $125.0 million of losses resulting from any single catastrophe are retained by OneBeacon and (2) property catastrophe

    F-27



    losses from a single event in excess of $125.0 million and up to $325.0$850.0 million are reinsured for 99%100% of the loss. Effective May 1, 2003, OneBeacon intends to enter into a property catastrophe cover that is consistent with the coverage provided by its 2002 catastrophe reinsurance program.

            OneBeacon's property catastrophe reinsurance program does not cover personal or commercial property losses resulting from nuclear, biological or chemical terrorist attacks or from "certified" events as defined under the Terrorism Act. The program covers personal property losses resulting from other types of terrorist attacks and commercial property losses from other types of domestic terrorist attacks. As a result, OneBeacon does not have reinsurance protection under either the Terrorism Act or its catastrophe reinsurance program for personal property losses resulting from a nuclear, biological or chemical attack. In the event of a catastrophe, OneBeacon can reinstate its property catastrophe reinsurance program for the remainder of the original contract term by paying a reinstatement premium which is based on the product of the percentage of coverage reinstated and itsthe original property catastrophe coverage premium.

            OneBeacon's property catastrophe reinsurance program does not cover personal or commercial property losses resulting from nuclear, biological or chemical terrorist attacks. The program covers personal property losses resulting from other types of terrorist attacks, and commercial property losses resulting from other types of domestic terrorist attacks or events not "certified" as defined under the Terrorism Act. The Terrorism Act provides protection for commercial property losses for certified events including those arising from nuclear, biological, or chemical attacks.

            OneBeacon also purchases individual property reinsurance coverage for certain risks to reduce large loss volatility. The Property per Risk reinsurance program reinsures losses in excess of $5.0 million up to $75.0 million. Individual risk facultative reinsurance may be purchased above $75.0 million where OneBeacon deems it appropriate. The Property per Risk treaty also reinsures losses in excess of $10.0 million up to $75.0 million on an individual risk basis for terrorism losses. However nuclear, biological, and chemical events are not covered.

            OneBeacon also maintains a casualty reinsurance program which provides protection for catastrophe losses involving worker'sworkers compensation, general liability or automobile liability in excess of $5.0 million up to $60.0 million. This program provides one full $55.0 million limit for either "certified" or "non-certified" terrorism losses but does not provide coverage for losses resulting from nuclear, biological or chemical attacks. OneBeacon also purchases reinsurance coverage for certain risks at levels below $125.0 million, on either a facultative or treaty basis, where it deems appropriate.

            In connection with the OneBeacon Acquisition, Aviva caused OneBeacon obtained the NICO Cover under which OneBeacon is entitled to recoverpurchase reinsurance contracts with two reinsurance companies rated "AAA" (Extremely Strong) by Standard & Poor's and "A++" (Superior) by A.M. Best: a full risk-transfer cover from National Indemnity Company ("NICO") for up to $2.5 billion in ultimate lossesold asbestos and LAE incurred related to asbestos claims arising from business written by OneBeacon prior to 1992, environmental claims arising(the "NICO Cover") and an adverse development cover from business written by OneBeacon prior to 1987 and certain other exposures. See Note 3General Reinsurance Corporation ("GRC") for a description of the NICO Cover.

            Also in connection with the Acquisition, OneBeacon obtained the GRC Cover which provided up to $570.0 million of reinsurance protection, consisting of $400.0 million of adverse development coverage on additional losses occurring in accident years 2000 and prior in addition to $170.0 million of reserves ceded as of the date of the Acquisition. Pursuant to the GRC Cover, OneBeacon is not entitled to recover losses to the full contract limit if such losses are reimbursed by GRC more quickly than anticipated at the time the contract was signed. OneBeacon has recorded $531.7 million in recoverables due from GRC at December 31, 2002 and December 31, 2001. OneBeacon will only seek reimbursement from GRC for claims which result in payment patterns similar to those supporting its recoverables recorded pursuant to the GRC Cover.(the "GRC Cover").

            At December 31, 2002, OneBeacon had $77.9 million of reinsurance currently recoverable on paid losses and $3,560.6 million that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsuranceReinsurance contracts do not relieve OneBeacon of its primary obligation to its policyholders, the financial position and solvencyceding companies. Therefore, collectibility of OneBeacon'sbalances due from its reinsurers is critical to the collectibility of its reinsurance coverages. OneBeacon is selective with regard to its reinsurers, placing reinsurance with only those reinsurers having strongOneBeacon's financial strength ratings. OneBeacon monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not historically been significant. Excluding industry pools and associations of $376.2 million, which are not rated by A.M. Best, 96% of OneBeacon's total reinsurance recoverables at December 31, 2002 were with reinsurers that had an A.M. Best rating of "A-" (Excellent) or better.strength. The following table provides a listing of OneBeacon's top reinsurers, excluding industry pools and



    associations and affiliates of White Mountains, based upon

    F-28



    recoverable amounts, the percentage of total reinsurance recoverables and the reinsurer's A.M. Best rating.

     
     Balance at
    December 31,
    2002

     % of Total
     A.M. Best
    Rating

     
     ($ in Millions)

    Top Reinsurers       
    Subsidiaries of Berkshire (NICO and GRC) $2,585.1 71%A++
    Liberty Mutual and subsidiaries*  273.8 8 A
    Tokio Fire and Marine Insurance Company  67.1 2 A++
    American Re-Insurance Company  47.0 1 A+
    Aviva plc and its affiliates**  34.9 1 not rated
      
     
     
    Top Reinsurers ($ in millions)

     Balance at
    December 31,
    2004

     % of Total
     A.M. Best
    Rating(2)

    Subsidiaries of Berkshire (NICO and GRC)(3) $2,109.2 76%A++
    Liberty Mutual and subsidiaries(1)  126.9 5%A
    Tokio Fire and Marine Insurance Company  57.0 2%A++
    American Re-Insurance Company  53.7 2%A+
    Swiss Re  25.9 1%A+
      
     
     

    *(1)
    At December 31, 2002,2004, OneBeacon had assumed balances payable and expenses payable of approximately $266.9$85.3 million under the Renewal RightsLiberty Agreement. In the event of Liberty Mutual's insolvency, OneBeacon has the right to offset these balances against its reinsurance recoverable due from Liberty Mutual.

    **(2)
    Represents non-U.S. insurance entities whose balanceA.M. Best ratings as detailed above are: "A++" (Superior, which is fully collateralized through funds held, lettersthe highest of credit and/or trust agreements.fifteen ratings), "A+" (Superior, which is the second highest of fifteen ratings) and "A" (Excellent, which is the third highest of fifteen ratings).

    (3)
    Includes $420.1 million of Third Party Recoverables that NICO would pay under the terms of the NICO Cover if they are unable to collect from the Third Party Reinsurers.

    FolksamericaWhite Mountains Re

            FolksamericaWhite Mountains Re has exposure to losses caused by hurricanes, earthquakes, winter storms, windstorms, terrorist acts and other catastrophic events. In the normal course of business, FolksamericaWhite Mountains Re seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance and reinsurance enterprises and by closely monitoring aggregate property exposures and related PMLs. To manage and analyze aggregate exposures and PML, FolksamericaWhite Mountains Re utilizes a variety of tools and analyses, including catastrophe modeling software packages. FolksamericaWhite Mountains Re regularly assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure, primarily through limiting accumulation of exposure to acceptable levels and, if deemed necessary, the purchase of catastrophe reinsurance.

            Folksamerica's currentprimary reinsurance protections are through quota share arrangements with Olympus. Folksamerica's retrocessional arrangements with Olympus are designed to increase Folksamerica's capacity to capitalize on the improved pricing trends that accelerated after the Attacks and to reduce its potential loss exposure to any large, or series of smaller, property catastrophe protection program includes $35.0 millionevents. Under the quota share agreements with Olympus, Folksamerica cedes up to 75% of protection insubstantially all of its short-tailed excess of loss business, mainly property and marine, and 50% of its proportional property business to Olympus and receives an override commission on the premiums ceded to Olympus.

            Effective April 1, 2004, Sirius International entered into a $60.0 million retention for a second loss. The current program also includes coveragequota share reinsurance agreement with Olympus. Under this agreement, Sirius International cedes 25% of $15.0 million inits new and renewal short-tailed proportional and excess of a $5.0 million retention for Folksamerica's proportional property portfolio. Each ofloss business to Olympus. White Mountains Re receives an override commission on the above contracts are 100% placed with a single, top quality reinsurer and have reinstatement provisions whereby, in the event of one loss, the coverage is reinstated for additional premium. Folksamerica's reinsurance program also includes annual aggregate stop loss protection from London Life, which protects the Company's accident year loss ratio from the effect of a very large catastrophic event or a number of smaller events. Folksamerica's limit of coverage under its accident year 2002 contract with London Life was $50.0 million, attaching at a 78% loss ratio. All balances due from London Life are fully collateralized, either in the form of funds held or a letter of credit.premiums ceded to Olympus.

    F-29


            In 2000, Folksamerica purchased thea reinsurance contract from Imagine CoverRe (the "Imagine Cover") to reduce its statutory operating leverage and protect its surplus from adverse development relating to A&E exposures as well as the reserves assumed in several recent acquisitions. Specifically, the Imagine Cover provided an aggregate of $115.0 million in reinsurance protection on:

    In accordance with



    SFAS No. 113, amounts related to reserves transferred to Imagine Re for liabilities incurred as a result of past insurable events have been accounted for as retroactive reinsurance. At December 31, 20022004 and 2001,2003, Folksamerica's reinsurance recoverables included $381.2$260.4 million and $442.3$312.4 million, respectively, recorded under the Imagine Re Cover. All balances due from Imagine are fully collateralized, either with Folksamerica as the beneficiary of invested assets in a trust, with funds held, or through a letter of credit. As of December 31, 2002, there was approximately $9.92003, the entire $115.0 million of coverage remaininglimit available under this contract.contract had been fully utilized. At December 31, 20022004 and 2001,2003, Folksamerica had also recorded $53.9$42.5 million and $40.0$50.6 million in deferred gains, respectively, related to adverse development on loss reserves transferred toretroactive reinsurance with Imagine at the inception of the Imagine Cover. FolksamericaRe. White Mountains Re is recognizing these deferred gains into income over the expected settlement period of the underlying claims, and accordingly recognized $8.5$8.1 million, $8.2 million and $2.8$8.5 million of such deferred gains during 2004, 2003 and 2002, and 2001.respectively.

     Folksamerica has a quota share retrocessional arrangement with Olympus which is designed to increase Folksamerica's capacity to capitalize on the improved pricing trends which accelerated after the Attacks and to reduce its potential loss exposure to any large, or series of smaller, property catastrophe events. Olympus is a Bermuda-domiciled insurance and reinsurance company that was formed in December 2001 with an initial capitalization of more than $500.0 million to respond to the favorable underwriting and pricing environment in the reinsurance market. Olympus is rated "A-" (Excellent) by A.M. Best. Under the quota share treaty with Olympus, Folksamerica cedes 75% of its short-tailed excess of loss business, mainly property and marine, to Olympus and receives an override commission on the premiums ceded to Olympus. During 2002, Folksamerica received $17.1 million in override and profit commissions from Olympus.

            At December 31, 2002, Folksamerica had $67.9 million of reinsurance currently recoverable on paid losses and $807.1 million that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance��      Reinsurance contracts do not relieve FolksamericaWhite Mountains Re of its obligation to its ceding companies, the financial position and solvencycompanies. Therefore, collectibility of Folksamerica'sbalances due from its reinsurers is critical to the collectibility of its reinsurance coverages. Folksamerica is selective with regard to its reinsurers, placing reinsurance with only those reinsurers having strongWhite Mountains Re's financial strength ratings. Folksamerica monitors the financial strength of its reinsurers on an ongoing basis.strength. The following table provides a listing of

    F-30



    Folksamerica's White Mountains Re's top reinsurers based upon recoverable amounts, the percentage of total recoverables and the reinsurer's A.M. Best Rating.

     
     Balance at
    December 31,
    2002

     % of Total
     Rating
     
     ($ in Millions)

    Imagine Re* $381.2 42%A-
    London Life*  135.4 15 A
    Olympus*  45.5 5 A-
    GRC and affiliates  34.9 4 A++
    Federal Insurance Company  34.6 4 A++
      
     
     
    Top Reinsurers ($ in millions)

     Balance at
    December 31, 2004

     % of Total
     A.M. Best
    Rating(2)

    Olympus(1) $305.0 22%A-
    Imagine Re(1)  260.4 19%A-
    London Life(1)  135.6 10%A
    General Re  71.7 5%A++
    St. Paul Travelers  70.1 5%A
      
     
     

    *(1)
    Represents non-U.S. insurance entities which balances are fully collateralized through Funds Held, Letters of Credit or Trust Agreements.

    (2)
    A.M. Best ratings as detailed above are: "A++" (Superior, which is the highest of fifteen ratings), "A" (Excellent, which is the third highest of fifteen ratings) and "A-" (Excellent, which is the fourth highest of fifteen ratings).

    Note
    NOTE 5. Investment Securities

            White Mountains' net investment income is comprised primarily of interest income associated with the fixed maturity investments of its consolidated insurance and reinsurance operations, dividend income from its equity investments and interest income from its short-term investments. Net investment income for 2002, 20012004, 2003 and 20002002 consisted of the following:

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     (Millions)

     
    Investment income:          
     Fixed maturity investments $332.7 $276.1 $63.1 
     Short-term investments  19.3  12.2  19.9 
     Common equity securities  6.6  4.7  2.8 
     Other  11.8  .8  .7 
      
     
     
     
    Total investment income  370.4  293.8  86.5 
     Less investment expenses and other charges  (17.7) (9.3) (.6)
      
     
     
     
    Net investment income, before tax $352.7 $284.5 $85.9 
      
     
     
     

    F-31


     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
    Investment income:          
     Fixed maturity investments $304.3 $267.2 $333.9 
     Short-term investments  24.9  16.6  19.3 
     Common equity securities  25.1  9.5  6.6 
     Other  15.0  1.3  11.8 
      
     
     
     
    Total investment income  369.3  294.6  371.6 
     Less investment expenses and other charges  (8.4) (3.7) (5.6)
      
     
     
     
    Net investment income, before tax $360.9 $290.9 $366.0 
      
     
     
     

            The composition of realized investment gains (losses) for investments sold consisted of the following:



     Year Ended December 31,
     
     Year Ended December 31,
     

     2002
     2001
     2000
     

     (Millions)

     
    Millions

    Millions

     Year Ended December 31,
     
     
    Fixed maturity investmentsFixed maturity investments $156.0 $170.4 $(9.2)Fixed maturity investments $32.2 $102.7 $156.0 
    Common equity securitiesCommon equity securities (3.0) 10.3 (4.7)Common equity securities 65.1 37.8 (3.0)
    Montpelier common sharesMontpelier common shares 35.2   
    Other investmentsOther investments 3.0 (7.6) 5.1 Other investments 48.6 22.1 3.0 
     
     
     
       
     
     
     
    Net realized investment gains (losses), before tax 156.0 173.1 (8.8)Net realized investment gains, before tax 181.1 162.6 156.0 
    Income taxes attributable to realized investment gains and lossesIncome taxes attributable to realized investment gains and losses (33.1) (55.1) 4.2 Income taxes attributable to realized investment gains and losses (56.7) (45.2) (33.1)
     
     
     
       
     
     
     
    Net realized investment gains (losses), after-tax $122.9 $118.0 $(4.6)Net realized investment gains, after-tax $124.4 $117.4 $122.9 
     
     
     
       
     
     
     

            White Mountains recognized gross realized investment gains of $265.2$229.7 million, $290.8$271.7 million and $22.3$265.2 million and gross realized investment losses of $109.2$48.6 million, $117.7$109.1 million and $31.1$109.2 million on sales of investment securities during 2002, 20012004, 2003 and 2000,2002, respectively.

            In 2001, the Company received warrants to acquire 4,871,5724,781,572 common shares of Montpelier at $16.67 per share (as adjusted for stock splits) that are exercisable until December 2011. During the first quarter of 2004, White Mountains sold 4.5 million common shares of Montpelier to third parties for net proceeds of $155.3 million, resulting in a pretax realized gain of $35.2 million. Also during the first quarter of 2004, White Mountains purchased additional warrants to acquire 2,390,786 common shares of Montpelier from an existing warrant holder for $54.1 million in cash, thereby raising the total number of such warrants owned by White Mountains to 7,172,358.

            The following table summarizes White Mountains' investment in the Montpelier as of December 31, 2004 and December 31, 2003:

     
     As of December 31, 2004
     As of December 31, 2003
    Millions

     Shares
     Carrying
    Value

     Fair
    Value

     Shares
     Carrying
    Value

     Fair
    Value

    Montpelier                
    Common shares 6.3 $235.4 $235.4 10.8 $282.7 $396.3
    Warrants to acquire common shares 7.2  160.9  160.9 4.8  90.5  90.5
      
     
     
     
     
     
    Total 13.5 $396.3 $396.3 15.6 $373.2 $486.8
      
     
     
     
     
     

            White Mountains accounts for its Montpelier and Symetra warrants constitutes(see Note 2) under FAS 133 as a derivative security under SFAS No. 133, thereby requiringcomponent of other investments, recording the instruments to be recorded at fair value with the resulting gain or losschanges in fair value recognized currently through the income statement as a realized investment gain. In accordance with SFAS No. 133, White Mountains has determinedgain or loss. The Montpelier and Symetra warrants are valued using the fair value ofBlack-Scholes valuation method. The major assumptions used in valuing the Montpelier warrants to bewere a risk-free rate of 3.25%, volatility of 30% and an expected life of approximately 3 years. The major assumptions used in valuing the Symetra warrants were a risk-free rate of 3.63%, volatility of 29% and an expected life of approximately 5 years.

            White Mountains recorded investment gains of $15.7 million, $32.5 million and $58.0 million as offor the years ended December 31, 2004, 2003 and December 31, 2002, and has correspondingly recognized a realizedrespectively related to its Montpelier warrants. White Mountains recorded an investment gain of $58.0$1.9 million for the year ended December 31, 2002.2004 related to its Symetra warrants.

            As of December 31, 2004 and 2003, White Mountains reported $30.9 million and $371.6 million, respectively, in accounts payable on unsettled investment purchases and $19.9 million and $9.1 million, respectively in accounts receivable on unsettled investment sales. The 2003 payable related primarily to



    an unsettled purchase of a Swedish Treasury Bill bought with funds used to purchase Sirius previous to the closing of the acquisition, which was included in short-term investments at December 31, 2003.

            Net realized investment gains were reduced by mark-to-market realized losses of $47.4$4.2 million and $4.8$47.4 million for the years ended December 31, 20022003 and 2001,2002, respectively in connection with White Mountains' interest rate swap agreements, which were undertaken to achieve a fixed interest rate on the Old Bank Facility. These interest rate swaps were terminated in May 2003 in connection with the repayment of the Old Bank Facility. Additionally, OneBeacon recorded a $5.4 million write-down of its surplus note investment in New Jersey Skylands Insurance Association during 2003, which is reflected in White Mountains' net realized investment gains.

            The components of White Mountains' change in unrealized investment gains, after-tax, as recorded on the statements of income and comprehensive income were as follows:

     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
    Net change in pretax unrealized gains for investment securities held $250.0 $235.9 $448.2 
    Net change in pretax unrealized gains from investments in unconsolidated affiliates held  51.6  5.1  9.3 
      
     
     
     
     Net change in pretax unrealized investment gains for investments held  301.6  241.0  457.5 
    Income taxes attributable to investments held  (83.6) (77.9) (158.8)
      
     
     
     
     Net change in unrealized gains for investments held, after-tax  218.0  163.1  298.7 
      
     
     
     

    Recognition of pretax net unrealized gains for investments sold

     

     

    (129.6

    )

     

    (134.0

    )

     

    (144.8

    )
    Income taxes attributable to investments sold  41.7  46.7  49.8 
      
     
     
     
    Recognition of net unrealized gains for investments sold, after-tax  (87.9) (87.3) (95.0)
      
     
     
     

    Change in net unrealized investment gains, after-tax

     

     

    130.1

     

     

    75.8

     

     

    203.7

     

    Change in net unrealized foreign currency gains (losses), after-tax

     

     

    48.8

     

     

    3.2

     

     

    (1.4

    )
    Net realized investment gains, after-tax  124.4  117.4  122.9 
      
     
     
     
    Total investment gains recorded during the period, after-tax $303.3 $196.4 $325.2 
      
     
     
     

            The components of White Mountains' ending net unrealized investment gains and losses on its investment portfolio and its investments in unconsolidated insurance affiliates were as follows:

     
     December 31,
     
    Millions

     
     2004
     2003
     
    Investment securities:       
     Gross unrealized investment gains $551.7 $410.4 
     Gross unrealized investment losses  (26.3) (7.4)
      
     
     
    Net unrealized gains from investment securities  525.4  403.0 
    Net unrealized gains from investments in unconsolidated insurance affiliates  67.2  17.6 
      
     
     
     Total net unrealized investment gains, before tax  592.6  420.6 
      Income taxes attributable to such gains  (176.5) (134.6)
      
     
     
     Total net unrealized investment gains, after-tax $416.1 $286.0 
      
     
     

            The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of White Mountains' fixed maturity investments as of December 31, 2004 and 2003, were as follows:

     
     December 31, 2004
    Millions

     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Net
    foreign
    currency
    gains

     Carrying
    value

    U.S. Government obligations $2,362.3 $40.5 $(8.2)$ $2,394.6
    Debt securities issued by industrial corporations  3,695.4  122.7  (6.2) 33.6  3,845.5
    Municipal obligations  91.3  1.8  (0.4)   92.7
    Asset-backed securities  681.9  1.0  (3.4)   679.5
    Foreign government obligations  780.3  15.2  (1.3)   794.2
    Preferred stocks  72.9  13.5    7.1  93.5
      
     
     
     
     
     Total fixed maturity investments $7,684.1 $194.7 $(19.5)$40.7 $7,900.0
      
     
     
     
     
     
     December 31, 2003
    Millions

     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Net
    foreign
    currency
    gains

     Carrying
    value

    U.S. Government obligations $2,089.3 $53.6 $(3.7)$ $2,139.2
    Debt securities issued by industrial corporations  2,686.7  160.7  (2.2)   2,845.2
    Municipal obligations  53.1  4.5      57.6
    Asset-backed securities  959.4  3.8  (.2)   963.0
    Foreign government obligations  141.1  3.8      144.9
    Preferred stocks  80.6  12.8  (.3) 5.1  98.2
      
     
     
     
     
     Total fixed maturity investments $6,010.2 $239.2 $(6.4)$5.1 $6,248.1
      
     
     
     
     

            The cost or amortized cost and carrying value of White Mountains' fixed maturity investments at December 31, 2004 is presented below by contractual maturity. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

     
     December 31, 2004
    Millions

     Cost or
    amortized
    cost

     Carrying
    value

    Due in one year or less $521.3 $522.6
    Due after one year through five years  4,123.5  4,200.0
    Due after five years through ten years  1,715.3  1,797.4
    Due after ten years  569.2  607.1
    Asset-backed securities  681.9  679.4
    Preferred stocks  72.9  93.5
      
     
    Total $7,684.1 $7,900.0
      
     

            The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of White Mountains' common equity securities and other investments as of December 31, 2004 and 2003, were as follows:

     
     December 31, 2004
    Millions

     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Net
    foreign
    currency
    gains

     Carrying
    value

    Common equity securities $775.9 $267.6 $(2.1)2.5 $1,043.9
      
     
     
     
     
    Other investments $442.7 $89.4 $(4.7) $527.4
      
     
     
     
     
     
     December 31, 2003
    Millions

     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Net
    foreign
    currency
    gains

     Carrying
    value

    Common equity securities $396.2 $115.4 $(.4)2.4 $513.6
      
     
     
     
     
    Other investments $184.0 $55.8 $(.6) $239.2
      
     
     
     
     

            White Mountains' consolidated insurance and reinsurance operations are required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits totalled $940.3 million and $592.7 million as of December 31, 2004 and 2003, respectively.

            Sales and maturities of investments, excluding short-term investments, totalled $7,466.8 million, $18,662.5 million and $13,943.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. There were no non-cash exchanges or involuntary sales of investment securities during 2004, 2003 or 2002.

            The Company participates in a securities lending program whereby it loans investment securities to other institutions for short periods of time. The Company receives a fee from the borrower in return for the use of its assets and its policy is to require collateral equal to approximately 102% of the fair value of the loaned securities, which is held by a third party. All securities loaned can be redeemed on short notice. The total market value of the Company's securities on loan at December 31, 2004 was $580.7 million with corresponding collateral of $593.3 million.

    Impairment

            White Mountains' portfolio of fixed maturity investments is comprised primarily of investment grade corporate debt securities, U.S. government and agency securities and mortgage-backed securities and are classified as available for sale. At December 31, 2004, approximately 99% of White Mountains' fixed maturity investments received an investment grade rating from S&P or from Moody's if a given security is unrated by S&P. White Mountains expects to continue to invest primarily in high quality, fixed maturity investments. Nearly all the fixed maturity investments currently held by White Mountains are publicly traded, and as such are considered to be liquid.


            Temporary losses on investment securities are recorded as unrealized losses. Temporary losses do not impact net income and earnings per common share but doserve to reduce comprehensive net income, shareholders' equity and tangible book value. Unrealized losses subsequently identified as other-than-temporary impairments are recorded as realized losses. Other-than-temporary impairments previously recorded as unrealized losses do not impact comprehensive net income, shareholders' equity and tangible book value but doserve to reduce net income and earnings per common share.

            White Mountains' methodology of assessing other-than-temporary impairments is based on security-specific facts circumstances and intentionscircumstances as of the balance sheet date. As a result, subsequent adverse changes in an issuers' credit quality or subsequent weakening of market conditions that differ from expectations could result in additional other-than-temporary impairments. In addition, the sale of a fixed maturity security with a previously recorded unrealized loss would result in a realized loss. Either of these situations would adversely impact net income and earnings per common share but would not impact comprehensive net income, shareholders' equity or tangible book value.

            The following table presents an analysis of the continuous periods during which White Mountains has held investment positions which were carried at an unrealized loss as of December 31, 2004 (excluding short-term investments):

     
     December 31, 2004
     
    $ in millions

     0-6
    Months

     6-12
    Months

     > 12
    Months

     Total
     
    Fixed maturity investments:             
     Number of positions  209  166  6  381 
     Market value $1,678.2 $787.0 $38.4 $2,503.6 
     Amortized cost $1,686.8 $797.0 $39.3 $2,523.1 
     Unrealized loss $(8.6)$(10.0)$(.9)$(19.5)
      
     
     
     
     
    Common equity securities:             
     Number of positions  10  2    12 
     Market value $8.9 $6.7 $ $15.6 
     Amortized cost $10.9 $6.8 $ $17.7 
     Unrealized loss $(2.0)$(.1)$ $(2.1)
      
     
     
     
     
    Other investments:             
     Number of positions  7  4    11 
     Market value $31.5 $7.2 $ $38.7 
     Amortized cost $35.8 $7.6 $ $43.4 
     Unrealized loss $(4.3)$(.4)$ $(4.7)
      
     
     
     
     
    Total:             
     Number of positions  226  172  6  404 
     Market value $1,718.6 $800.9 $38.4 $2,557.9 
     Amortized cost $1,733.5 $811.4 $39.3 $2,584.2 
     Unrealized loss $(14.9)$(10.5)$(.9)$(26.3)
      
     
     
     
     
    % of total gross unrealized losses  56.7% 39.9% 3.4% 100.0%
      
     
     
     
     

    During the year ended December 31, 2002,2004, White Mountains experienced $9.6$3.0 million in pre-tax, other-than-temporary impairment charges.charges, comprised of $2.5 million taken on equity securities, and $.5 million on several limited partnership investments included in other investments. Of the charge recorded in 2002, $4.9 million was related to White Mountains' investment in Insurance Partners and $3.5taken on equity securities, $1.3 million was related to White Mountains' investment in the Conning Connecticut Insurance Fund. Bothcommon stock of Callaway Golf Company and the remaining $1.2 million related to two other equity positions, neither of which were individually significant. White Mountains recorded the other-than-temporary impairments primarily due to the fact that the unrealized loss position on these investments are limited partnerships carried in other investments.securities was greater



    than 20% of White Mountains' cost over the previous six-month period and also that certain factors have been reported by those companies which affect the likelihood that White Mountains will recover the original cost of its investment. White Mountains did not experience any other material impairment charges relating to any other individual investment security during the three years ended December 31, 2002.2004.

    F-32



            The components of        White Mountains' change in unrealized investment gains, after-tax, as recorded onMountains believes that the statements of income and comprehensive income were as follows:

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     (Millions)

     
    Net change in pretax unrealized gains for investment securities held $453.2 $(13.9)$65.1 
    Net change in pretax unrealized gains from investments in unconsolidated affiliates held  9.3  .3  6.2 
      
     
     
     
     Net change in pretax unrealized investment gains for investments held  462.5  (13.6) 71.3 
    Income taxes attributable to investments held  (160.7) 9.1  (15.0)
      
     
     
     
     Net change in unrealized gains for investments held, after-tax  301.8  (4.5) 56.3 
      
     
     
     
    Recognition of pretax net unrealized gains for investments sold  (144.8) (46.3) (23.7)
    Income taxes attributable to investments sold  49.8  10.3  7.8 
      
     
     
     
    Recognition of net unrealized gains for investments sold, after-tax  (95.0) (36.0) (15.9)
    �� 
     
     
     
    Change in net unrealized investment gains, after-tax  206.8  (40.5) 40.4 
    Net realized investment gains (losses), after-tax  122.9  118.0  (4.6)
      
     
     
     
    Total investment gains recorded during the period, after-tax $329.7 $77.5 $35.8 
      
     
     
     

    F-33


            The components of White Mountains' ending net unrealized investment gains and losses on its investment portfolio and its investments in unconsolidated insurance affiliates were as follows:

     
     December 31,
     
     
     2002
     2001
     
     
     (Millions)

     
    Investment securities:       
     Gross unrealized investment gains $354.9 $108.4 
     Gross unrealized investment losses  (48.2) (110.1)
      
     
     
    Net unrealized gains (losses) from investment securities  306.7  (1.7)
    Net unrealized gains from investments in unconsolidated insurance affiliates  12.5  3.2 
      
     
     
     Total net unrealized investment gains, before tax  319.2  1.5 
      Income taxes attributable to such gains  (105.4) 5.6 
      
     
     
     Total net unrealized investment gains, after-tax $213.8 $7.1 
      
     
     

            The cost or amortized cost, gross unrealized investment gains and losses and carrying values of White Mountains' fixed maturity investments as of December 31, 2002 and 2001, were as follows:

     
     December 31, 2002
     
     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Carrying
    value

     
     (Millions)

    U. S. Government obligations $2,052.4 $66.4 $ $2,118.8
    Debt securities issued by industrial corporations  3,120.0  171.8  (3.7) 3,288.1
    Municipal obligations  62.7  4.4    67.1
    Asset-backed securities  892.0  9.3  (0.3) 901.0
    Foreign government obligations  90.8  3.0  (0.1) 93.7
    Preferred stocks  189.6  28.0  (17.2) 200.4
      
     
     
     
     Total fixed maturity investments $6,407.5 $282.9 $(21.3)$6,669.1
      
     
     
     
     
     December 31, 2001
     
     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Carrying
    value

     
     (Millions)

    U. S. Government obligations $1,846.0 $18.7 $(17.7)$1,847.0
    Debt securities issued by industrial corporations  3,512.5  12.7  (54.3) 3,470.9
    Municipal obligations  69.1  1.5  (.3) 70.3
    Asset-backed securities  468.0  4.2  (1.7) 470.5
    Foreign government obligations  66.3  1.1  (.4) 67.0
    Preferred stocks  194.6  30.0  (22.0) 202.6
      
     
     
     
     Total fixed maturity investments $6,156.5 $68.2 $(96.4)$6,128.3
      
     
     
     

            The cost or amortized cost and carrying value of White Mountains'relating to its fixed maturity investments at December 31, 2002 is presented below by contractual maturity. Actual maturities could differ2004 resulted primarily from

    F-34



    contractual maturities increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in value are viewed as being temporary because borrowers may haveWhite Mountains has the rightintent and ability to call or prepay certain obligations with or without call or prepayment penalties.

     
     December 31, 2002
     
     Cost or
    amortized cost

     Carrying
    value

     
     (Millions)

    Due in one year or less $408.6 $412.3
    Due after one year through five years  2,793.3  2,917.0
    Due after five years through ten years  1,846.0  1,945.1
    Due after ten years  278.0  293.3
    Asset-backed securities  892.0  901.0
    Preferred stocks  189.6  200.4
      
     
    Total $6,407.5 $6,669.1
      
     

            The cost or amortized cost,retain such investments for a period of time sufficient to allow for any anticipated recovery in market value. White Mountains also believes that the gross unrealized investment gains and losses and carrying values of White Mountains'recorded on its common equity securities and its other investments at December 31, 2004 resulted primarily from decreases in quoted market values from the dates that certain investments securities within that portfolio were acquired as opposed to fundamental changes in the issuer's financial performance and near-term financial prospects. Therefore, these decreases are also viewed as being temporary. However, due to the inherent risk involved in investing in the equity markets, it is possible that the decrease in market value of these investments may ultimately prove to be other than temporary. As of December 31, 2002 and 2001, were as follows:

     
     December 31, 2002
     
     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Carrying
    value

     
     (Millions)

    Common equity securities $252.3 $43.7 $(21.0)$275.0
      
     
     
     
    Other investments $142.3 $28.3 $(5.9)$164.7
      
     
     
     
     
     December 31, 2001
     
     Cost or
    amortized
    cost

     Gross
    unrealized
    gains

     Gross
    unrealized
    losses

     Carrying
    value

     
     (Millions)

    Common equity securities $155.1 $26.0 $(7.5)$173.6
      
     
     
     
    Other investments $150.0 $14.2 $(6.2)$158.0
      
     
     
     

    2004, White Mountains' consolidated insurance and reinsurance operations are required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits totalled $552.2 million and $510.1 million as of December 31, 2002 and 2001, respectively.

            Sales and maturities of investments, excluding short-term investments, totalled $14,042.2 million, $8,971.6 million and $582.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. There were no non-cash exchanges or involuntary sales ofinvestment portfolio did not include any investment securities during 2002, 2001 or 2000.

            OneBeacon participates in a securities lending program whereby it loans investment securities to other institutions for short periodswith an after-tax unrealized loss of time. OneBeacon receives a fee from the borrower in return for the use of its assets. OneBeacon's policy is to require collateral equal to approximately 102% of the fair value of the loaned securities, which is held by a third party. All securities loaned can be redeemed

    F-35



    on short notice. The total market value of OneBeacon's securities on loan at December 31, 2002 was $1,211.1 million with corresponding collateral of $1,232.8more than $2.0 million.

    Note
    NOTE 6.    Debt

            Debt outstanding as of December 31, 20022004 and 20012003 consisted of the following:

     
     December 31,
     
     2002
     2001
     
     Millions

    Bank Facility:      
     Revolving loan $125.0 $125.0
     Tranche A term loan  85.0  300.0
     Tranche B term loan  393.0  400.0
     Tranche C term loan  143.4  
      
     
      Total Bank Facility  746.4  825.0
    Seller Note    260.0
    C-F seller note  25.0  25.0
    Fund III notes  15.0  7.0
    Other Debt  6.8  8.4
      
     
      Total debt $793.2 $1,125.4
      
     
     
     December 31,
     
    Millions

     
     2004
     2003
     
    Senior Notes, face value $700.0 $700.0 
     Unamortized original issue discount  (1.7) (1.9)
      
     
     
      Senior Notes, carrying value  698.3  698.1 
      
     
     
    Sierra Note  50.0   
    Atlantic Specialty Note  20.0   
    C-F Seller Note    25.0 
    Fund III notes  15.0  15.0 
    Other debt    4.9 
      
     
     
      Total debt $783.3 $743.0 
      
     
     

            A schedule of contractual repayments of White Mountains' debt as of December 31, 20022004 follows:


     December 31,
    2002


     Millions

    Millions

     December 31,
    2004

    Due in one year or less $33.4 $
    Due in 2 to 3 years 90.5
    Due in two to three years 17.0
    Due in four to five years 669.3 4.0
    Due after five years  764.0
     
     
    Total $793.2 $785.0
     
     


    Senior Notes

            At December 31, 2002In May 2003, Fund American issued $700.0 million face value of senior unsecured debt through a public offering, at an issue price of 99.7%. The Senior Notes bear an annual interest rate of 5.9%,



    payable semi-annually in arrears on May 15 and November 15, until maturity on May 15, 2013, and are fully and unconditionally guaranteed as to the payment of principal and interest by the Company. Fund American incurred $7.3 million in expenses related to the issuance of the Senior Notes (including the $4.5 million underwriting discount), which have been deferred and are being recognized into interest expense over the life of the Senior Notes. Taking into effect the amortization of the original issue discount and all underwriting and issuance expenses, the Senior Notes have an effective yield to maturity of approximately 6.0% per annum.


    Bank Facility

            In September 2003, Fund American established a $300.0 million revolving credit facility (the "Bank Facility") under which both Fund American and the Company had $33.4 million of debt outstanding due within one year, consisting of $28.3 million of term loans underare permitted borrowers. In August 2004, Fund American restructured and re-syndicated the Bank Facility to increase the availability under the revolving credit facility to $400.0 million and $5.1 millionto extend the maturity from September 2006 to August 2009. Under the Bank Facility, the Company guarantees all obligations of medium term notes.Fund American, and Fund American guarantees all borrowings of the Company, subject to certain limitations imposed by the terms of the Berkshire Preferred Stock. As of December 31, 2004, the Bank Facility was undrawn.

    Bank Facility

    GeneralOther Debt of Operating Subsidiaries

            In connection with the Acquisition, FAC, a wholly-owned subsidiaryits acquisition of the Company, borrowed $825.0Sierra Group on March 31, 2004, Folksamerica entered into a $62.0 million under the Bank Facility,purchase note (the "Sierra Note"), $58.0 million of which is comprised of twowill be adjusted over its approximate six-year term loan facilities and a revolving credit facility. On October 31, 2002, FAC completed an amendment of the Bank Facility, which included the issuance of a new $143.8 million Tranche C term loan that was utilized to refinance a portion of the existing $228.8 million Tranche A term loan. The new Tranche C term loan has nominal amortization until its final maturity in March 2007. The refinancing reduced the amount of quarterly amortization payments FAC must make over the next four years (see amortization table below). The applicable eurodollar rate marginreflect favorable or adverse loss reserve development on the new Tranche C term loan is 87.5 basis points higher thanacquired reserve portfolio and run-off of remaining policies in force (mainly workers compensation business) as well as certain other balance sheet protections. During 2004, the margin on the existing Tranche A term loan, and the applicable eurodollar rate margin on the existing

    F-36



    and otherwise unchanged Tranche B term loanSierra Note was increasedreduced by 12.5 basis points. The revolving credit facility provides for revolving credit loans of up to $175.0$12.0 million including up to $25.0 million available for the issuance of letters of credit. The revolving credit facility expires on June 1, 2006. As of December 31, 2002, $50.0 million was available under the revolving credit facility.

    Repayments and Prepayments

            The Tranche A, Tranche B and Tranche C term loans are repaid quarterly in amounts equal to a specified percentage rate multiplied by the principal amount borrowed. The term loans may be prepaid at any time without premium or penalty.

            The credit facilities are subject to mandatory prepayments with (i) 50% of the net proceeds in excess of $5.0 million from certain equity issuances by subsidiaries of White Mountains and (ii) 100% of the net proceeds in excess of $10.0 million from certain asset sales.

            The following table illustrates the amortization of the Bank Facility, both before and after giving effect to the refinancing (in millions):

     
     Original Bank Facility
     After the Refinancing
      
     
    Year
    Ended

     Annual
    Change

     
     Tranche A
     Tranche B
     Total
     Tranche A
     Tranche B
     Tranche C
     Total
     
    2002(1) $13.1 $1.0 $14.1 $ $1.0 $.4 $1.4 $(12.7)
    2003  58.1  4.0  62.1  22.9  4.0  1.4  28.3  (33.8)
    2004  65.6  4.0  69.6  25.9  4.0  1.4  31.3  (38.3)
    2005  73.2  4.0  77.2  28.8  4.0  1.4  34.2  (43.0)
    2006  18.8  4.0  22.8  7.4  4.0  1.4  12.8  (10.0)
    2007    377.0  377.0    377.0  137.8  514.8  137.8 
      
     
     
     
     
     
     
     
     
    Total $228.8 $394.0 $622.8 $85.0 $394.0 $143.8 $622.8 $ 
      
     
     
     
     
     
     
     
     

    (1)
    The $1.4 million amortization payment for 2002 was made by the Company on December 30, 2002. It is included in the above table to fully reflect the net change in the amortization as a result of adverse development on the refinancingacquired reserves and run-off of unearned premium. Interest will accrue on the unpaid balance of the Bank Facility.

    Interest Rate and Related Swaps

            As of December 31, 2002, interest on all borrowings under the Bank Facility was calculatedSierra Note at a rate of 4.0% per annum, equal to the eurodollar rate (the rate based on a formula relating to the rate for dollar deposits in the interbank eurodollar market for a given interest period) plus (i) 2.125%, for borrowings under the revolving credit facilitycompounded quarterly, and the Tranche A term loan, and (ii) 3.0%, for borrowings under the Tranche B and Tranche C term loans. As of December 31, 2002, the weighted average interest rate for the $621.4 million outstanding under the term portion and $78.6 million of the revolving portion of the Bank Facility, after giving effect to the interest rate swaps described below, was approximately 7.13%. As of December 31, 2002, the interest rate on the remaining $46.4 million outstanding under the revolving portion of the Bank Facility was based on the eurodollar rate in effectwill be payable at that time plus 2.125%, or 3.525%.its maturity.

            During 2001, FAC entered into a series of interest rate swaps with large financial institutions that were undertaken to achieve a fixed interest rate on the term loans under the Bank Facility. The interest rate swaps consist of a $200.0 million notional contract that is indexed to a 6.050% ten-year rate, a

    F-37



    $200.0 million notional contract that is indexed to a 3.955% three-year rate, and $300.0 million of notional contracts that are indexed to a 3.825% three-year rate.

            The swap investments do not match the duration of the Bank Facility and as a result do not satisfy the criteria for hedge accounting under SFAS No. 133. Pursuant to SFAS No. 133, the interest rate swaps are carried at fair value on White Mountains' balance sheet as other invested assets, with changes in their fair value reported directly through the income statement as realized gains or losses. For the years ended December 31, 2002 and 2001, White Mountains recorded realized losses of $47.4 million and $4.8 million, respectively, representing the decrease in fair value of the swap investments as a result of decreases in market interest rates. As of December 31, 2002 and 2001, the aggregate fair value of the interest rate swaps was a net liability of $52.2 million and $4.8 million.

    Guarantees

            The obligations of FAC with respect to the Bank Facility are unconditionally guaranteed by OneBeacon, each of its subsidiaries (other than insurance company subsidiaries, certain foreign subsidiaries, and A.W.G. Dewar) and FAEH, a wholly owned subsidiary of White Mountains and immediate parent company of FAC.

            The obligations of FAC and each guarantor with respect to the Bank Facility are secured by a perfected first priority security interest in all their assets including the capital stock of their non-insurance company subsidiaries (other than Dewar) and each of their first-tier insurance company subsidiaries.

    Certain Covenants

            The Bank Facility contains various affirmative, negative and financial covenants which are customary for such borrowings and include requirements to meet certain minimum net worth and financial ratio standards. Failure to meet one or more of these covenants could result in an event of default which ultimately could accelerate required principal repayments.        In connection with its acquisition of Atlantic Specialty on March 31, 2004, OneBeacon issued a $20.0 million ten-year note to the amendment, certain financial and other covenants that currently governseller (the "Atlantic Specialty Note"). OneBeacon is required to repay $2.0 million of principal on the Bank Facility were relaxed or eliminated, thereby increasingnotes per year, commencing with the Company's operational and financial flexibility. At December 31, 2002, FAC was in compliance with all of the covenants under the Bank Facility, and anticipates it will continue to meet the financial covenants under the Bank Facility for the foreseeable future.

    Events of Default

    first payment due on January 1, 2007. The Bank Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-default to certain other indebtedness, bankruptcy and insolvency events, ERISA violations, material judgments, invalidity of any guarantee or security document and a change of control.

    F-38



    Other Debt

            On June 1, 2001, White Mountains issued the Seller Note of $260.0 million to Aviva. The Seller Note had an eighteen-month term and borenote accrues interest at a rate equal to 50 basis points overof 5.2% except that the outstanding principal amount in excess of $15.0 million accrues interest at a rate on White Mountains' Bank Facility. The Seller Note was repaid on November 29, 2002.

            In September 2001, Folksamerica acquired C-F, an inactive insurance company in run-off, for total consideration of $49.2 million plus related expenses. The purchase consideration included the issuance of a $25.0 million, four-year note by Folksamerica which may be reduced by adverse loss development experienced by C-F post-acquisition.3.6%.

            OBPP and FSUIFolksamerica Specialty Underwriting, Inc. ("FSUI") have borrowed $8.0 million and $7.0 million, respectively, from Dowling & Partners Connecticut Fund III, LP ("Fund III") in connection with an incentive program sponsored by the State of Connecticut known as the Connecticut Insurance Reinvestment Act.Act (the "CIR Act"). The CIR Act provides for Connecticut income tax credits to be granted for qualifying investments made by approved fund managers. The loans made by Fund III to OBPP and FSUI are qualifying investments and, together, have the potential to generate up to $15 million of tax credits that would be shared equally between Fund III on the one hand and OBPP and FSUI on the other. The borrowings mature in April 2007 and bear interest at the option of OBPP and FSUI at either (1) the greater of (a) the prime rate minus 1% and (b) the federal funds rate minus 0.50% or (2) the eurodollar rate plus 0.325%.

            White Mountains' other debt of $6.8 million at December 31, 2002 consisted of $5.1 million in medium term notes, that the Company has prepaid through the Debt Escrow, and $1.7 million outstanding under a seller note issued inIn connection with Fund American Re's 2001its acquisition of Folksam's international reinsurance business. The Fund American ReC-F Insurance Company in September 2001, Folksamerica issued a $25.0 million note to the seller note contains an acquisition protection clause whereby(the "C-F Seller Note".) On August 27, 2004, Folksamerica paid off the amount due under the note may be reduced by post-acquisition adverse loss development.remaining balance of this note.



    Interest

            Total interest expense incurred by White Mountains for its indebtedness was $49.1 million, $48.6 million and $71.8 million $45.7 millionin 2004, 2003 and $16.1 million in 2002, 2001 and 2000, respectively. Total interest paid by White Mountains for its indebtedness was $48.9 million, $45.8 million and $79.8 million $35.0 millionin 2004, 2003 and $16.1 million in 2002, 2001 and 2000, respectively.

    Note
    NOTE 7.    Income Taxes

            The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries. The majority of the Company's worldwide operations are taxed in the United States. Income earned or losses incurred by non-U.S. companies will generally be subject to an overall effective tax rate lower than that imposed by the United States.

            The total income tax provision (benefit) for the years ended December 31, 2004, 2003 and 2002 consisted of the following:

     
     Year Ended December 31,
     
    Millions

     
     2002
     2001
     2000
     
    U.S. income tax provision (benefit) $4.7 $(180.3)$38.6 
    State and local income tax provision    2.0  1.7 
    U.S. withholding tax and foreign income tax provision (benefit)  7.0  (.9) 2.8 
      
     
     
     
     Total income tax provision (benefit) $11.7 $(179.2)$43.1 
      
     
     
     
    Net income tax receipts (payments) $189.6 $(8.4)$(54.5)
      
     
     
     
    Income taxes recorded directly to shareholders' equity related to:          
     Changes in net unrealized investment gains and losses $(111.0)$19.4 $(7.2)
     Changes in net foreign currency translation gains and losses $(.5)$.8 $.4 
      
     
     
     

    F-39


     
     Year Ended December 31,
    Millions

     2004
     2003
     2002
    U.S. income tax provision $19.5 $114.2 $4.7
    State and local income tax provision  1.0  .1  
    U.S. withholding tax and foreign income tax provision  26.5  13.3  7.0
      
     
     
     Total income tax provision $47.0 $127.6 $11.7
      
     
     
    Net Federal income tax receipts (payments) $(86.5)$27.4 $189.6
      
     
     

            The components of the income tax provision (benefit) on pretax earnings follow:

     
     Year Ended December 31,
     
    Millions

     
     2002
     2001
     2000
     
    Current $(152.2)$11.7 $58.2 
    Deferred  163.9  (190.9) (15.1)
      
     
     
     
     Total income tax provision (benefit) on pretax earnings $11.7 $(179.2)$43.1 
      
     
     
     

    F-40


     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
    Current $106.0 $22.6 $(152.2)
    Deferred  (59.0) 105.0  163.9 
      
     
     
     
     Total income tax provision on pretax earnings $47.0 $127.6 $11.7 
      
     
     
     

            Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes. Deferred income tax assets and liabilities are shown net in circumstances where a consolidated income



    tax return is filed. An outline of the significant components of White Mountains' deferred tax assets and liabilities follows:



     December 31,

     
     December 31,
    Millions

    Millions

     Millions

    2002
     2001
      2004
     2003
    Deferred income tax assets related to:Deferred income tax assets related to:     Deferred income tax assets related to:    
    Net operating loss and tax credit carryforwards $192.4 $363.2 Net operating loss and tax credit carryforwards $102.0 $84.2
    Discounting of loss reserves 134.0 122.8 Discounting of loss reserves 152.3 149.5
    Compensation and benefit accruals 128.2 121.0 Compensation and benefit accruals 219.8 180.0
    Unearned insurance and reinsurance premiums 90.0 114.5 Unearned insurance and reinsurance premiums 99.5 79.7
    Involuntary pool and guaranty fund accruals 35.3 51.3 Involuntary pool and guaranty fund accruals 5.3 12.2
    Fixed assets 34.3 43.5 Fixed assets 2.2 3.6
    Allowance for doubtful accounts 26.7 35.0 Allowance for doubtful accounts 7.0 12.2
    Deferred gain on reinsurance contract 23.2 16.3 Deferred gain on reinsurance contract 20.7 21.5
    Other items 47.2 48.0 Other items 15.0 49.4
     
     
       
     
    Total deferred income tax assetsTotal deferred income tax assets $711.3 $915.6 Total deferred income tax assets $623.8 $592.3
    Deferred income tax liabilities related to:Deferred income tax liabilities related to:     Deferred income tax liabilities related to:    
    Net unrealized investment gains 105.4 3.3 Net unrealized investment gains 176.5 134.6
    Deferred acquisition costs 84.8 107.0 Foreign currency translation on investments and other assets 14.4 3.8
    Receivable from trust 26.8 24.1 Equity in unconsolidated insurance affiliates 27.3 36.4
    Prepaid pension cost 13.7 18.9 Deferred acquisition costs 100.9 80.6
    Other items 20.6 10.9 Receivable from trust  24.1
     
     
     Safety reserve 310.6 
    Total deferred income tax liabilities 251.3 164.2 
    Net deferred tax assets before valuation allowance 460.0 751.4 
    Valuation allowance (30.0) (55.0)Other items 35.6 52.8
     
     
       
     
    Net deferred tax assets $430.0 $696.4 
    Total deferred income tax liabilitiesTotal deferred income tax liabilities 665.3 332.3
    Net deferred tax asset (liability) before valuation allowanceNet deferred tax asset (liability) before valuation allowance (41.5) 260.0
     
     
     Valuation allowance (3.3) 
     
     
    Net deferred tax asset (liability)Net deferred tax asset (liability) $(44.8)$260.0
     
     

            The Company believes that it is more likely than not that results of future operations will generate sufficient taxable income to realize the deferred tax asset balances carried as of December 31, 20022004 and 2001.2003. During 2002,2003, the valuation allowance was reduced by $25.0 million. Approximately $10.0$30.0 million due to the expiration of this reduction was related to deferredcertain foreign tax assets which will be fully realized. The remaining $15.0 million was offset againstcredits that were previously recorded as deferred tax assets. TheDuring 2004, a valuation allowance at December 31, 2002 reflects management's assessment that it is more likely than not that the benefit related to certain foreign tax creditof $3.3 million was established for net operating loss carryforwards may not be realized before expiration of the carryforward period.a consolidated insurance reciprocal.

    F-41




            A reconciliation of taxes calculated using the 35% U.S. statutory rate (the tax rate at which the majority of the Company's worldwide operations are taxed) to the income tax provision on pretax earnings follows:



     Year Ended December 31,
     
     Year Ended December 31,
     
    Millions

    Millions

     Millions

     
    2002
     2001
     2000
      2004
     2003
     2002
     
    Tax (benefit) provision at the U.S. statutory rate $41.8 $(149.6)$125.3 
    Tax provision at the U.S. statutory rateTax provision at the U.S. statutory rate $86.7 $130.3 $41.8 
    Differences in taxes resulting from:Differences in taxes resulting from:       Differences in taxes resulting from:       
    Deferred credit amortization and purchase price adjustments (7.0) (23.8) (6.3)Interest expense—dividends and accretion on preferred stock 16.7 7.8  
    Tax reserve adjustments 15.4 5.1 5.5 Tax reserve adjustments (7.6) 4.3 15.4 
    State income taxes, net  1.3 1.2 Restructuring 16.6   
    Non-U.S. net earnings (34.2) (.3) (88.6)Non-U.S. earnings, net of foreign taxes (18.5) (11.4) (27.2)
    U.S. income tax incurred upon the Redomestication   11.0 Foreign tax credit (38.8)   
    Tax exempt interest and dividends (4.5) (4.5) (3.9)Tax exempt interest and dividends (4.1) (4.1) (4.5)
    Foreign and withholding taxes 7.0 (.9) 2.8 Deferred credit amortization and purchase price adjustments (5.0)  (7.0)
    Change in valuation allowance (10.0)   Change in valuation allowance 3.3  (10.0)
    Non deductible interest expense 4.3 3.6  Non deductible interest expense 1.4  4.3 
    Other, net (1.1) (10.1) (3.9)Other, net (3.7) .7 (1.1)
     
     
     
       
     
     
     
    Total income tax (benefit) provision on pretax earnings $11.7 $(179.2)$43.1 
    Total income tax provision on pretax earningsTotal income tax provision on pretax earnings $47.0 $127.6 $11.7 
     
     
     
       
     
     
     

            The non-U.S. component of pretax earnings was $97.8$100.0 million, $.8$70.5 million and $401.3$97.8 million for the years ended December 31, 2004, 2003 and 2002, 2001 and 2000, respectively.

            During 2000, the Company released a $95.0 million tax reserve relating to its 1991 sale of Fireman's Fund.

            At December 31, 2002,2004, there were U.S. net operating loss carryforwards of approximately $380.3$46.3 million available, the majority of which will expire in 2020. Certain of these2011. These tax losses are subject to an annual limitation on utilization under Internal Revenue Code Section 382. In addition, at December 31, 2004, there were Swedish net operating loss carryforwards of approximately $25.1 million available which do not expire.

            At December 31, 2002,2004, there were foreign tax credit carryforwards andcredits for increasing research activities of $2.3 million which will begin to expire in 2020.

            At December 31, 2004, there were alternative minimum tax credit carryforwards available of approximately $45.0 million and $14.4 million, respectively. The foreign tax credits expire in 2003-2005.$30.8 million. The alternative minimum tax credits docredit does not expire.

            Subsequent to the passage of the Jobs Creation Act of 2004, which extended the carryforward period for utilization of a foreign tax credit, the Company filed amended United States tax returns to claim a credit rather than a deduction for foreign taxes paid. At December 31, 2004, $45.7 million of the credit remained which will expire in 2010. During 2004, as a result of the Company's reorganization to align its legal organization with its main operating businesses, certain subsidiaries were removed from the existing consolidated Federal income tax group, resulting in $16.6 million of income tax.

            The U.S. federal income tax returns of the U.S. Companies are routinely audited by taxing authorities. In management's opinion, adequate tax liabilities have been established for all open tax years. These liabilities could be revised in the future if estimates of White Mountains' ultimate liability changes.

    Note
    NOTE 8.    Retirement and Postretirement Plans

            Certain subsidiaries of the Company offer various retirement and postretirement benefits to its employees. Under the terms of these plans, White Mountains reserves the right to change, modify or discontinue the plans. Prior to the purchase of OneBeacon, the cost associated with retirement and postretirement benefits was not material to White Mountains' financial statements.



            Certain subsidiaries of the Company sponsor qualified and non-qualified, non-contributory, defined benefit plans covering substantially all employees. Current plans include a OneBeacon qualified pension plan, a OneBeacon non-qualified pension plan, and an NFU qualified pension plan. The benefits for the plans are based primarily on years of service and employees' pay near retirement. Participants generally vest after five years of

    F-42



    continuous service. White Mountains' funding policy is consistent with the funding requirements of federal laws and regulations.

            In addition to the defined benefit plans, certain of the Company's subsidiaries have multiple contributory postretirement benefit plans which provide medical and life insurance benefits to pensioners and survivors. White Mountains' funding policy is to make contributions to the plan that are necessary to cover its current obligations.

            The majority of OneBeacon's pension and retiree medical plans were curtailed in the fourth quarter of 2002. The OneBeacon Insurance Pension Plan will no longer add new participants or increase benefits for existing participants. Non-vested participants already in the plan will continue to vest during their employment with OneBeacon, which this effectively causes the projected benefit obligation to equal the accumulated benefit obligation. Retirees are also eligible for medical benefits if they meet certain age and service requirements. However, due to the curtailment, the plan will no longer acceptaccepts new retirees after a grace period endingended May 31, 2003. The majority of retiree medical costs are capped at defined dollar amounts, with retirees contributing the remainder. OneBeacon uses a December 31st measurement date for its plans.

            Effective January 1,The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the "Medicare Act") made significant changes to the federal Medicare Program by increasing coverage for prescription drugs. As a result, OneBeacon's retiree medical benefit obligations have been reduced. In the third quarter of 2004, OneBeacon adopted an employee stock ownership plan,FASB Staff Position No. 106-2 entitled "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003", which is a OneBeacon-funded, qualified retirement plan. This new plan provides current and future employees additional or alternative retirement benefits sincereduced OneBeacon's accumulated benefit obligation by less than $1 million. Accordingly, the freezeimpact of the OneBeacon Insurance Pension Plan at December 31, 2002.Medicare Act is immaterial to White Mountains' consolidated financial position.



            The following table setstables set forth (i) the change in the benefit obligation, (ii) the change in the fair value ofobligations and funded status, assumptions, plan assets (iii) the resulting funded status reconciled with amounts reported in White

    F-43



    Mountains' consolidated financial statements, and (iv) the weighted average assumptionscash flows associated with the various pension plan and postretirement benefits as of December 31, 20022004 and 2001:2003:

     
     December 31, 2002(a),(b)
     December 31, 2001
     
    Millions

     Pension
    Benefits

     Other
    Postretirement
    Benefits

     Pension
    Benefits

     Other
    Postretirement
    Benefits

     
    Benefit obligation at beginning of year $605.1 $136.6 $34.2 $ 
    Benefit obligation in respect of companies acquired      552.3  137.6 
    Service cost  14.6  1.8  13.0  2.1 
    Interest cost  36.3  8.3  24.4  5.6 
    Curtailment  (64.1) (30.5) (15.1) (15.7)
    Plan amendments  .1  (41.6) 15.1   
    Actuarial (gain) loss  (12.0)   11.6  11.4 
    Liability net loss  1.1  4.7     
    Benefits and expenses paid, net of participant contributions  (86.5) (9.3) (30.4) (4.4)
      
     
     
     
     
    BENEFIT OBLIGATION AT END OF YEAR $494.6 $70.0 $605.1 $136.6 
      
     
     
     
     
    Fair value of plan assets at beginning of year $551.6 $ $34.0 $ 
    Fair value of plan assets in respect of companies acquired      540.0   
    Actual return on plan assets  11.6    5.5   
    Employer contributions  6.0  9.4  2.5  4.4 
    Benefits and expenses paid, net of participant contributions  (98.1) (9.4) (30.4) (4.4)
      
     
     
     
     
    FAIR VALUE OF PLAN ASSETS AT END OF YEAR $471.1 $ $551.6 $ 
      
     
     
     
     
    Funded status at end of year $(23.5)$(70.0)$(53.5)$(136.6)
    Unrecognized actuarial loss  7.4    20.4  11.4 
    Unrecognized net loss  4.3       
    Unrecognized prior service cost    (41.1) 16.2   
      
     
     
     
     
    NET LIABILITY AT END OF YEAR $(11.8)$(111.1)$(16.9)$(125.2)
      
     
     
     
     
    Weighted average assumptions:             
    Effective discount rate  6.5% 6.5% 6.5% 6.5%
    Expected return on plan assets  7.0%   7.5%  
    Rate of compensation increase  0.3%   4.1%  
      
     
     
     
     

            (a) Effective December 31, 2002, the participants' benefits in the OneBeacon Insurance Pension Plan were frozen. The benefit cessation resulted in a reduction in the projected benefit obligation at December 31, 2002 of $61.0 million, of which $20.7 million was recognized as a curtailment gain.

            (b) During 2002, OneBeacon made several design changes to its post-retirement benefit plan including reducing the Company's share of retiree health costs and eliminating the subsidy for the majority of future retirees. As a result, the Company recorded $14.4 million in curtailment gains.

    F-44



            The components of net pension costs were as follows:Obligations and Funded Status

     
     December 31, 2002
     December 31, 2001
     
     Pension
    Benefits

     Other
    Postretirement
    Benefits

     Pension
    Benefits

     Other
    Postretirement
    Benefits

     
     (Millions)

    Service cost $14.6 $1.8 $13.0 $2.1
    Interest cost  36.3  8.3  24.4  5.6
    Expected return on plan assets  (38.4)   (31.4) 
    Amortization of prior service cost  1.5  (.5) .1  
    Recognized actuarial loss  .1  .1    
      
     
     
     
    Net periodic pension cost before settlements, curtailments and special termination benefits  14.1  9.7  6.1  7.7
    Settlement expense  3.5    ��  
    Curtailment gain  (20.7) (14.4)   
    Special termination benefits expense  3.4      
      
     
     
     
    Net periodic pension cost (income) $.3 $(4.7)$6.1 $7.7
      
     
     
     
     
     Pension
    Benefits

     Other Postretirement
    Benefits

     
    Millions

     
     2004
     2003
     2004
     2003
     
    Change in projected benefit obligation:             
    Projected benefit obligation at beginning of year $501.5 $494.6 $69.7 $70.0 
    Service cost  1.9  1.9  .1  .2 
    Interest cost  30.7  30.5  3.2  4.6 
    Curtailment          
    Plan amendments         (13.4)
    Assumption changes      (.6) 3.5 
    Actuarial (gain) loss  40.8  44.5  (12.8) 13.8 
    Liability net loss         
    Benefits and expenses paid, net of participant contributions  (49.4) (70.0) (8.7) (9.0)
      
     
     
     
     
    Projected benefit obligation at end of year $525.5 $501.5 $50.9 $69.7 
      
     
     
     
     
    Change in plan assets:             
    Fair value of plan assets at beginning of year $478.8 $471.1 $ $ 
    Actual return on plan assets  61.8  82.0     
    Employer contributions  4.2  5.4  8.7  9.0 
    Special termination benefits  (2.9) (9.7)      
    Benefits and expenses paid, net of participant contributions  (49.4) (70.0) (8.7) (9.0)
      
     
     
     
     
    Fair value of plan assets at end of year $492.5 $478.8 $ $ 
      
     
     
     
     
    Funded status $(33.0)$(22.7)$(50.9)$(69.7)
    Unrecognized net loss(gain)  17.6  6.4  3.3  16.7 
    Unrecognized prior service benefit      (46.8) (50.9)
      
     
     
     
     
    Net amount accrued as a liability $(15.4)$(16.3)$(94.4)$(103.9)
      
     
     
     
     

            The funded status of the consolidated pension plans is ($23.3)33.0) million, of which $3.9($3.8) million relates to the qualified pension plans and ($27.2)29.2) million is related to the non-qualified plan which is unfunded.

            For measurement purposes,Amounts recognized in the financial statements consist of:

     
      
      
     Other Postretirement Benefits
     
     
     Pension Benefits
     
    Millions

     
     2004
     2003
     2004
     2003
     
    Prepaid benefit cost $15.0 $15.4 $ $ 
    Accrued benefit cost  (34.1) (31.7) (94.4) (103.9)
    Intangible assets         
    Accumulated other comprehensive income (pre-tax)  3.7       
      
     
     
     
     
    Net amount accrued as a liability $(15.4)$(16.3)$(94.4)$(103.9)
      
     
     
     
     

            The accumulated benefit obligation for all defined benefit pension plans was $521.2 million and $497.4 million at December 31, 2004 and 2003, respectively.

            Information for the OneBeacon non-qualified pension plan and the NFU qualified pension plan which had accumulated benefit obligations in excess of plan assets were as follows:

     
     December 31,
    Millions

     2004
     2003
    Projected benefit obligation $57.6 $52.5
    Accumulated benefit obligation  53.3  48.4
    Fair value of plan assets  21.1  18.9
      
     

            The components of net periodic benefit costs for the years ended December 31, 2004, 2003 and 2002 were as follows:

     
     Pension Benefits
     Other Postretirement Benefits
     
    Millions

     
     2004
     2003
     2002
     2004
     2003
     2002
     
    Service cost $1.9 $1.9 $14.6 $.1 $.2 $1.8 
    Interest cost  30.7  30.5  36.3  3.2  4.6  8.3 
    Expected return on plan assets  (32.2) (30.5) (38.4)      
    Amortization of prior service cost (benefit)      1.5  (4.1) (3.6) (.5)
    Amortization of unrecognized loss        .1  .5   
    Recognized actuarial loss      .1      .1 
      
     
     
     
     
     
     
    Net periodic pension cost before settlements, curtailments and special termination benefits  .4  1.9  14.1  (.7) 1.7  9.7 
    Settlement expense(gain)    (1.6) 3.5       
    Curtailment (gain)      (20.7)     (14.4)
    Special termination benefits expense(1)  2.9  9.7  3.4       
      
     
     
     
     
     
     
    Total settlements, curtailments and special termination benefits  2.9  8.1  (13.8)     (14.4)
      
     
     
     
     
     
     
    Total net periodic benefit cost (income) $3.3 $10.0 $.3 $(.7)$1.7 $(4.7)
      
     
     
     
     
     
     

    (1)
    Special termination benefits are additional payments made from the pension plan when a 9.5% annualvested participant terminates employment due to a reduction in force.


    Assumptions

            The weighted average assumptions used to determine benefit obligations at December 31, 2004 and 2003 were:

     
     Pension Benefits
     Other Postretirement Benefits
     
     
     2004
     2003
     2004
     2003
     
    Discount rate 5.875%6.000%5.875%6.000%
    Rate of compensation increase(1) 0.190%0.180%0.034%0.026%

    (1)
    The rate of compensation increase affects only the NFU qualified pension plan as both the OneBeacon qualified and non-qualified pensions plans are frozen.

            The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2004, 2003 and 2002 were:

     
     Pension Benefits
     Other Postretirement Benefits
     
     
     2004
     2003
     2002
     2004(1)
     2003(2)
     2002
     
    Discount rate 6.000%6.500%6.500%6.125%6.250%6.500%
    Expected long-term rate of return on plan assets 7.000%7.000%7.500%   
    Rate of compensation increase(3) 0.190%0.206%0.300%0.034%0.026%0.026%
      
     
     
     
     
     
     

    (1)
    The discount rate in effect from January 1 through June 30, 2004 was 6.0%. The postretirement health plan was re-measured on June 30 due to plan changes that became effective on July 1. The discount rate was raised to 6.25% for the per capita costre-measurement and remained in effect through December 31, 2004.

    (2)
    The discount rate in effect from January 1 through June 30, 2003 was 6.5%. The postretirement health plan was re-measured on June 30 due to plan changes that became effective on July 1. The discount rate was lowered to 6.0% for the re-measurement and remained in effect through December 31, 2003.

    (3)
    The rate of coveredcompensation increase affects only the NFU qualified pension plan as both the OneBeacon qualified and non-qualified pensions plans are frozen.

            OneBeacon performed an analysis of expected long-term rates of return based on the allocation of its pension plan assets as of both December 31, 2004 and December 31, 2003 to develop expected rates of return for each significant asset class or economic indicator. A range of returns was developed based both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. Although the expected investment return assumption is long-term in nature, the range of reasonable returns had dropped over the past few years as a consequence of lower inflation and lower bond yields.

            The assumed health care benefits was assumedcost trend rates at December 31, 2004 and 2003 were:

     
     2004
     2003
     
    Health care cost trend rate assumed for next year 10.0%9.5%
    Rate to which the cost trend rate is assumed to decline 5.0%5.0%
    Year that the rate reaches the ultimate trend rate 2014 2013 

            Assumed health care cost trend rates typically have a significant effect on the amounts reported for 2002. The rate was assumed to decrease gradually to 5% over a five year period and remain constant thereafter.

    the health care plans. A one percentone-percentage-point change in assumed health care cost trend rates would have the following pre-tax effects:

    Millions

     One-
    Percentage
    Point
    Increase

     One-
    Percentage
    Point
    Decrease

     
    Effect on total service and interest cost $ $ 
    Effect on postretirement benefit obligation  .3  (.2)
      
     
     
     
     One Percent
    Increase

     One Percent
    Decrease

     
     
     (Millions)

     
    Effect on total service and interest cost components $.1 $(.1)
    Effect on postretirement benefit obligation  1.1  (1.0)
      
     
     


    Plan Assets

            OneBeacon's pension plans weighted-average asset allocations at December 31, 2004 and 2003, by asset category were as follows:

     
     Plan Assets at December 31,
     
    Asset Category

     
     2004
     2003
     
    Equity securities 45%44%
    Debt securities 36%37%
    Convertible securities 13%11%
    Cash and cash equivalents 6%8%
      
     
     
    Total 100%100%
      
     
     

            The majority of the plans' assets are invested by White Mountains Advisors LLC, a subsidiary of White Mountains Insurance Group, Ltd. The investment policy places an emphasis on preserving invested assets through a diversified portfolio of high-quality income producing investments and equity investments.

            The investment management process integrates the risks and returns available in the investment arena with the risks and returns available to the plan in establishing the proper allocation of invested assets. The asset classes include fixed income, equity, convertible securities, and cash and cash equivalents. The factors examined in establishing the appropriate investment mix include: the outlook for risk and return in the various investment markets and sectors, and the long term need for capital growth.


    Cash Flows

            OneBeacon expects to contribute $4.2 million to its pension plans and $6.9 million to its other postretirement benefits plans in 2005. The majority of OneBeacon's expected pension contributions in 2005 relate to non-qualified pension plans, for which OneBeacon has established assets held in rabbi trusts.

            The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

     
     Pension Benefits
     Other Benefits
    Millions

     Expected Benefit
    Payments

     Expected Benefits
    Payments

     Expected Medicare
    Part D
    Subsidies

    2005 $39.1 $6.9 $
    2006  38.6  6.5  .1
    2007  38.4  6.1  .1
    2008  38.1  5.6  .1
    2009  38.4  5.2  .1
    2010-2014  184.4  20.7  .4


    Other Benefit Plans

            Certain of the Company's subsidiaries sponsor various employee savings plans (defined contribution plans) covering the majority of employees. The contributory plans provide qualifying employees with matching contributions of up to six percent of qualifying employees' salary (subject to federal limits on allowable contributions in a given year). Total expense for the plans was $5.8 million, $5.5 million and $7.4 million $9.6 millionin 2004, 2003 and $1.5 million in 2002, 2001 and 2000, respectively.


            OneBeacon had a post-employment benefit liability of $14.1$13.2 million and $16.6$14.4 million related to its long-term disability plan at December 31, 20022004 and 2001,2003, respectively.

            Effective January 1, 2003, OneBeacon replaced its defined benefit pension plan with an employee stock ownership plan ("ESOP"). See Note 9.

    Note
    NOTE 9. Employee Share-basedShare-Based Compensation Plans

            White Mountains' share-based compensation expenses, consisting primarily of performance share expense, are designed to maximize shareholder value over long periods of time by aligning the financial

    F-45



    interests of its management with those of its owners. The Board believes that share-based compensation for its key employees should be payable in full only if the Company achieves superior returns for its owners. Performance shares are payable upon achievement of pre-defined business goals and are valued based on the market value of Common Shares at the time awards are earned. Performance shares are typically paid in cash, though they may be paid in Common Shares at the election of the Board. The target of White Mountains' performance share programs is linked to achievement of an overall annualized return of at least equal to the market yield available from a ten-year U.S. Treasury note plus 700 basis points at the time of grant. White Mountains expenses all its share-based compensation, including its outstanding Options. As a result, the Company's calculation of such return includes the full expense of all outstanding share-based compensation awards.


    White Mountains' Long-Term Incentive Plan (the "Incentive Plan")

            The Incentive Plan provides for granting to certain officers of the Company, and certain of its subsidiaries, various types of share-based incentive awards including performance shares, Restricted Shares and Options. The Incentive Plan was adopted by the Board and was approved by the Company's sole shareholder in 1985 and was subsequently amended by its shareholders in 1995 and 2001.

    Performance Shares.Shares

            Performance shares are conditional grants of a specified maximum number of Common Shares or an equivalent amount of cash. GrantsIn general, grants are generally earned, subject to the attainment of pre-specified performance goals, (which bear the cost of all projected compensation awards), at the end of a three-year period or as otherwise determined by the Compensation Committee of the Board.Board and are valued based on the market value of Common Shares at the time awards are paid. Results that significantly exceed pre-specified targets can result in a performance share payout of up to 200% of value whereas results significantly less thanbelow target result in no payout. ForThe Company's principal performance share goal is its after-tax corporate return on equity as measured by growth in its intrinsic value per share ("ROE"). The Company calculates intrinsic value per share based on its growth in economic value per share (weighted 50%), growth in tangible GAAP book value per share (weighted 25%) and growth in market value per share (weighted 25%).This proprietary measure is viewed by management and the Board as being an objective and conservative measure of the value of White Mountains and includes the projected cost of all outstanding compensation awards. At December 31, 2004, 69,250, 75,200 and 53,500 performance shares had been granted at target under the Incentive Plan for the three-year performance periods beginning 2004, 2003 and 2002, 2001 and 2000,respectively.

            During 2004, White Mountains granted a totalmade payments with respect to 63,480 performance shares (relating to the 2001-2003 performance period) at an average 137% payout level, amounting to $40.7 million, to its participants in cash or by deferral into certain non-qualified compensation plans of 66,000, 84,600 andthe Company or its subsidiaries. During the first quarter of 2003, White Mountains made payments with respect to 39,500 performance shares respectively, under(relating to the Incentive Plan.2000-2002 performance period) at a 200% payout level, amounting to $25.7 million, to its participants in cash or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries. In the second quarter of 2003, White Mountains made payments with respect to 21,725 performance shares, amounting to $13.1 million, in cash or by deferral into certain non-qualified compensation plans of the Company. The performance share payments in the second quarter were the result of an agreed upon cancellation of performance shares held by certain non-employee directors of the Company for performance periods scheduled to end on December 31, 2003, 2004 and 2005. During 2002, White Mountains paid a total of 31,300 performance shares (relating to the 1999-2001 performance period) at a 200% value, amounting to



    $20.7 million, to its participants in cash, Common Shares or by deferral into certain non- qualifiednon-qualified compensation plans of the Company or its subsidiaries. Performance shares paid during 1999 included 43,250

            The targeted performance goal for full payment of performance shares paid early relatinggranted during 2004 to non-investment personnel is the attainment of an ROE of 13%. At an ROE of 6% or less, no such performance shares would be earned and at an ROE of 20% or more, 200% of such performance shares would be earned. With respect to the 1998-2000 performance period and 40,3002004 performance shares paid early relatinggranted investment personnel, the performance goals for full payment are based in part on the ROE criteria described above and in part on the attainment of an annual return on invested assets of the greater of 1.5% or 150 basis points over the applicable total return on the constant maturity ten-year United States treasury note (the "2004 Treasury Return"). At an annual return on invested assets less than or equal to the 1997-1999greater of 0% or the 2004 Treasury Return, no such performance period.shares would be earned and at an annual return on invested assets of the greater of 3.25% or 325 basis points over the 2004 Treasury Return, 200% of such performance shares would be earned. With respect to the 2004 performance shares granted to investment personnel, the Compensation Committee of the Board generally retains the authority to weigh each performance goal as they deem appropriate at the end of the cycle.

            The targeted performance goal for full payment of performance shares granted during 2003 to non-investment personnel is the attainment of an ROE of 11%. At an ROE of 4% or less, no such performance shares would be earned and at an ROE of 21% or more, 200% of such performance shares would be earned. With respect to the 2003 performance shares granted to investment personnel, the performance goals for full payment are based in part on the ROE criteria described above and in part on the attainment of an annual return on invested assets of 150 basis points over the applicable total return on the constant maturity ten-year United States treasury note (the "2003 Treasury Return"). At an annual return on invested assets equal to the 2003 Treasury Return, no such performance shares would be earned and at an annual return on invested assets of 325 basis points over the 2003 Treasury Return, 200% of such performance shares would be earned. With respect to the 2003 performance shares granted to investment personnel, the Compensation Committee of the Board generally retains the authority to weigh each performance goal as they deem appropriate at the end of the cycle.

            The targeted performance goal for full payment of performance shares granted during 2002 is the attainment of a 12% annual after-tax return on equity (as specifically defined by the Company's Compensation Committee) which would result in such performance shares being fully earned. With respect to 50% of the 2002 performance shares granted to certain participants, target performance is the attainment of a 12% after-tax return. The remaining 50%holding company personnel is based on the attainment of a Trade Ratioan ROE of 102% on OneBeacon's core insurance operations. With respect to 50% of the 2002 performance shares granted to certain other participants, target performance is the attainment of a 12% after-tax return with the remaining 50% based on the attainment of a return on invested assets of 150 basis points over the applicable return on the ten-year U.S. treasury rate.. At a return on invested assetsan ROE of 5% or less, no such performance shares would be earned and at a return on invested assetsan ROE of 8%23% or more, 200% of such performance shares would be earned.

            The With respect to the 2002 performance shares granted to OneBeacon personnel (including certain officers of the holding company), the targeted performance goal for full payment of performance shares granted during 2001 is based in part on the ROE criteria described above and in part on the attainment of a 12.1% annual after-tax return which would result in such performance shares being fully earned. With respect to 50%an insurance trade ratio of the 2001 performance shares granted to certain participants, target performance is the attainment of a 12.1% after- tax return with the remaining 50% based on the

    F-46



    attainment of a Trade Ratio of 105%102% on OneBeacon's core insurance operations. At a trade ratio of 106% or more, no such performance shares would be earned and at a trade ratio of 96% or less, 200% of such performance shares would be earned. With respect to 50% of the 20012002 performance shares granted to certain other participants, targetinvestment personnel, the performance isgoals for full payment are based in part on the attainment of a 12.1% after-tax return with the remaining 50% basedROE criteria described above and in part on the attainment of aan annual return on invested assets of 100150 basis points over the applicable total return on the two-year U.S.constant maturity ten-year United States treasury bill.

            The targetednote (the "2002 Treasury Return"). At an annual return on invested assets equal to the 2002 Treasury Return, no such performance goal for full paymentshares would be earned and at an annual return on invested assets of 300 basis points over the 2002 Treasury Return, 200% of such performance shares would be earned. With respect to the 2002 performance shares granted during 2000 isto OneBeacon personnel (including certain officers of the attainment of a 13% annual after-tax return which would resultholding company) and investment personnel, in such performance shares being fully earned.

            Restricted Shares.    In 2001,general the Compensation Committee made an award of Restricted Shares to key officers of the Company. PursuantBoard generally retains the authority to weigh each performance goal as they deem appropriate at the Incentive Plan,end of the cycle.



    Restricted Shares

            In 2001 White MountainsMountains' Compensation Committee issued 94,500 Restricted Shares, of which 250 were21,000 vested in December, 2002 and 73,500 vestvested in June 2003. In addition, duringDuring 2002 and 2003, the Company repurchased 20,750 outstandingand 34,000, respectively, of these Restricted Shares held by certain key employees and said employees were insteadin return granted an equivalent value in various non-qualified deferred compensation plans of the Company and its subsidiaries. VestingDuring 2004 and 2003, certain key officers were awarded 10,000 and 6,000 Restricted Shares, respectively. No Restricted Shares were awarded during 2002. These Restricted Shares vest either ratably or entirely over a three year period from the date of grant and vesting of Restricted Share awards is dependent on continuous service by the employee throughout the award period. There are no other restrictions on the Restricted Shares once they have become fully vested. NoAs of December 31, 2004, the Company had 15,000 Restricted Shares that were awarded during 2002.unvested.

            Options.Options

            At December 31, 20022004 and 2001,2003, the Company had 46,530 Options outstanding 61,965 Options (10,305(10,530 of which were exercisable) and 80,66550,565 Options (15,865outstanding (7,365 of which were exercisable)., respectively. These Options were issued in 2000 to certain key employees as a one-time incentive and vest ratably over a ten-year period. The Options had a weighted average exercise price of $125.31$140.80 and $118.22$132.83 per Common Share at December 31, 20022004 and 2001.2003, respectively. During 20022004 and 2001, 11,5002003, 4,035 and 33511,400 Options, respectively, were exercised at an average exercise price of $120.55$139.58 and $118.15$129.01 per Common Share. During 2002, 7,200 Options were forfeited.Share, respectively.


    OneBeacon Performance Plan

            OneBeacon's Performance Plan (the "Performance"OB Performance Plan") provides for granting of performance shares to certain key employees of OneBeacon. The performance goals for full payment of performance shares issued under the OB Performance Plan are similar to those of the Incentive Plan. The OB Performance Plan was approved by the Board but was not subject to shareholder approval.

            As ofAt December 31, 2002,2004, there were 130,7243,500, none and 150,896 performance shares outstanding under the OB Performance Plan for the three-year performance periods beginning 2004, 2003 and 2002, respectively. During 2004, OneBeacon made payments with respect to 101,802 performance shares (relating to the 2001-2003 performance period and there were 170,853 performance shares outstanding with respectperiod) at an average 182% payout level, amounting to the 2002-2004 performance period.$84.6 million, to its participants in cash. No performance shares were paid during 2001 or 20022003 and 2002.


    Folksamerica Performance Plan

            Folksamerica's Performance Plan provides for granting of performance shares to certain key employees of Folksamerica. The performance goals for full payment of performance shares issued under the Folksamerica Performance Plan are similar to those of the Incentive Plan. The Folksamerica Performance Plan was approved by the Board but was not subject to shareholder approval.

            At December 31, 2004, there were 2,000, 4,900 and 9,400 performance shares outstanding under the Folksamerica Performance Plan for the three-year performance periods beginning 2004, 2003 and 2002, respectively. Folksamerica made payments with respect to 2,500 performance shares (relating to the 2001-2003 performance period) at a 93% payout level, amounting to $1.1 million, to its participants in cash. Folksamerica made payments with respect to 5,500 performance shares (relating to the 2000-2002 performance period) at a 200% payout level, amounting to $2.9 million, to its participants in cash. No performance shares were paid during 2002.


    Other Share-basedShare-Based Compensation

            The defined contribution plans of OneBeacon and Folksamerica (the "401(k) Plans") offer its participants the ability to invest their balances in several different investment options, including the



    Company's Common Shares. As of December 31, 20012004 and 2000,2003, the 401(k) Plans owned less than 1% of the total Common Shares outstanding. In connection with the OneBeacon Acquisition, during 2001 eligible OneBeacon employees received a one-time contribution of two Common Shares which resulted in the issuance of 11,980 Common Shares.

    F-47        Effective January 1, 2003, OneBeacon adopted an employee stock ownership plan ("ESOP"), which is a OneBeacon-funded benefit plan. The ESOP 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 (or $87,900 with respect to 2004). Additionally, those participants not otherwise eligible to receive benefits under OneBeacon's Management Incentive Plan can earn up to an additional 6% of their salary through the ESOP, contingent upon OneBeacon's performance. OneBeacon accrued $13.3 million to pay benefits and allocate shares of stock to participant's accounts in the first quarter of 2005 and paid $13.2 million in benefits to allocate shares of stock to participant's accounts during the first quarter of 2004.



    NoteNOTE 10. Minority Interest—Mandatorily Redeemable Preferred Stock of Subsidiaries and Convertible Preference Shares

    Mandatorily Redeemable Preferred Stock

            In July 2003, White Mountains adopted the provisions of SFAS 150 and it subsequently adopted FSP 150-3 in November 2003 (See Note 1). White Mountains has two classes of mandatorily redeemable preferred stock of subsidiaries, which were previously classified as minority interests, that fell within the scope of SFAS 150 and are considered noncontrolling interests under FSP 150-3. Upon adoption of SFAS 150 in 2003, White Mountains reclassified these instruments from mezzanine equity to liabilities at their historical carrying values. In addition, beginning in the third quarter of 2003, all dividends and accretion on White Mountains' mandatorily redeemable preferred stock have been recorded as interest expense. During the years ended December 31, 2004 and 2003 White Mountains recorded $47.6 million and $22.3 million, respectively as interest expense on preferred stock (of which $17.3 million and $7.2 million, respectively, represented accretion of discount).

    Berkshire Preferred Stock

            On June 1, 2001,As part of the financing for the OneBeacon Acquisition, Berkshire purchased for $225.0 million, $300.0invested a total of $300 million in face valuecash, of cumulative non-voting preferred stock of a subsidiarywhich (i) $225 million was for the purchase of the Company.Berkshire Preferred Stock, which has a $300 million redemption value; and (ii) $75 million was for the purchase of the Warrants. The Berkshire Preferred Stock is entitled to a dividend of no less than 2.35% per quarter and is mandatorily redeemable after seven years.on May 31, 2008. The Berkshire Preferred Stock was initially recorded at $145.2 million, as the aggregate proceeds received from Berkshire of $300 million were originally between the Berkshire Preferred Stock and the Warrants, based on their relative fair values in accordance with Accounting Principles Board Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". Through December 31, 2004, the carrying value of the Berkshire Preferred Stock had been accreted up to $191.9 million.

            During 2002each of 2004, 2003 and 2001,2002, White Mountains declared and paid dividends of $28.2 million and $16.4 million, respectively, on the Berkshire Preferred Stock and recorded $10.6$17.3 million, $13.6 million and $5.1$10.6 million, respectively, of related accretion charges (See Note 2).charges. In accordance with SFAS 150, $28.2 million and $14.1 million, respectively of the dividends and $17.3 million and $7.2 million, respectively of the accretion recorded during the year ended December 31, 2004 and during the second half of 2003 are presented as interest expense on mandatorily redeemable preferred stock.

    Zenith Preferred Stock

            On June 1, 2001, Zenith Insurance Company ("Zenith") purchased $20.0 million in cumulative non-voting preferred stock of a subsidiary of the Company.Company (the "Zenith Preferred Stock"). The Zenith



    Preferred Stock is entitled to a dividend of no less than a 2.5% per quarter through June 30, 2007 and a dividend of no less than 3.5% per quarter thereafter and is mandatorily redeemable after ten years.on May 31, 2011. At the Company's option, the Zenith Preferred Stock may be redeemed on June 30, 2007. During 20022004, 2003 and 2001,2002, White Mountains declared and paid dividends of $2.1$2.0 million, $2.0 million and $1.7$2.1 million, respectively, on the Zenith Preferred Stock. In accordance with SFAS 150, $2.0 million and $1.0 million, respectively of the dividends recorded during the year ended December 31, 2004 and during the second half of 2003 are presented as interest expense on mandatorily redeemable preferred stock.

    Convertible Preference Shares

            OnIn October 24,of 2002, investmentWhite Mountains sold $200.0 million of convertible preference shares in a private transaction. Investment funds managed by Franklin Mutual Advisers, LLC existing shareholders of White Mountains, purchased 677,966 convertible preference shares of the Company at a price of $200.0 million ($295.00 per share), which had the effect of increasing the Franklin Mutual-managed investment funds' ownership in White Mountains from 12% to 17% on a fully converted basis. The convertible preference shares bear an annual dividend of $2.95 per share, payable in installments on June 30 and December 31, and will be repurchased and cancelled by the Company in consideration of 677,966 Common Shares upon approval by shareholders. White Mountains intends to seek. Upon shareholder approval at its 2003 Annual Meeting. If shareholder approval has not been obtained prior to March 31, 2005, each holder of convertible preference shares will thereafter have the right to require the Company to repurchase for cash the convertible preference shares on an "as converted" basis at the then-current market price of a Common Share. This requires the convertible preference shares to be marked-to-market, (i.e., redemption value) until they are converted to shareholders' equity. This resulted in a $19.0 million charge to retained earnings during 2002, with an offsetting increase to paid-in surplus. During 2002, White Mountains declared and paid dividends of $.4 million on the convertible preference shares.

            On June 1, 2001, a small group of private investors purchased 2,184,583 convertible preference shares. Upon approval by shareholders at the 2001Company's Annual Meeting held on May 19, 2003, the convertible preference shares were repurchased and cancelled in consideration of 2,184,583677,966 Common Shares. This requiredBecause the redemption value of the convertible preference shares was in excess of the cash received upon their issuance, they were required to be marked-to-market (i.e., redemption value) until the date the convertible preference sharesthey were converted to shareholders' equity, which occurred on August 23, 2001. This resultedresulting in a $305.1cumulative $68.5 million charge to retained earnings ($49.5 million of which was recognized during the year ended December 31, 2003), with an offsetting increase to paid-in surplus. During 2001, the Company declared and paid dividends of $.3 million on the convertible preference shares.

    F-48



    Note
    NOTE 11. Common Shareholders' Equity

    Common Shares Repurchasedrepurchased and Retiredretired

            During 2002, 20012004, 2003 and 20002002, the Company repurchased for cash 97 Common Shares for $.1 million, 284 Common Shares for $.1 million and 489 Common Shares for $.2 million 6,000 Common Shares for $1.9 million and 65,838 Common Shares for $8.3 million, respectively. In addition, during 2004, 2003 and 2002 the Company repurchased 316, 39,274 and 20,750, respectively, outstanding Restricted Shares held by certain key employees and said employeeswho were instead granted the market value of such Sharesshares in various non-qualified deferred compensation plans of the Company and its subsidiaries (See Note 9). In conformance with Bermuda law, the Company retires all Common Shares it repurchases.

    Common Shares Issuedissued

            On June 29, 2004, Berkshire exercised all of its warrants to purchase 1,724,200 Common Shares of White Mountains for $294 million. As a result, Berkshire now holds approximately 16.0% of White Mountains' outstanding common stock. Berkshire acquired the warrants in connection with the financing of White Mountains' acquisition of OneBeacon in 2001. The warrants were exercisable at any time until May 2008 and callable by the Company on or after May 31, 2005. In consideration for the early exercise of the warrants, Berkshire and the Company agreed to reduce the exercise price by approximately 2%.

            In addition to the Berkshire warrant exercise, during the year ended December 31, 2004, the Company issued a total of 41,807 Common Shares, which consisted of 27,772 shares issued to the OneBeacon employee stock ownership plan, 10,000 Restricted Shares issued to key management personnel, and 4,035 shares issued in satisfaction of Options exercised. During 2003, the Company issued a total of 695,366 Common Shares, which consisted of 677,966 Common Shares issued in connection with the repurchase and cancellation of Convertible Preference Shares and 17,400 Common Shares issued to employees in connection with various White Mountains share-based compensation plans. During 2002, the Company issued a total of 107,945 Common Shares, which consisted of 84,745 Common Shares issued in a private equity transaction with Highfields Capital Management LPfor $25.0 million ($295.00 per



    Common Share) and 23,200 Common Shares issued to employees in connection with various White Mountains share-based compensation plans. During 2001, the Company issued a total of 2,390,566 Common Shares which consisted of 2,184,583 Common Shares issued in connection with the repurchase and cancellation of the Convertible Preference Shares, 86,385 Common Shares issued in connection with the purchase of the Folksam net assets, 94,500 Restricted Shares issued to key employees and 25,098 Common Shares issued to employees in connection with various White Mountains share-based compensation plans. No Common Shares were issued during 2000.

    Dividends on Common Shares

            During 2002, 20012004, 2003 and 2000,2002, the Company declared and paid cash dividends totalling $9.1 million (or $1.00 per Common Share), $8.3 million (or $1.00 per Common Share) and $8.3 million (or $1.00 per Common Share), $5.9 million (or $1.00 per Common Share) and $7.1 million (or $1.20 per Common Share), respectively.

    Warrants to Acquire Common Shares

            On June 1, 2001, Berkshire purchased the Warrants from the Company for $75.0 million in cash entitling it to acquire 1,714,285 Common Shares at an exercise price of $175.00 per Common Share. The Warrants have a term of seven years from the date of issuance although the Company has the right to call the Warrants for $60.0 million in cash commencing on the fourth anniversary of their issuance. See Note 2. As a result of White Mountains' private equity issuances in the fourth quarter of 2002, customary anti-dilution provisions applicable to the Warrants increased the number of Common Shares purchasable on exercise of the Warrants to 1,724,200 and decreased the exercise price per Common Share of the Warrants to $173.99.

    Note
    NOTE 12. Statutory Capital and Surplus

            White Mountains' insurance and reinsurance operations are subject to regulation and supervision in each of the jurisdictions where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. Over the last several years most states have implemented laws that establish standards for current, as well as continued, state accreditation. In addition, the NAIC

    F-49



    uses risk-based capital ("RBC") standards for property and casualty companiesinsurers as a means of monitoring certain aspects affecting the overall financial condition of insurance companies. At December 31, 2002,2004, White Mountains' active insurance and reinsurance operating subsidiaries met their respective RBC requirements.

            OneBeacon's consolidated combined policyholders' surplus (which includes Folksamerica and its subsidiaries)subsidiaries at December 31, 2003), as reported to various regulatory authorities as of December 31, 20022004 and 2001,2003, was $2,640.9$1,773.4 million and $2,406.5$2,810.8 million, respectively. OneBeacon's consolidated combined statutory net income (loss) for the years ended December 31, 2004, 2003 and 2002 and 2001 was $280.5$314.2 million, $472.1 million and $(408.4)$342.6 million, respectively. The principal differences between OneBeacon's combined statutory amounts and the amounts reported in accordance with GAAP include deferred acquisition costs, deferred taxes, gains recognized under retroactive reinsurance contracts, market value adjustments for debt securities and recognition of pension plan curtailment gains. OneBeacon's insurance subsidiaries' statutory policyholders' surplus at December 31, 20022004 was in excess of the minimum requirements of relevant state insurance regulations.

            Folksamerica Reinsurance Company's, ("Folksamerica Re") policyholders' surplus, as reported to various regulatory authorities as of December 31, 20022004 and 2001,2003, was $857.1$917.4 million and $804.8$912.8 million, respectively. Folksamerica Reinsurance Company'sRe's statutory net income (loss) for the years ended December 31, 2004, 2003 and 2002 2001 and 2000 was $58.2$(1.0) million, $(35.3)$33.0 million and $(20.0)$58.2 million, respectively. The principal differences between Folksamerica Reinsurance Company'sRe's statutory amounts and the amounts reported in accordance with GAAP include deferred acquisition costs, deferred taxes, gains recognized under retroactive reinsurance contracts and market value adjustments for debt securities. Folksamerica Reinsurance Company'sRe's statutory policyholders' surplus at December 31, 20022004 was in excess of the minimum requirements of relevant state insurance regulations.

            Under the insurance laws of the statesjurisdictions under which OneBeacon'sWhite Mountains' regulated insurance operating subsidiaries are domiciled, OneBeacon's insurance subsidiariesan insurer is restricted with respect to the timing and the amount of dividends it may pay dividends only from unassigned funds as determined on a statutory basis. Generally,without prior approval by regulatory authorities. Accordingly, there can be no assurance regarding the maximum amount of cashsuch dividends that may be paid by such subsidiaries in the future. Following is a description of the ability of White Mountains insurance and reinsurance operating



    subsidiaries to make pay dividends during 2005 to the Company, and certain of its intermediate holding companies:

            Generally, OneBeacon's regulated insurance operating subsidiaries mayhave the ability to pay out of their statutory earned surplus without prior regulatory approval individends during any twelve12 month period iswithout the prior approval of regulatory authorities in an amount equal to the greater of the company's prior year statutory net income or 10% of prior year end statutory surplus. Accordingly, there is no assurance thatsurplus, subject to the availability of unassigned funds. As a result, based upon 2004 statutory net income OneBeacon's top tier regulated insurance operating subsidiaries have the ability to pay $325.2 million of dividends may be paid by OneBeacon's insurance subsidiaries induring 2005 without prior approval of regulatory authorities, subject to the future. Atavailability of unassigned funds. As of December 31, 2002,2004, OneBeacon's firsttop tier regulated insurance operating subsidiaries had $1.3 billion of unassigned funds available for dividend distribution. In addition, as of December 31, 2004, OneBeacon had $195.0 million of cash and investments outside of its regulated insurance operating subsidies available for distribution during 2005. During 2004, OneBeacon paid $305 million of cash dividends to Fund American.

            Folksamerica Re has the ability to pay dividends during any 12 month period without the prior approval of regulatory authorities in an amount equal to their parent holding companythe lesser of $261.5net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. As a result, based upon December 31, 2004 statutory surplus of $917.4 million, in 2003Folksamerica Re would have the ability to pay approximately $91.7 million of dividends during 2005 without prior approval of regulatory authorities.authorities, subject to the availability of earned surplus. As of December 31, 2004, Folksamerica Re had $16.8 million of earned surplus, therefore it can pay dividends of $16.8 million plus additional earned surplus reported during 2005, subject to the $91.7 million limitation discussed above.

    F-50        As of December 31, 2004, WMU had $3.2 million of cash and investments available for distribution during 2005. In addition, WMU has the ability to distribute its 2005 earnings without restriction. During 2004, WMU paid $60.0 million of cash dividends to its immediate parent.


            In addition, as of December 31, 2004, White Mountains Re had approximately $97 million of cash and investments outside of its regulated insurance and reinsurance operating subsidiaries available for distribution during 2005.

            In accordance with Swedish regulations, Sirius International holds restricted reserves of $808.1 million, which represents 72% of its untaxed reserves (See Liquidity and Capital Resources within the Management Discussion and Analysis for information). These restrictions are based on stockholder's equity determined on a Swedish statutory basis. These restricted reserves can not be paid as dividends. At December 31, 2004 Sirius International is in compliance with these restrictions. Sirius International's actual statutory surplus at December 31, 2004, which includes Scandinavian Re and its other subsidiaries is $1.3 billion.

    Safety Reserve

            In accordance with provisions of Swedish law, Sirius International can voluntarily transfer its pretax earnings, or a portion thereof, subject to certain limitations, into an untaxed reserve referred to as a safety reserve. The safety reserve is a Swedish regulatory concept that has no equivalent under GAAP. Accordingly, under GAAP, an amount equal to Sirius International's safety reserve of $1.1 billion at December 31, 2004, net of the related deferred tax liability established at the statutory Swedish tax rate of 28%, is classified as equity. Generally, this deferred tax liability is only required to be paid by Sirius International if it fails to maintain predetermined levels of premium writings in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations.



    NoteNOTE 13. Segment Information

            White Mountains has determined that its reportable segments includeare "OneBeacon", "White Mountains Re" (consisting solely of the operations of OneBeacon)Folksamerica, Sirius and WMU), "Reinsurance" (consisting of Folksamerica, Fund American Re, WMU and White Mountains' investment in Montpelier)"Esurance" and "Other Operations" (consisting of Peninsula,White Mountains' investments in Montpelier and Symetra warrants, the International American Centennial, British Insurance Company, Esurance, the operations ofGroup, the Company and the Company'sits intermediate subsidiary holding companies). During 2004, White Mountains expanded its segment disclosure to include Esurance as a separate segment. As a result, amounts presented in prior periods have been reclassified to conform with the current presentation.

            White Mountains has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each of the Company's subsidiaries and affiliates; (ii) the manner in which the Company's subsidiaries and affiliates are organized; (iii) the existence of primary managers responsible for specific subsidiaries and affiliates; and (iv) the organization of information provided to the Board. There are no significantBoard of Directors. Significant intercompany transactions among White Mountains' segments other than occasional intercompany sales and transfers of investment securities (gains and losses resulting from such transfers have been eliminated herein).

    F-51



    herein. Certain amounts in the prior periods have been reclassified to conform with the current presentation. Selected financialFinancial information for White Mountains' segments follows:

     
     OneBeacon
     Reinsurance
     Other Operations
     Total
     
     
     (Millions)

     
    Year Ended December 31, 2002             
    Earned insurance and reinsurance premiums $2,870.9 $675.8 $29.7 $3,576.4 
    Net investment income  300.7  52.7  (.7) 352.7 
    Net realized gains (losses)  113.0  88.3  (45.3) 156.0 
    Other revenue  1.0  53.6  45.7  100.3 
      
     
     
     
     
    Total revenues $3,285.6 $870.4 $29.4 $4,185.4 
      
     
     
     
     
    Pretax earnings ( loss) $200.3 $165.5 $(246.4)$119.4 
    Income tax (provision) benefit  (66.7) (21.8) 76.8  (11.7)
    Accretion and dividends on preferred stock of subsidiaries      (40.9) (40.9)
    Equity in earnings (loss) of unconsolidated affiliates  (5.9) 19.9    14.0 
      
     
     
     
     
    Net income (loss) from continuing operations $127.7 $163.6 $(210.5)$80.8 
      
     
     
     
     
    Year ended December 31, 2001             
    Earned insurance and reinsurance premiums $2,208.2 $421.5 $26.4 $2,656.1 
    Net investment income  228.4  46.1  10.0  284.5 
    Net realized gains (losses)  183.1  23.9  (33.9) 173.1 
    Amortization of deferred credits and other revenue    17.3  103.4  120.7 
      
     
     
     
     
    Total revenues $2,619.7 $508.8 $105.9 $3,234.4 
      
     
     
     
     
    Pretax loss $(265.8)$(46.1)$(115.6)$(427.5)
    Income tax benefit  111.8  19.4  48.0  179.2 
    Accretion and dividends on preferred stock of affiliates      (23.2) (23.2)
    Equity in earnings (loss) of unconsolidated affiliates  (.2) (2.0) 2.6  .4 
      
     
     
     
     
    Net loss from continuing operations  (154.2) (28.7) (88.2) (271.1)
      
     
     
     
     
    Year ended December 31, 2000             
    Earned insurance and reinsurance premiums $ $312.5 $21.9 $334.4 
    Net investment income    57.6  28.3  85.9 
    Net realized gains (losses)    (12.3) 3.5  (8.8)
    Amortization of deferred credits and other revenue    20.2  419.2  439.4 
      
     
     
     
     
    Total revenues $  378.0  472.9  850.9 
      
     
     
     
     
    Pretax earnings (loss) $ $(29.4)$387.5 $358.1 
    Income tax (provision) benefit    19.4  (62.5) (43.1)
    Equity in loss of unconsolidated affiliates      (2.1) (2.1)
      
     
     
     
     
    Net income from continuing operations $ $(10.0)$322.9 $312.9 
      
     
     
     
     
    Ending assets             
    December 31, 2002 $12,247.9 $3,621.6 $164.1 $16,033.6 
    December 31, 2001  13,218.6  3,394.6  (3.7) 16,609.5 
      
     
     
     
     

    F-52


     
     OneBeacon
     White
    Mountains Re

     Esurance
     Other
    Operations

     Total
     
     Millions

    Year ended December 31, 2004               
    Earned insurance and reinsurance premiums $2,378.5 $1,265.5 $176.5 $ $3,820.5
    Net investment income  221.4  98.5  3.5  37.5  360.9
    Net realized gains  129.6  29.6  1.1  20.8  181.1
    Other revenue  141.8  36.1  2.2  10.4  190.5
      
     
     
     
     
    Total revenues  2,871.3  1,429.7  183.3  68.7  4,553.0
      
     
     
     
     
    Loss and LAE  1,545.2  918.9  122.4  4.6  2,591.1
    Insurance and reinsurance acquisition expenses  442.3  271.8  29.4    743.5
    Other underwriting expenses  369.2  122.9  27.7  1.5  521.3
    General and administrative expenses  122.2  15.1    172.0  309.3
    Accretion of fair value adjustment to loss and LAE reserves    10.1    33.2  43.3
    Interest expense on debt  1.0  3.8    44.3  49.1
    Interest expense—dividends and accretion on preferred stock subject to mandatory redemption        47.6  47.6
      
     
     
     
     
    Total expenses  2,479.9  1,342.6  179.5  303.2  4,305.2
      
     
     
     
     
    Pretax earnings (loss) $391.4 $87.1 $3.8 $(234.5)$247.8
      
     
     
     
     


     

     

    OneBeacon


     

    White
    Mountains Re


     

    Esurance


     

    Other
    Operations


     

    Total

     
     Millions

    Year ended December 31, 2003               
    Earned insurance and reinsurance premiums $2,160.3 $845.8 $99.9 $31.7 $3,137.7
    Net investment income  223.7  50.4  1.3  15.5  290.9
    Net realized gains (losses)  127.0  7.7  .2  27.7  162.6
    Other revenue  90.5  75.5  .3  36.3  202.6
      
     
     
     
     
    Total revenues  2,601.5  979.4  101.7  111.2  3,793.8
      
     
     
     
     
    Loss and LAE  1,475.6  557.6  81.0  23.9  2,138.1
    Insurance and reinsurance acquisition expenses  394.2  198.0  18.8  4.0  615.0
    Other underwriting expenses  258.7  57.8  20.4  10.2  347.1
    General and administrative expenses  67.6  19.6    114.6  201.8
    Accretion of fair value adjustment to loss and LAE reserves        48.6  48.6
    Interest expense on debt  .3  2.0    46.3  48.6
    Interest expense—dividends and accretion on preferred stock subject to mandatory redemption        22.3  22.3
      
     
     
     
     
    Total expenses  2,196.4  835.0  120.2  269.9  3,421.5
      
     
     
     
     
    Pretax earnings (loss) $405.1 $144.4 $(18.5)$(158.7)$372.3
      
     
     
     
     
    Year ended December 31, 2002               
    Earned insurance and reinsurance premiums $2,870.9 $635.0 $40.8 $29.7 $3,576.4
    Net investment income  314.0  51.5  1.2  (.7) 366.0
    Net realized gains (losses)  113.0  30.3    12.7  156.0
    Amortization of deferred credits and other revenue  14.4  53.6  1.6  39.9  109.5
      
     
     
     
     
    Total revenues  3,312.3  770.4  43.6  81.6  4,207.9
      
     
     
     
     
    Loss and LAE  2,131.3  442.2  36.6  28.1  2,638.2
    Insurance and reinsurance acquisition expenses  629.6  161.2  9.7  3.8  804.3
    Other underwriting expenses  329.2  41.0  22.4  9.1  401.7
    General and administrative expenses  22.4  20.6    49.7  92.7
    Accretion of fair value adjustment to loss and LAE reserves        79.8  79.8
    Interest expense on debt    2.0    69.8  71.8
      
     
     
     
     
    Total expenses  3,112.5  667.0  68.7  240.3  4,088.5
      
     
     
     
     
    Pretax loss $199.8 $103.4 $(25.1)$(158.7)$119.4
      
     
     
     
     


    Selected Balance Sheet Data


     

    OneBeacon


     

    White
    Mountains Re


     

    Esurance


     

    Other
    Operations


     

    Total

     
     Millions

    December 31, 2004               
    Total investments $5,391.6 $4,292.2 $111.9 $733.8 $10,529.5
    Reinsurance recoverable on paid and unpaid losses  2,757.2  1,388.7  .2  (256.7) 3,889.4
    Total assets  9,979.6  8,152.5  241.7  641.9  19,015.1
    Loss and LAE reserves  5,475.5  4,170.3  63.0  (310.3) 9,398.5
    Total liabilities  7,686.8  6,471.1  132.7  840.6  15,131.2
    Total equity  2,292.2  1,681.4  109.0(1) (198.7) 3,883.9
      
     
     
     
     
    December 31, 2003               
    Total investments $5,552.3 $1,951.1 $80.9 $963.2 $8,547.5
    Reinsurance recoverable on paid and unpaid losses  3,048.6  791.5    (244.6) 3,595.5
    Total assets  11,286.0  3,644.1  195.7  756.2  15,882.0
    Loss and LAE reserves  6,241.2  1,777.2  39.1  (329.3) 7,728.2
    Total liabilities  9,064.5  2,611.9  102.7  1,123.7  12,902.8
    Total equity  2,221.5  1,032.2  93.0  (367.5) 2,979.2
      
     
     
     
     

    (1)
    Esurance equity includes approximately $44 million of inception to date losses. Total GAAP capital committed from White Mountains to Esurance is approximately $153 million.

            The following table provides further information ontables provide net written premiums and earned insurance premiums for OneBeacon's four underwriting sub-segments consistingongoing businesses and in total for the years ended December 31, 2004, 2003, and 2002:

    Twelve Months Ended December 31, 2004

     Specialty
     Personal
     Commercial
     Total(1)
     
     Dollars in millions

    Net written premiums $848.5 $724.7 $807.1 $2,459.1
    Earned insurance premiums $812.0 $723.8 $703.3 $2,378.5
      
     
     
     
    Twelve Months Ended December 31, 2003            
    Net written premiums $733.7 $676.8 $426.7 $1,972.5
    Earned insurance premiums $694.9 $744.7 $432.0 $2,160.3
      
     
     
     
    Twelve Months Ended December 31, 2002            
    Net written premiums $696.6 $845.2 $454.6 $2,522.8
    Earned insurance premiums $564.3 $871.3 $527.4 $2,870.9
      
     
     
     

    (1)
    Includes results from reciprocals (consolidated beginning April 1, 2004) and run-off operations. Results from reciprocals are net of itsbusiness assumed by OneBeacon, which is contained in Personal Commercial, Specialty and Non-core insurance products:

     
     Twelve Months Ended December 31, 2002
     
     
     OneBeacon
     
     
     Personal
     Commercial
     Specialty
     Total Core
     Non-core
     Total
     
     
     (Millions)

     
    Net written premiums $1,092.1 $454.6 $284.1 $1,830.8 $692.0 $2,522.8 
      
     
     
     
     
     
     
    Earned insurance premiums $1,015.5 $527.4 $253.4 $1,796.3 $1,074.6 $2,870.9 
    Loss and LAE  (714.3) (351.9) (143.3) (1,209.5) (921.8) (2,131.3)
    Insurance acquisition expenses  (160.4) (75.2) (67.6) (303.2) (325.9) (629.1)
    Other underwriting expenses  (103.5) (72.2) (28.2) (203.9) (120.0) (323.9)
      
     
     
     
     
     
     
    Net pre-tax underwriting gain (loss) $37.3 $28.1 $14.3 $79.7 $(293.1)$(213.4)
      
     
     
     
     
     
     
     
     Seven Months Ended December 31, 2001
     
     
     OneBeacon
     
     
     Personal
     Commercial
     Specialty
     Total Core
     Non-core
     Total
     
     
     (Millions)

     
    Net written premiums $513.2 $358.0 $139.8 $1,011.0 $867.2 $1,878.2 
      
     
     
     
     
     
     
    Earned insurance premiums $521.5 $427.5 $127.0 $1,076.0 $1,132.2 $2,208.2 
    Loss and LAE  (444.7) (449.6) (79.9) (974.2) (1,099.6) (2,073.8)
    Insurance acquisition expenses  (87.5) (77.8) (26.3) (191.6) (211.6) (403.2)
    Other underwriting expenses  (53.1) (100.6) (16.0) (169.7) (238.8) (408.5)
      
     
     
     
     
     
     
    Net pre-tax underwriting gain (loss) $(63.8)$(200.5)$4.8 $(259.5)$(417.8)$(677.3)
      
     
     
     
     
     
     
    Lines.

    Note
    NOTE 14. Investments in Unconsolidated Insurance Affiliates

            White Mountains' investments in unconsolidated insurance affiliates represent operating investments in other insurers in which White Mountains has a significant voting and economic interest but does not own more than 50.0% of the entity. White Mountains' voting percentages and directorships in its unconsolidated affiliates do not provide White Mountains the ability to exercise significant influence over the operating and financial policies of its investees.investees.



    Investment in Symetra

            On August 2, 2004, White Mountains invested $194.7 million in Symetra in exchange for 2.0 million common shares and 1.1 million warrants to purchase additional common shares of Symetra (See Note 2). As of December 31, 2004, White Mountains owned 19% of the total of Symetra's common shares outstanding and 24% of Symetra's common shares on a fully-diluted basis. White Mountains accounts for its investment in Symetra's common shares using the equity method, while it accounts for its investment in Symetra' warrants as a derivative instrument, recognizing changes in the fair value of the warrants through the income statement as a realized gain or loss.

            The following table provides summary financial amounts recorded by White Mountains relating to its investment in Symetra:

     
     Common
    Shares

     Warrants
     Total
     
     Millions

    Initial value of investment in Symetra at closing, August 2, 2004 $159.3 $35.4 $194.7
    Extraordinary gain—excess of fair value of acquired net assets over cost  40.7    40.7
    Equity in earnings of Symetra(1)  10.2    10.2
    Equity in net unrealized gains from Symetra's equity portfolio  .9    .9
    Increase in value of warrants    1.9  1.9
    Equity in net unrealized gains from Symetra's fixed maturity portfolio  56.6    56.6
      
     
     
    Carrying value of investment in Symetra as of December 31, 2004 $267.7 $37.3 $305.0
      
     
     

    (1)
    Equity in earnings is net of tax of $0.

            The following table summarizes financial information for Symetra for the approximately five-month period ended December 31, 2004:

     
     Period ended
    December 31, 2004

     
     $ in millions

    Symetra balance sheet data:   
    Total cash and investments $19,430.0
    Separate account assets  1,228.4
    Total assets  22,130.1
    Funds held under deposit contracts  17,541.0
    Long-term debt  300.0
    Separate account liabilities  1,228.4
    Total liabilities  20,704.7
    Common shareholders' equity  1,425.4
    Symetra income statement data:   
    Net premiums earned $263.2
    Net investment income  410.9
    Policy benefits  485.3
    Net income  54.3
    Comprehensive net income  360.5
      

    Investment in MSA

            At December 31, 2004, 2003 and 2002, White Mountains owned 222,093 shares of the common stock of MSA. This represented 50% of the total shares of MSA common stock outstanding at those times. White Mountains' investment in MSA is accounted for using the equity method. The following



    table provides summary financial amounts recorded by White Mountains relating to its investment in MSA common stock:

     
     2004
     2003
     2002
     
     
     $ in millions

     
    Amounts recorded by White Mountains:          
    Investment in MSA common stock $161.6 $142.8 $128.1 
    Equity in earnings (losses) from MSA common stock(1)(2)  16.4  12.3  (5.9)
    Equity in net unrealized investment gains from MSA's investment portfolio(3)  1.3  1.5  3.5 
      
     
     
     

    (1)
    2002 recorded net of related amortization of goodwill.

    (2)
    Equity in earnings amounts are net of taxes of $1.2 million, $.9 million and $(3.2) million for the years ended 2004, 2003 and 2002, respectively.

    (3)
    Recorded directly to shareholders' equity (after-tax) as a component of other comprehensive income.

            The following table summarizes financial information for MSA for the years ended December 31, 2004, 2003 and 2002:

     
     Period ended December 31,
     
     
     2004
     2003
     2002
     
     
     $ in millions

     
    MSA balance sheet data:          
    Total cash and investments $677.6 $589.7 $510.7 
    Premiums receivable  116.5  109.3  93.1 
    Total assets  978.1  875.1  759.5 
    Unearned premium  288.3  264.7  223.9 
    Loss and lae reserves  325.6  281.3  253.5 
    Total liabilities  654.8  584.7  505.7 
    Common shareholders' equity  323.3  290.4  253.8 
    MSA income statement data:          
    Net premiums written $454.5 $427.6 $357.3 
    Net premiums earned  435.6  396.0  334.1 
    Net investment income  26.4  23.3  22.9 
    Loss and lae  298.8  263.8  241.9 
    Net income  29.6  29.3  (13.2)
    Comprehensive net income  32.1  36.6  (8.5)
      
     
     
     

            At December 31, 2004 and 2003, White Mountains' consolidated retained earnings included $51.0 million, $33.4 million and $20.2 million, respectively, of accumulated undistributed earnings of MSA. No dividends were declared or paid by MSA during 2004, 2003 and 2002.

    Investment in Montpelier

            In December 2001, White Mountains, the Benfield Group plc and several other private investors established Montpelier and its wholly owned subsidiary Montpelier Re. Montpelier Re was formed with approximately $1.0 billion in capital to respond to the then current favorable underwriting and pricing environment in the reinsurance industry. Montpelier has initially focused on property reinsurance business. Montpelier Re is rated "A-" (Excellent) by A.M. Best. AtAs of December 31, 2002 and 2001, as adjusted for stock splits,2004, White Mountains' investment in Montpelier consisted of 10,800,0006.3 million common shares and warrants to acquire 4,781,5727.2 million common shares at $16.67 per share that are exercisable until December 6, 2011. On October 9, 2002, Montpelier completed an IPO whereby it sold 10,952,600 of its common shares for total proceeds of $201.2 million. White Mountains did not acquire or sell any shares through the IPO.

    F-53



    Through its holdings of common shares and warrants, White Mountains owns approximately 17% of the outstanding common shares of Montpelier and accounts for this investment using the equity method. White Mountains' ownership in Montpelier when considering its warrants is approximately 21% on a fully-converted basis.

            During the first quarter of 2004, White Mountains sold a portion of its investment in Montpelier common shares to third parties. As a result of this sale, as well as changes to the composition of the



    Board of Directors of both Montpelier and White Mountains, White Mountains changed the method of accounting for its remaining common share investment in Montpelier as of March 31, 2004 from an equity method investment in an unconsolidated affiliate to a common equity security classified as available for sale and carried at fair value. White Mountains accounts for its warrants in Montpelier as derivative instruments and recognizes changes in the fair value of the warrants during a given period in its income statement as a realized gain or loss. The fair value(See Note 5 for details of the warrants to acquire Montpelier common stock was immaterial at December 31, 2001, as the book value of Montpelier at that time was less than the Company's exercise price. No dividends were declared or paid by Montpelier during 2002 or 2001.

            The following table summarizes financial information for Montpelier for the year ended December 31, 2002 and for the approximately one-month period ended December 31, 2001:

     
     Period ended December 31,
     
     
     2002
     2001
     
     
     (Millions)

     
    Montpelier balance sheet data:       
    Total cash and investments $1,581.5 $991.0 
    Premiums receivable  147.2  .1 
    Total assets  1,833.9  1,021.8 
    Unearned premium  241.0  .2 
    Long-term debt  150.0  150.0 
    Loss and LAE reserve  146.1   
    Total liabilities  581.4  161.1 
    Common shareholders' equity  1,252.5  860.7 

    Montpelier income statement data:

     

     

     

     

     

     

     
    Net premiums written $565.9 $.2 
    Net premiums earned  329.9  .2 
    Net investment income  41.4  1.1 
    Loss and LAE  150.0   
    Net income  152.0  (61.6)
    Comprehensive net income (loss)  185.7  (59.7)
      
     
     
    Amounts recorded by White Mountains:       
    Investment in Montpelier common shares and warrants $271.8 $177.4 
      
     
     
    Realized investment gains on Montpelier Warrants $58.0 $ 
    After-tax equity in earnings from Montpelier common shares  19.9  (2.0)
    Equity in net unrealized investment gains (losses) from       
     Montpelier's investment portfolio(a)   3.7  .3 
      
     
     
    Comprehensive net income from Montpelier $81.6 $(1.7)
      
     
     

    (a)
    Recorded directly to shareholders' equity (after-tax) with related changes in net unrealized investment gains and losses (after-tax) reported as a component of comprehensive net income.

    F-54


    Investment in MSA

            At December 31, 2002, 2001 and 2000, White Mountains owned 222,093 shares of the common stock of MSA. This represented 50.0% of the total shares of MSA common stock outstanding at those times. White Mountains' investment in MSAMontpelier as of December 31, 2004).

            White Mountains' equity in earnings of Montpelier was $10.8 million, $45.1 million and $19.9 million (net of tax of $6.1 million, $24.4 million and $10.7 million) for the years ended 2004, 2003 and 2002, respectively.


    Note 15. Variable Interest Entities

    New Jersey Skylands

            As part of a restructuring of its New Jersey personal lines, OneBeacon formed New Jersey Skylands Management LLC and the New Jersey Insurance Department approved the formation of New Jersey Skylands Insurance Association and its wholly owned subsidiary New Jersey Skylands Insurance Company (together, the "Association") during the third quarter of 2002. New Jersey Skylands Insurance Association (the "NJ Skylands Reciprocal"), is accounteda not-for-profit, policyholder-owned reciprocal insurance carrier. A reciprocal is an unincorporated association with each insured sharing risk with the others in the association. Thus, each participant in this pool is both an insurer and an insured. Policyholders share profits and losses in the same proportion as the amount of insurance purchased by that member. However, policyholders in the reciprocal are not subject to assessment for usinglosses of the equity method.reciprocal.

            An attorney-in-fact administers the reciprocal. Such administration entails paying losses, investing premium inflow, recruiting new members, underwriting new and renewal business, receiving premiums and exchanging reinsurance contracts. New Jersey Skylands Management LLC is the attorney-in-fact for all the business affairs of the NJ Skylands Reciprocal. Accordingly, New Jersey Skylands Insurance Company, the stock insurance company, has a management agreement with New Jersey Skylands Management LLC to manage its business affairs.

            The following table provides summary financial amounts recordedNJ Skylands Reciprocal was capitalized by OneBeacon with a $31.3 million surplus note. Principal and interest on the surplus note are repayable only with regulatory approval. As defined in the surplus note agreement, the NJ Skylands Reciprocal's obligation to pay principal under the surplus note agreement is subordinated to all liabilities and obligations to policyholders, to claimants for benefits under contracts of insurance it issued, to all other classes of creditors other than surplus note holders, and to the State of New Jersey and any governmental or quasi-governmental entity. The Association began writing personal automobile coverage for new customers in August 2002.

            OneBeacon has no ownership interest in the Association. As a result of its adoption of FIN 46, White Mountains' future economic income derived from the New Jersey automobile insurance market will differ from the operating results that it will record on a consolidated GAAP basis. On an economic basis, OneBeacon will realize income from management and service fees charged by New Jersey Skylands Management LLC to the Association and interest on the surplus note. On a consolidated GAAP basis, White Mountains relating to its investmentwill recognize profits from the insurance operations of the Association until such time that the Association's equity is greater than zero or until the accumulated losses in MSA common stock:

     
     2002
     2001
     2000
     
     (Millions)

    Amounts recorded by White Mountains:         
    Investment in MSA common stock(a)  $128.1 $133.7 $130.6
    Equity in earnings (losses) from MSA common stock(b)   (5.9) 2.4  1.0
    Equity in net unrealized investment gains (losses) from         
     MSA's investment portfolio(c)   2.3  .9  6.2
      
     
     

    (a)
    Includes related goodwillthe Association exceed OneBeacon's initial surplus note investment. White Mountains has determined that the Association qualifies as a VIE under the provisions of $2.5FIN 46. Upon adoption of FIN 46 on March 31, 2004, White Mountains consolidated the Association, which had total assets and total liabilities with a carrying value of $138.5 million and $3.7$111.6 million, at December 31, 2001 and 2000, respectively.

    (b)
    2001 and 2000 recorded net of related amortization of goodwill.

    (c)
    Recorded directly to shareholders' equity (after-tax) as a component of other comprehensive income.

            At December 31, 2002 and 2001, White Mountains' consolidated retained earnings included $23.0 The resulting $26.9 million and $28.9 million, respectively, of accumulated undistributed earnings of MSA (net of related amortization of goodwill). No dividends were declared or paid by MSA during 2002, 2001 and 2000.

    Investment in Financial Security Assurance Holdings Ltd. ("FSA")

            During 2000, White Mountains concludeddifference between the Dexia Sale, which included all its holdings of FSA at that time, for proceeds of $620.4 million and recognized a pretax gain of $391.2 million. Prior to the Dexia Sale, White Mountains owned 6,943,316 shares of FSA common stock , which represented approximately 21.2%carrying values of the total sharesassets and liabilities of FSA Common Stock outstandingthe Association was equal to the March 31, 2004 carrying value of the surplus note investment at that time. White Mountains' accounted for its investment in FSA common stock usingOneBeacon. Therefore, the equity method and recorded a $3.0 million lossadoption of FIN 46 did not have an effect on the equity in FSA's losses and received $1.4 million in dividends from FSA during 2000, priorCompany's financial condition. The Company's exposure to the Dexia Sale.New Jersey auto market remains limited to the surplus notes invested in the reciprocal.


    F-55
    Prospector Offshore Fund



            White Mountains has determined that one of its ownership interests in a limited partnership, Prospector Offshore Fund, Ltd. ("the Fund"), qualifies as a VIE under the provisions of FIN 46. The Company's economic exposure to the Fund is equal to $51.1 million, which represents the Company's 49.3% ownership in the Fund's total equity. Any creditor of the Fund would not have recourse against the Company beyond the Company's investment.


    Note 15.NOTE 16. Fair Value of Financial Instruments

            SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information of financial instruments. For certain financial instruments where quoted market prices are not available, other independent valuation techniques and assumptions are used. Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. SFAS No. 107 excludes certain financial instruments from disclosure, including insurance contracts, other than financial guarantees and investment contracts. White Mountains carries its financial instruments on its balance sheet at fair value with the exception of its fixed-rate, long-term indebtedness. As of

            At December 31, 20022004 and 2001,2003, the fair value of White Mountains had fixed- rateMountains' Senior Notes (its only fixed-rate, long-term indebtedness withindebtedness) was $714.0 million and $710.6 million respectively, which compared to a carrying value of $5.1$698.3 million and $698.1 million, respectively.

            At December 31, 2004, the fair values of the Berkshire and Zenith Preferred Stock were $340.5 million and $22.7 million, respectively, which approximates itscompared to carrying values of $191.9 million and $20.0 million, respectively.

            The fair values of these obligations were estimated by discounting future cash flows using current market rates for similar obligations or using quoted market prices. Considerable judgment is required to develop such estimates of fair value. Therefore, the estimate provided herein is not necessarily indicative of the amounts that could be realized in a current market exchange.

    Note 16.
    NOTE 17. Related Party TransactionsDisclosures

    Berkshire

            Berkshire owned approximately 16% of the Common Shares of White Mountains as of December 31, 2004. Berkshire acquired the Common Shares through its June 2004 exercise of warrants to purchase 1,724,200 Common Shares for $294 million. Berkshire bought the warrants in connection with the financing of White Mountains' acquisition of OneBeacon in 2001. The warrants were exercisable at any time until May 2008 and callable by the Company on or after May 31, 2005. Berkshire and the Company agreed to reduce the exercise price by approximately 2% ($6 million) to induce Berkshire's early exercise of the warrants.

            In November 2004, White Mountains completed a significant corporate reorganization that made the legal organization of White Mountains' subsidiaries consistent with its main operating businesses. In order to effect the reorganization, White Mountains and Fund American entered into or amended certain agreements with respect to the Series A Preferred Stock of Fund American (the "Series A Preferred Stock"), which is owned by subsidiaries of Berkshire. Under the terms of a Keep-Well Agreement dated November 30, 2004 between White Mountains and Fund American (the "Keep-Well"), White Mountains has agreed to return to Fund American up to approximately $1.1 billion, which equals the amount of net assets transferred out of Fund American as a result of the reorganization, if some or all of that amount is required by Fund American to meet its obligations to Berkshire under the Series A Preferred Stock. Additionally, the Keep-Well limits the aggregate amount of distributions that White Mountains may make to its shareholders to approximately $1.3 billion plus



    White Mountains' aggregate consolidated net income after September 30, 2004. The Keep-Well will expire when all obligations of the Series A Preferred Stock, which is redeemable in May 2008, have been satisfied, or when approximately $1.1 billion has been returned to Fund American.

            NICO and GRC, which have provided the NICO Cover and the GRC Cover to subsidiaries of White Mountains, are wholly-owned subsidiaries of Berkshire (see "Reinsurance Protection" within the "ONEBEACON" section of Item 1 of this report)Note 4). Through the Warrants, at December 31, 2002, Berkshire has the right to acquire 1,724,200 Common Shares at an exercise price of $173.99 per Common Share, which represented approximately 16.1% of the total outstanding Common Shares on a fully-converted basis. Reinsurance recoverable from, and preferred stock of White Mountains' subsidiaries owned by, Berkshire are shown as separate line items in White Mountains' consolidated balance sheet. In addition, in the ordinary course of its business, White Mountains has, and in the future may, enter into other insurance and reinsurance transactions with Berkshire on arm's length terms and conditions.

            White Mountains and Berkshire co-led the investor group that acquired Symetra for $1.35 billion on August 2, 2004. See "Symetra" below.


    Olympus

            In January 2002, Folksamerica and Sirius have entered into a quota share retrocessional arrangementarrangements with Olympus. Under the quota share treaty,these arrangements with Olympus, Folksamerica cedesceded up to 75% of substantially all of its short-tailed excess of loss business, mainly property and marine, and 50% of its proportional property business to Olympus and received an override commission on the premiums ceded to Olympus. Effective April 1, 2004, Sirius International entered into a quota share reinsurance agreement with Olympus. Under this agreement, Sirius International ceded 25% of its new and renewal short-tailed proportional and excess of loss business to Olympus. During 2004, 2003 and 2002, FolksamericaWhite Mountains ceded approximately$465.6 million, $449.1 million and $229.7 million, respectively, in written premiums and approximately$269.5 million, $107.0 million and $54.4 million, respectively, in losses and LAE to Olympus.

    White Mountains through either Folksamerica or WMU, receives fee income on reinsurance placements referred to Olympus and is entitled to additional fees based on net underwriting profits on referred business. During 2004, 2003 and 2002, White Mountains earned $68.7 million, $98.4 million and $48.9 million of fee income from management and service fee revenues on business referred to Olympus.

            In June 2002, OneBeacon supplemented its existing catastrophe reinsurance protection through a new contract with Folksamerica which was subsequently reinsured to Olympus through the 75% quota share retrocessional arrangement. Pursuant to the terms of this arrangement, Folksamerica and Olympus are responsible for 25% and 75%, respectively, of the first $25 million of any losses in excess of $100 million incurred by OneBeacon related to a catastrophic event. Under this arrangement, Olympus has received $2.6 million in premiums. All balances related to the Folksamerica portion of the reinsurance cover have been eliminated in consolidation.

            Certain directors, officers and affiliates of White Mountains does not own approximately 5% of theor control any common shares of Olympus Holdings. Mr.

            Joseph S. Steinberg, a director of the Company, is Chairman of Olympus Holdings (the parent company of Olympus) and is President of Leucadia. Leucadia owns approximately 19% of the common shares of Olympus Holdings. Investment funds managed by Franklin Mutual Advisors LLC ("Franklin Mutual"), which own approximately 19% of the common shares of White Mountains, does not have an ownership stake inown approximately 13% of Olympus Holdings. Bruce Berkowitz, a director of the Company, is Founder and Managing Member of Fairholme Capital Management, L.L.C., a registered investment adviser. Through Fairholme Capital Management, Mr. Berkowitz controls approximately 11% of the common shares of Olympus Holdings. John Gillespie, a director and executive officer of the Company, through investment management arrangements including Prospector, controls approximately .1% of the common shares of Olympus Holdings. In addition, other directors and executive officers of White Mountains (consisting of Jack Byrne, John Cavoores, Steven Fass and Arthur Zankel) own approximately 3% of the common shares of Olympus Holdings.

    F-56



    MontpelierSymetra

            In December 2001, White Mountains invested $180.0 million in Montpelier, which was formed to respond to the favorable underwriting and pricing environment in the reinsurance industry with approximately $1.0 billion of capital.        As of December 31, 2002, as adjusted for stock splits, White Mountains' investment in Montpelier consisted of 10,800,000 common shares and warrants to acquire 4,781,572 common shares at $16.67 per share that are exercisable until December 6, 2011. Through2004, through its holdings of common shares and warrants, White Mountains ownsowned approximately 21%24% of MontpelierSymetra on a fully-converted basis, as adjusted forbasis. Berkshire, who co-led the IPO.

            Fourinvestor group that acquired Symetra, also owns approximately 24% of Symetra on a fully-converted basis. White Mountains' directors serve on Montpelier's elevenMountains is entitled to appoint three persons to Symetra's eight member board of directors.directors (currently Jack Byrne, John J. Byrne, Chairman of the Company, serves as Montpelier's non-executive Chairman, and Raymond Barrette, John D. Gillespie and K. Thomas Kemp serve as Directors of Montpelier.David Foy). In addition, Mr. Kemp isFoy serves as Chairman of Symetra.

            In connection with the Chief Financial Officeracquisition of Montpelier. Certain directors, officers and affiliates ofSymetra, the following entities were among the investors in the investor group that was co-led by White Mountains and Berkshire Hathaway. Investment funds



    managed by Franklin Mutual own approximately 10% of common shares of Symetra on a fully converted basis. Bruce Berkowitz, through Fairholme Capital Management controls approximately 2% of the common shares of Symetra on a fully converted basis. John Gillespie, through investment management arrangements including Prospector, controls approximately 3% of the common shares of Montpelier.Symetra on a fully converted basis.


    Other relationships

            Mr.        Howard Clark, a Directordirector of the Company, is Vice Chairman of Lehman. Lehman has, from time to time, provided various services to White Mountains including investment banking services, brokerage services, underwriting of debt and equity securities and financial consulting services. Lehman iswas the lead underwriter of Fund American's $700.0 million Senior Notes. Lehman was also the arranger, the administrative agent and a lender under the $875.0 millionOld Bank Facility. In addition, Fund American paid Lehman approximately $1.5 million in fees related to the October 2002 refinancing of theFacility and is a lender under White Mountains' current Bank Facility. See Note 6.

            Mr. George Gillespie, a Directordirector and Chairman of the Company, is a Partner at Cravath, Swaine & Moore LLP ("CS&M"), which has been retained by White Mountains from time to time to perform legal services.

            PursuantJohn Gillespie, pursuant to anhis employment agreement entered into with White Mountains, Mr. John Gillespie, a Director and Deputy Chairman of the Company and Presidentas of WM Advisors,January 1, 2001, may continue his active involvement with Prospector so long as Mr. Gillespiehe devotes the requisite time required to fulfill his responsibilities to WM Advisors. The agreement specifies procedures pursuant to which Prospector's funds have the ability to invest first in opportunities generated by Mr. Gillespie that are appropriate for both White Mountains and such funds. PursuantIn addition, pursuant to a revenue sharing agreements,agreement established in connection with his employment by the Company, Mr. Gillespie has agreed to pay White Mountains a portion33% of thecertain revenues and distributions allocable to him in connection withof Prospector in return for White Mountains agreeing to pay theits operational expenses. For 2004, White Mountains' received total revenues of approximately $4.2 million and paid total expenses of hisapproximately $2.8 million under the revenue sharing agreement. Pursuant to another revenue sharing agreement with Prospector, Mr. Gillespie has agreed to pay White Mountains 6% of the revenues in excess of $500,000 of certain of Prospector's funds in return for White Mountains having made a founding investment management companies.in Prospector in 1997. For 2004, White Mountains' received a payment of approximately $.8 million under the second revenue sharing agreement. Mr. Gillespie's share of Prospector's revenues for 2004 was approximately $4.2 million. Mr. Gillespie's employment contract and the revenue sharing arrangements are filed as exhibits to this Form 10-K.

            At December 31, 2002,2004, White Mountains had $64.9approximately $115.9 million invested in funds managed by Prospector. In addition, Messrs. Byrne, George Gillespie and John Gillespie owned investments in funds managed by Prospector as of such date.

            In September 2001, White Mountains Advisors entered into a five-year lease at a market-based rate for a building partially owned by Mr. John Gillespie and trusts for the Gillespie Trusts.benefit of members of his family (the "Gillespie Trusts"). For 2002,2004, the rental payments attributable to Mr.John Gillespie's ownership in the building totalled approximately $13,000$16,000 and the rental payments attributable to the Gillespie Trusts' ownership in the building totalled approximately $104,000.$127,000.

            Mr.        John Gillespie indirectly through general and limited partnership interests holds a 44% interest in Dowling & Partners Connecticut Fund III.III, LP ("Fund III"). OBPP and FSUIFolksamerica Specialty Underwriting, Inc. ("FSUI") have borrowed approximately $8 million and $7 million, respectively, from Fund III in connection with an incentive program sponsored by the Act. The loans mature in April 2007 and bear interest atState of Connecticut known as the option of OBPP and FSUI at either (1) the greater of (a) the prime rate minus 1% and (b) the federal funds rate minus 0.50% or (2) the eurodollar rate plus 0.325%Connecticut Insurance Reinvestment Act (the "CIR Act"). The CIR Act provides for Connecticut income tax credits to be granted for qualifying investments made by approved fund managers. The loans made by Fund III to OBPP and FSUI are qualifying investments and, together,

    F-57



    have the potential to generate up to $15 million of tax credits that would be shared equally between Fund III on the one



    hand and OBPP and FSUI on the other. As a result of his interest in Fund III, Mr.John Gillespie could realize up to $3.3 million from the tax credits, although any such amount would be subject to the revenue sharing agreements with White Mountains described above.

            Mr.Arthur Zankel, a director of the Company, is Senior Managing Member of the General Partner of High Rise Capital Advisors LLC, which is the General Partner of High Rise Partners II, L.P. and Cedar Bridge Realty Fund, L.P. At December 31, 2002,2004, White Mountains had $8.8 million in limited partnership investment interests in High Rise Partners, L.P. and White Mountains owned $36.6a total of approximately $80.8 million in investments that arewere managed by High Rise Capital Advisors LLC.these entities.

            WM Advisors provides investment advisory and management servicesIn connection with acquisitions or other transactions led or sponsored by the Company in which it obtains equity financing, entities affiliated with directors from time to Montpelier Re and Olympus. Montpelier Re and Olympus pay investment management fees based on month-end market values of investments held under custody to WM Advisors. The fees, which vary dependingtime may participate in such financings on the amount of assets under management, are between 0.15% and 0.30%. This agreement may be terminated by either party upon 30 days written notice. At December 31, 2002, WM Advisors had $1.4 billion and $653.9 million of assets under management from

            Montpelier Re and Olympus, respectively. During 2002, WM Advisors had received $2.1 million and $1.1 millionsame terms as unaffililated third parties that participate in fees from Montpelier Re and Olympus, respectively.such financings.

    Note 17.
    NOTE 18. Commitments and Contingencies

            White Mountains leases certain office space under noncancellable operating leases expiring at various dates through 2010. Rental expense for all of White Mountains' locations was approximately $25.0$46.5 million, $22.3$42.9 million and $2.1$45.9 million for the years ended December 31, 2002, 20012004, 2003 and 2000,2002, respectively. White Mountains also has various other lease obligations which are immaterial in the aggregate.

            White Mountains' future annual minimum rental payments required under noncancellable leases for office space are $35.6$41.8 million, $29.0$37.7 million, $26.7$34.1 million, $25.5$26.3 million and $46.1$28.6 million for 2003, 2004, 2005, 2006, 2007, 2008 and 20072009 and thereafter, respectively.

    Assigned Risks

            As a condition of its license to do business in certain states, White Mountains' insurance operations are required to participate in mandatory shared market mechanisms. Each state dictates the types of insurance and the level of coverage that must be provided. The total amount of such business an insurer is required to accept is based on its market share of voluntary business in the state. In certain cases, White Mountains is obligated to write business from mandatory shared market mechanisms at some time in the future based on the market share of voluntary policies it is currently writing. Underwriting results related to assigned risk plans are typically adverse and are not subject to the predictability associated with White Mountains' voluntarily written business.

            The NYAIP is a residual insurance market that obtains personal automobile insurance for those individuals who cannot otherwise obtain it in the voluntary insurance market. The NYAIP assigns such individuals to insurers to underwrite and service policies based on the proportion of the automobile insurance premiums each company voluntarily wrote in New York two years prior. The NYAIP allows insurers to either provide insurance coverage to these individuals or to transfer their NYAIP obligation to certain other insurance companies approved by the New York State Insurance Department. This latter process is referred to as a Limited Assigned Distribution ("LAD") and the companies that assume this obligation are referred to as "LAD servicing carriers". Companies who transfer their

    F-58



    NYAIP business pay a fee to LAD servicing carriers in addition to the policy premium. To mitigate some of its NYAIP exposure, OneBeacon entered the LAD servicing business in December 2001 through the formation of its wholly owned subsidiary, General Assurance Company, which does business under the trade name "AutoOne Insurance".

            Several of OneBeacon's insurance subsidiaries write voluntary automobile insurance in the state of New York. In doing so, they are obligated to accept NYAIP assignments during the next two years. At December 31, 2002 and 2001, White Mountains' liabilities for discharging its obligations associated with NYAIP assignments resulting from voluntary business written by OneBeacon in the preceding two-year periods were $103.0 million and $131.1 million, respectively. This estimate is based on projections of the total NYAIP assigned premiums over the next two years, OneBeacon's share of such assignments, fees charged by LAD servicing carriers to transfer NYAIP business and credits OneBeacon is able to generate for its own use as a result of being a LAD servicing carrier (i.e., AutoOne Insurance).

    Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. In accordance with SOP 97-3, White Mountains' insurance subsidiaries record guaranty fund assessments when such assessments are billed by the respective guaranty funds. In addition, each insurance subsidiary's policy is to accrue for any significant insolvencies when the loss is probable and the assessment amount can be reasonably estimated. The actual amount of such assessments will depend upon the final outcome of rehabilitation proceedings and will be paid over several years. At December 31, 2002,2004, the reserve for such assessments at White Mountains' insurance subsidiaries totalled $24.7$18.3 million.

    General Litigation

            White Mountains, and the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of its business. Other than those items listed below, White Mountains was not a party to any material litigation or arbitration other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on its financial condition and/or cash flows as of December 31, 2002.2004.

            On December 20, 2002, a jury in Federal District Court in Arkansas returned a verdict against OneBeacon in a case involving a claim by an insurance agent that its agency agreement had been improperly terminated in 1999. The award against OneBeacon consisted of $1.2 million in compensatory damages and $32.6 million in punitive damages. OneBeacon strongly believes there are meritorious grounds for setting aside the verdict and intends to vigorously pursue those matters with the District Court. If necessary, OneBeacon will appeal to the U.S. Court of Appeals for the Eighth Circuit.



            On May 15, 2002, The Robert Plan Corporation and several of its subsidiaries filed a lawsuit against the Company, certain of its subsidiaries and several individuals employed by such subsidiaries. The suit alleges that the defendants misappropriated confidential information of the plaintiffs and used such information to enter into the New York automobile assigned risk business in direct competition with the plaintiffs. The plaintiffs seek approximately $120$185 million in damages which they allege represents threetwo years of their lost profits in the subject business. The Company, its named subsidiaries and its named employees do not believe they engaged in any improper or actionable conduct. White Mountains and its subsidiaries have no reason to believe they have any liability to The Robert Plan Corporation and intend to vigorously defend the lawsuit. In addition, OneBeacon has brought a counterclaim against the plaintiffs that it believes to be meritorious. OneBeacon is seeking

    F-59


    compensatory damages of $8.8 million as a result of the breach by the plaintiffs of the LAD servicing contract that OneBeacon had entered into with them.

            In December 2001, American Centennial filed for arbitration against Gerling, a reinsurer of American Centennial, based on Gerling's failure to pay American Centennial amounts due under a reinsurance contract. At December 31, 2002, American CentennialGerling had recorded $22.6 million in recoverables from Gerling under this reinsurance contract, of which $10.2 million is currently due. Approximately $16.7 million of this obligation is collateralized. Gerling may owe American Centennial significantly greater amounts in the future should additional losses which are covered by the reinsurance contract emerge. Gerling has requested the arbitration panel to rescind the contract as of December 31, 2000 based upon, among other things, White Mountains' acquisition of American Centennial in 1999. White Mountains,A preliminary judgement was handed down in December 2003 in which the arbitrator ruled that Gerling had been harmed and they are entitled to a discount on certain amounts that it owes American Centennial and their counsel believe that Gerling's claims are meritless and intend to pursue collection of any and all amounts due under the contract. The impact of this discount is immaterial to White Mountains' financial results. A final judgement handed down in January 2004 confirmed that the reinsurance contract will remain in-force. At December 31, 2003, American Centennial had recorded $22.7 million in recoverables from Gerling under this reinsurance contract.contract, of which $9.8 million was for losses paid by American Centennial. Gerling has subsequently reimbursed American Centennial early in 2004 for the $9.8 million in paid recoverables. The remaining obligation on unpaid recoverables is fully collateralized.

            In August 2000, Aramarine, a former insurance broker of OneBeacon's, filed a lawsuit alleging that OneBeacon had wrongfully terminated its business relationship with Aramarine. The suit claimsoriginally claimed $410 million in compensatory damages for lost commissions. However, Aramarine has recently reduced its demand to $158 million. OneBeacon does not believe it has engaged in any actionable conduct, has filedconduct. During 2004, OneBeacon prevailed on a motion for summary judgment and intends to vigorously defenddismiss the lawsuit.plaintiff's claim. OneBeacon expects the plaintiff to appeal the summary judgment upon resolution of OneBeacon's counterclaim for return commission.

            In June 1999, White Mountains sold VGI to Unitrin. As part of the VGI Sale, White Mountains has provided Unitrin with adverse loss development protection of up to $50.0 million on loss reserves sold to Unitrin. During 2004, White Mountains paid Unitrin has made$47 million for a demandfull release of its obligation in this matter.


    NOTE 19. Consolidating Financial Information

            The Company will fully and unconditionally guarantee any debt securities, preference shares or trust preferred securities issued by Fund American pursuant to its December 2001 shelf registration statement, including Fund American's May 2003 issuance of the Senior Notes (see Note 6). The following tables present White Mountains' consolidating balance sheets as of December 31, 2004 and December 31, 2003 and statements of income and cash flows for the full $50.0 million.years then ended. These financial statements reflect the Company's financial position, results of operations and cash flows on a stand-alone basis, that of Fund American and of the Company's other entities, as well as the necessary adjustments to eliminate intercompany balances and transactions.


    F-60


    Consolidating Balance Sheet as of December 31, 2004

     The Company
     Other Entities
     Fund American
     Eliminations
     Total
     
     (Dollars in Millions)

    ASSETS               
    Fixed maturity investments, at fair value $246.8 $3,457.6 $4,195.6 $ $7,900.0
    Short-term investments, at amortized cost  16.2  632.9  409.1    1,058.2
    Common equity securities, at fair value    327.7  716.2    1,043.9
    Other investments    367.0  160.4    527.4
      
     
     
     
     
     Total investments  263.0  4,785.2  5,481.3    10,529.5
    Cash    195.8  47.3    243.1
    Reinsurance recoverable on paid and unpaid losses    1,388.9  2,500.5    3,889.4
    Funds held by ceding companies    943.8      943.8
    Securities lending collateral     308.4  284.9    593.3
    Accounts receivable on unsettled investment sales    0.2  19.7    19.9
    Insurance and reinsurance premiums receivable    392.0  550.2    942.2
    Investment in unconsolidated insurance affiliates  37.3  267.6  161.7    466.6
    Deferred tax asset    92.4  179.1    271.5
    Deferred acquisition costs    108.0  200.2    308.2
    Ceded unearned premiums    182.5  41.6    224.1
    Investment income accrued  1.6  41.3  59.5    102.4
    Investments in subsidiaries  3,665.1      (3,665.1) 
    Other assets  12.3  87.7  381.1    481.1
      
     
     
     
     
     Total assets $3,979.3 $8,793.8 $9,907.1 $(3,665.1)$19,015.1
      
     
     
     
     
    LIABILITIES AND COMMON SHAREHOLDERS' EQUITY               
    Loss and LAE reserves $ $4,277.8 $5,120.7 $ $9,398.5
    Reserves for structured contracts    375.9      375.9
    Unearned insurance and reinsurance premiums    672.6  1,066.8    1,739.4
    Securities lending liability    308.4  284.9    593.3
    Debt    57.0  726.3    783.3
    Deferred tax liability    316.3      316.3
    Ceded reinsurance payable    121.4  80.0    201.4
    Accounts payable on unsettled investment purchases    11.8  19.1    30.9
    Funds held under reinsurance treaties    149.3  6.1    155.4
    Other liabilities  95.4  409.8  819.7    1,324.9
    Preferred stock subject to mandatory redemption    19.9  192.0    211.9
      
     
     
     
     
     Total liabilities  95.4  6,720.2  8,315.6    15,131.2
      
     
     
     
     
    Common shareholders' equity  3,883.9  2,073.6  1,591.5  (3,665.1) 3,883.9
      
     
     
     
     
    Total liabilities and common shareholders' equity $3,979.3 $8,793.8 $9,907.1 $(3,665.1)$19,015.1
      
     
     
     
     

    Consolidating Balance Sheet as of December 31, 2003

     The Company
     Other Entities
     Fund American
     Eliminations
     Total
     
     (Dollars in Millions)

    ASSETS               
    Fixed maturity investments, at fair value $ $71.0 $6,177.1 $ $6,248.1
    Short-term investments, at amortized cost  11.1  682.2  854.6  (1.3) 1,546.6
    Common equity securities, at fair value      513.6    513.6
    Other investments    89.9  149.3    239.2
      
     
     
     
     
     Total investments  11.1  843.1  7,694.6  (1.3) 8,547.5
    Cash  .3  27.1  62.5    89.9
    Reinsurance recoverable on paid and unpaid losses    8.8  3,586.7    3,595.5
    Funds held by ceding companies    5.9  138.2    144.1
    Securities lending collateral      911.0    911.0
    Accounts receivable on unsettled investment sales      9.1    9.1
    Insurance and reinsurance premiums receivable    44.6  744.4  (10.0) 779.0
    Investment in unconsolidated insurance affiliates    90.5  425.4    515.9
    Deferred tax asset    (8.2) 361.6  (93.4) 260.0
    Deferred acquisition costs    3.6  230.0    233.6
    Ceded unearned premiums    .9  184.4    185.3
    Investment income accrued      73.0    73.0
    Investments in subsidiaries  3,021.0      (3,021.0) 
    Other assets  5.0  80.9  477.9  (25.7) 538.1
      
     
     
     
     
     Total assets $3,037.4 $1,097.2 $14,898.8 $(3,151.4)$15,882.0
      
     
     
     
     
    LIABILITIES AND COMMON SHAREHOLDERS' EQUITY               
    Loss and LAE reserves $ $75.9 $7,652.3 $ $7,728.2
    Unearned insurance and reinsurance premiums    23.3  1,386.1    1,409.4
    Securities lending liability      911.0    911.0
    Debt    12.9  730.1    743.0
    Deferred tax liability     .2  .2     .4
    Ceded reinsurance payable      158.3    158.3
    Accounts payable on unsettled investment purchases    302.0  69.6    371.6
    Funds held under reinsurance treaties      211.9    211.9
    Other liabilities  58.2  318.6  928.1  (130.4) 1,174.5
    Preferred stock subject to mandatory redemption    20.0  174.5    194.5
      
     
     
     
     
     Total liabilities  58.2  752.9  12,222.1  (130.4) 12,902.8
      
     
     
     
     
    Common shareholders' equity $2,979.2 $344.3 $2,676.7 $(3,021.0)$2,979.2
      
     
     
     
     
    Total liabilities common shareholders' equity $3,037.4 $1,097.2 $14,898.8 $(3,151.4)$15,882.0
      
     
     
     
     

    Consolidating Statement of Income for the Year Ended December 31, 2004

     The Company
     Other Entities
     Fund American
     Eliminations
     Total
     
     
     (Dollars in Millions)

     
    Earned insurance and reinsurance premiums $ $768.5 $3,052.0 $ $3,820.5 
    Net investment income  1.8  72.6  286.5    360.9 
    Net realized investment gains (losses)  1.9  40.9  138.3    181.1 
    Other revenue    (39.6) 230.1    190.5 
      
     
     
     
     
     
     Total revenues  3.7  842.4  3,706.9    4,553.0 
      
     
     
     
     
     
    Loss and LAE    494.1  2,097.0    2,591.1 
    Insurance and reinsurance acquisition expenses    135.4  608.1    743.5 
    Other underwriting expenses    55.2  466.1    521.3 
    General and administrative expenses  65.0  59.5  184.8    309.3 
    Accretion of fair value adjustment to loss and LAE reserves    10.1  33.2    43.3 
    Interest expense on debt  0.3  2.7  46.1    49.1 
    Interest expense on preferred shares    2.0  45.6    47.6 
      
     
     
     
     
     
     Total expenses  65.3  759.0  3,480.9    4,305.2 
      
     
     
     
     
     
    Pretax income (loss)  (61.6) 83.4  226.0    247.8 
    Income tax benefit (provision)  9.3  74.6  (130.9)   (47.0)
    Equity in earnings of subsidiaries  430.3      (430.3)  
    Equity in earnings of unconsolidated insurance affiliates    10.0  27.4    37.4 
    Excess of fair value of acquired net assets over cost  40.7  130.7  9.1    180.5 
      
     
     
     
     
     
    Net income $418.7 $298.7 $131.6 $(430.3)$418.7 
      
     
     
     
     
     

    Consolidating Statement of Income for the Year Ended December 31, 2003

     The Company
     Other Entities
     Fund American
     Eliminations
     Total
     
     
     (Dollars in millions)

     
    Earned insurance and reinsurance premiums $ $78.3 $3,059.4 $ $3,137.7 
    Net investment income  .2  4.9  285.8    290.9 
    Net realized investment gains (losses)  (1.1) 34.8  128.9    162.6 
    Other revenue (loss)  (.5) 80.6  153.2  (30.7) 202.6 
      
     
     
     
     
     
     Total revenues  (1.4) 198.6  3,627.3  (30.7) 3,793.8 
      
     
     
     
     
     
    Losses and LAE    53.3  2,084.8    2,138.1 
    Insurance and reinsurance acquisition expenses    16.9  618.0  (19.9) 615.0 
    Other underwriting expenses    3.2  343.9    347.1 
    General and administrative expenses  70.7  22.3  120.8  (12.0) 201.8 
    Accretion of fair value adjustment to loss and LAE reserves      48.6    48.6 
    Interest expense on debt    .3  48.3    48.6 
    Interest expense on preferred shares    1.0  21.3    22.3 
      
     
     
     
     
     
     Total expenses  70.7  97.0  3,285.7  (31.9) 3,421.5 
      
     
     
     
     
     
    Pretax income (loss)  (72.1) 101.6  341.6  1.2  372.3 
    Income tax benefit (provision)  (.1) .2  (126.5) (1.2) (127.6)
    Accretion and dividends on preferred stock of subsidiaries    (1.0) (20.5)   (21.5)
    Equity in earnings of subsidiaries  352.8      (352.8)  
    Equity in earnings of unconsolidated insurance affiliates      57.4    57.4 
    Cumulative effect of changes in accounting principles           
      
     
     
     
     
     
    Net income $280.6 $100.8 $252.0 $(352.8)$280.6 
      
     
     
     
     
     

    Consolidating Statement of Cash Flows
    for the Year Ended December 31, 2004

     The Company
     Other Entities
     Fund American
     Total
     
     
     (Dollars in Millions)

     
    Net income (loss), excluding undistributed equity in earnings of subsidiaries $(1.4)$288.5 $131.6 $418.7 
    Charges (credits) to reconcile net income to cash flows from operating activities:             
     Excess of fair value of acquired net assets over cost  (40.7) (130.7) (9.1) (180.5)
     Net realized investment gains  (1.9) (40.9) (138.3) (181.1)
     Undistributed equity in earnings from unconsolidated affiliates, net of tax    (10.0) (27.4) (37.4)
     Deferred income tax (benefit) provision    (181.8) 122.8  (59.0)
    Other operating items:             
     Net Federal income tax payments    (58.8) (27.7) (86.5)
     Net change in insurance and reinsurance balances receivable    199.9  (109.9) 90.0 
     Net change in reinsurance recoverable on paid and unpaid losses    121.6  179.2  300.8 
     Net change in deferred acquisition costs    9.8  (43.3) (33.5)
     Net change in loss and LAE reserves and reserves for structured contracts    (277.6) (529.1) (806.7)
     Net change in unearned insurance and reinsurance premiums    (177.0) 123.0  (54.0)
     Net change in other assets and liabilities, net  (7.8) 293.9  (213.6) 72.5 
      
     
     
     
     
    Net cash flows provided from (used for) operating activities  (51.8) 36.9  (541.8) (556.7)
      
     
     
     
     
    Cash flows from investing activities:             
    Net (increase) decrease in short-term investments  (5.1) 509.0  264.3  768.2 
    Sales of fixed maturity investments    921.9  4,983.2  5,905.1 
    Maturities of fixed maturity investments    560.0  1,001.7  1,561.7 
    Sales of common equity securities and other investments    268.9  288.4  557.3 
    Sales of consolidated and unconsolidated affiliates, net of cash sold    (32.6) 253.5  220.9 
    Purchases of fixed maturity investments  (242.1) (1,430.5) (5,484.7) (7,157.3)
    Purchases of common equity securities and other investments    (128.0) (250.8) (378.8)
    Purchases of consolidated and unconsolidated affiliates, net of cash acquired    (516.6) (143.2) (659.8)
    Net change in unsettled investment purchases and sales    (299.8) (37.4) (337.2)
    Net acquisitions of property and equipment    (1.1) (12.5) (13.6)
      
     
     
     
     
    Net cash flows provided from (used for) investing activities  (247.2) (148.8) 862.5  466.5 
      
     
     
     
     
    Cash flows from financing activities:             
    Proceeds from issuance of Common Shares  307.8      307.8 
    Proceeds from issuance of debt    (27.0) 27.0   
    Repayments of debt      (25.0) (25.0)
    Dividends paid on mandatorily redeemable preferred stock of subsidiaries    (2.0) (28.3) (30.3)
    Dividends paid on Common Shares  (9.1)     (9.1)
    Intercompany dividends and distributions    309.6  (309.6)  
      
     
     
     
     
    Net cash provided from (used for) financing activities  298.7  280.6  (335.9) 243.4 
      
     
     
     
     
    Net increase (decrease) in cash during period  (.3) 168.7  (15.2) 153.2 
    Cash balances at beginning of period  .3  27.1  62.5  89.9 
      
     
     
     
     
    Cash balances at end of period $ $195.8 $47.3 $243.1 
      
     
     
     
     

    Consolidating Statement of Cash Flows
    for the Year Ended December 31, 2003

     The Company
     Other Entities
     Fund American
     Total
     
     
     (Dollars in Millions)

     
    Net income (loss), excluding equity in earnings of subsidiaries $(72.2)$100.8 $252.0 $280.6 
    Charges (credits) to reconcile net income to cash flows from operating activities:             
     Net realized investment (gains) losses  1.1  (34.8) (128.9) (162.6)
     Undistributed equity in earnings from unconsolidated affiliates, net of tax      (57.4) (57.4)
     Deferred income tax provision (benefit)    47.2  57.8  105.0 
    Other operating items:             
     Net Federal income tax receipts (payments)  32.0  (4.6)   27.4 
     Net change in insurance and reinsurance balances receivable    (6.0) 57.5  51.5 
     Net change in reinsurance recoverable on paid and unpaid losses    (3.6) 639.8  636.2 
     Net change in deferred acquisition costs  (.3) (.4) 12.0  11.3 
     Net change in loss and LAE reserves and reserves for structured contracts    14.5  (1,161.6) (1,147.1)
     Net change in unearned insurance and reinsurance premiums    6.0  (111.0) (105.0)
     Net change in other assets and liabilities, net  43.0  (61.5) (129.9) (148.4)
      
     
     
     
     
    Net cash flows (used for) provided from operating activities  3.6  57.6  (569.7) (508.5)
      
     
     
     
     
    Cash flows from investing activities:             
    Net decrease (increase) in short-term investments  4.5  (460.9) 700.4  244.0 
    Sales of fixed maturity investments    69.6  17,220.9  17,290.5 
    Maturities of fixed maturity investments      1,372.0  1,372.0 
    Sales of common equity securities and other investments      160.1  160.1 
    Sales of consolidated and unconsolidated affiliates, net of cash sold      25.0  25.0 
    Purchases of fixed maturity investments    (93.1) (18,155.1) (18,248.2)
    Purchases of common equity securities and other investments  (.2)   (354.2) (354.4)
    Net change in unsettled investment purchases and sales    302.0  (273.9) 28.1 
    Net dispositions (acquisitions) of property and equipment    (.1) 43.5  43.4 
      
     
     
     
     
    Net cash flows provided from (used for) investing activities  4.3  (182.5) 738.7  560.5 
      
     
     
     
     
    Cash flows from financing activities:             
    Proceeds from issuance of Common Shares  1.5      1.5 
    Proceeds from issuance of debt      693.4  693.4 
    Repayments of debt      (739.9) (739.9)
    Dividends paid on mandatorily redeemable preferred stock of subsidiaries    (2.0) (28.3) (30.3)
    Dividends paid on Common Shares  (8.3)     (8.3)
    Intercompany dividends and distributions    112.6  (112.6)  
      
     
     
     
     
    Net cash (used for) provided from financing activities  (6.8) 110.6  (187.4) (83.6)
      
     
     
     
     
    Net (decrease) increase in cash during period  1.1  (14.3) (18.4) (31.6)
    Cash balances at beginning of period  (.8) 41.4  80.9  121.5 
      
     
     
     
     
    Cash balances at end of period $.3 $27.1 $62.5 $89.9 
      
     
     
     
     


    REPORT ON MANAGEMENT'S RESPONSIBILITIESRESPONSIBILITY FOR FINANCIAL STATEMENTS

            TheManagement is responsible for the preparation and fair presentation of the financial informationstatements included in this report, including the audited consolidated financial statements, has been prepared by the management of White Mountains.report. The consolidated financial statements have been prepared in accordanceconformity with GAAP and, where necessary, include amounts based on informedin the United States. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments. In those instances where there is no single specified accounting principle or standard, management makes a choice from reasonable, accepted alternatives which are believed to be most appropriate underassumptions that affect the circumstances. Financial information presented elsewhere in this report is consistent with that shown inreported amounts of assets and liabilities as of the date of the financial statements.

            White Mountains maintains internal financialstatements and accounting controls designed to provide reasonablethe reported amounts of revenues and cost effective assurance that assets are safeguardedexpenses during the reporting period. Actual results could differ from loss or unauthorized use, that transactions are recorded in accordance with management's policies and that financial records are reliable for preparing financial statements. The internal controls structure is documented by written policies and procedures which are communicated to all appropriate personnel and is updated as necessary. White Mountains' business ethics policies require adherence to ethical standards in the conduct of its business. Compliance with these controls, policies and procedures is continuously maintained and monitored by management.

            PricewaterhouseCoopers LLP has audited the consolidated financial statements of White Mountains as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002. PricewaterhouseCoopers has issued their unqualified report thereon, which appears on page F-62.

            In connection with their financial statement audit, PricewaterhouseCoopers LLP considers the structure of internal controls to the extent considered necessary. Management reviews all recommendations of PricewaterhouseCoopers LLP concerning the structure of internal controls and responds to such recommendations with corrective actions, as appropriate.those estimates.

            The Audit Committee of the Board, which is comprised solelyentirely of independent, qualified directors, has general responsibilityis responsible for the oversight and surveillance of theour accounting policies, financial reporting and financialinternal control practicesincluding the appointment and compensation of White Mountains as well as establishing and maintaining the Company's Audit Committee Charter.our independent registered public accounting firm. The Audit Committee which reportsmeets periodically with management, our independent registered public accounting firm and our internal auditors to the full Board, annually reviews the overall qualityensure they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing our financial reports. Our independent registered public accounting firm and effectiveness of the independent auditors and management with respect to the financial reporting process and the adequacy of internal controls. The independent auditors have freefull and unlimited access to the Audit Committee, with or without members of management present, to discuss the results of their audits, the adequacy of internal controlscontrol over financial reporting and any other matter thatmatters which they believe should be brought to their attention.


    MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

            Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the attentionSecurities Exchange Act of 1934. There are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, an effective internal control environment as of a point in time may become inadequate in the future because of changes in conditions, or deterioration in the degree of compliance with the policies and procedures.

            We assessed the effectiveness of White Mountains' internal control over financial reporting as of December 31, 2004. Our assessment did not include an assessment of the Audit Committee. The Reportinternal control over financial reporting for certain recent acquisitions. These acquisitions were Sirius, the Sierra group, Tryg-Baltica and Atlantic Specialty which represent 17.0%, 2.4%, .9% and ..5% of White Mountains' total assets as of December 31, 2004, respectively, and 11.3%, .5%, .6%, and 6.1%, respectively, of White Mountains' total revenue for the year ended December 31, 2004. In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Audit CommitteeTreadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, we have concluded that White Mountains maintained effective internal control over financial reporting as of December 31, 2004.

            PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has audited management's assessment of the effectiveness of White Mountains' internal control over financial reporting as of December 31, 2004 as stated in their report which appears on page 17 of the Company's 2003 Proxy Statement, herein incorporated by reference.F-72.

    March 1, 2005

    /s/ RAYMOND BARRETTE
    /s/ DAVID T. FOY

    Raymond Barrette
    Director, President and CEO
    (Principal Executive Officer)

     
    Dennis P. Beaulieu
    Corporate SecretaryDavid T. Foy
    Executive Vice President and TreasurerCFO
    (Principal Financial Officer)
    J. Brian Palmer
    Chief Accounting Officer
    (Principal Accounting Officer)

    F-61




    REPORT OF INDEPENDENT ACCOUNTANTSREGISTERED PUBLIC ACCOUNTING FIRM

    To the Board of Directors and Shareholders
    of White Mountains Insurance Group, Ltd.:

            We have completed an integrated audit of White Mountains Insurance Group, Ltd.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

    Consolidated financial statements and financial statement schedules

            In our opinion, the consolidated financial statements listed in the accompanying index referenced under Item 15(a) on page 79 present fairly, in all material respects, the financial position of White Mountains Insurance Group, Ltd. and its subsidiaries at December 31, 20022004 and 2001,2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20022004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index referenced under Item 15(a) on page 79 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; ourmanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditingthe standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

            As discussedInternal control over financial reporting

            Also, in Note 1our opinion, management's assessment, appearing under Item 9A and included in Management's Annual Report on Internal Control Over Financial Reporting appearing on page F-71, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control—Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



            A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

            Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

            As described in Management's Annual Report on Internal Control Over Financial Reporting, management has excluded Sirius, Sierra group, Tryg-Baltica and Atlantic Specialty from its assessment of internal control over financial reporting as of December 31, 2004 because they were acquired by the Company in purchase business combinations during 2004. As a result, we have also excluded Sirius, Sierra group, Tryg-Baltica and Atlantic Specialty from our audit of internal control over financial reporting. Sirius, Sierra group, Tryg-Baltica and Atlantic Specialty are wholly-owned subsidiaries whose total assets and total revenues represent 17.0%, 2.4%, .9%, .5%, and 11.3%, .5%, .6%, 6.1%, respectively, of the related consolidated financial statements,statement amounts as of and for the Company changed its method of accounting for business combinations in 2001.year ended December 31, 2004.

    /s/ PricewaterhouseCoopers LLP


    Boston, Massachusetts
    February 14, 2003March 1, 2005

    F-62




    SELECTED QUARTERLY FINANCIAL DATA
    (UNAUDITED)(Unaudited)

            Selected quarterly financial data for 20022004 and 20012003 is shown in the following table. The quarterly financial data includes, in the opinion of management, all recurring adjustments necessary for a fair presentation of the results of operations for the interim periods. Certain reclassifications have been made to prior quarterly results to conform with the 20022004 annual presentation.

     
     2002 Three Months Ended
     2001 Three Months Ended(a)
     
     Dec. 31.
     Sept. 30
     June 30
     Mar. 31.
     Dec. 31.
     Sept. 30
     June 30
     Mar. 31
     
     (Millions, except per share amounts)

    Revenues $1,000.7 $1,078.8 $1,015.1 $1,090.8 $1,192.2 $1,338.0 $550.2 $154.0
    Expenses  941.1  996.8  1,028.2  1,099.9  1,424.8  1,418.3  679.0  139.8
      
     
     
     
     
     
     
     
    Pretax earnings (loss)  59.6  82.0  (13.1) (9.1) (232.6) (80.3) (128.8) 14.2
    Tax benefit (provision)  (10.4) (20.3) 6.0  13.0  107.4  44.4  24.8  2.6
    Equity in earnings (losses) of subsidiaries  6.2  3.2  3.6  1.0  (3.1) .9  2.3  .3
    Accretion and dividends on preferred stock of subsidiaries  (10.5) (10.3) (10.1) (10.0) (10.3) (9.8) (3.1) 
      
     
     
     
     
     
     
     
    Net income (loss) from continuing operations  44.9  54.6  (13.6) (5.1) (138.6) (44.8) (104.8) 17.1
    Cumulative effect of accounting changes        660.2        
    Extraordinary items      7.1    3.0  13.6  (4.8) 
      
     
     
     
     
     
     
     
    Net income (loss) $44.9 $54.6 $(6.5)$655.1 $(135.6)$(31.2)$(109.6)$17.1
      
     
     
     
     
     
     
     
    Net income (loss) from continuing operations per share:                        
     Basic $3.09 $6.67 $(1.66)$(.62)$(17.14)$5.07 $(83.30)$2.91
     Diluted  2.78  6.04  (1.68) (.62) (17.14) 4.56  (83.30) 2.88
      
     
     
     
     
     
     
     
    Net income (loss) per share:                        
     Basic $3.09 $6.67 $(.79)$80.09 $(16.77)$7.08 $(84.12)$2.91
     Diluted  2.78  6.04  (.81) 80.09  (16.77) 6.36  (84.12) 2.88
      
     
     
     
     
     
     
     
     Fully converted tangible book value per share $258.82 $249.38 $235.62 $221.80 $225.81 $243.41 $247.34 $185.44
      
     
     
     
     
     
     
     
     
     2004 Three Months Ended
     2003 Three Months Ended
     
     
     Dec. 31
     Sept. 30
     June 30
     Mar. 31
     Dec. 31
     Sept. 30
     June 30
     Mar. 31
     
     
     Millions, except per share amounts

     
    Revenues $1,248.1 $1,163.6 $1,119.1 $1,022.2 $951.3 $911.6 $961.4 $969.5 
    Expenses  1,132.4  1,241.7  1,022.5  908.6  885.5  875.2  837.3  823.5 
      
     
     
     
     
     
     
     
     
    Pretax earnings (loss)  115.7  (78.1) 96.6  113.6  65.8  36.4  124.1  146.0 
    Tax benefit (provision)  18.7(1) 23.6  (44.4) (44.9) (22.4) (14.4) (44.7) (46.1)
    Equity in earnings of unconsolidated affiliates  10.6  3.7  4.9  18.2  15.1  13.6  15.8  12.9 
    Accretion and dividends on preferred stock of subsidiaries              (10.8) (10.7)
      
     
     
     
     
     
     
     
     
    Net income (loss) before accounting changes and extraordinary items $145.0 $(50.8)$57.1 $86.9 $58.5 $35.6 $84.4 $102.1 
      
     
     
     
     
     
     
     
     
    Net income (loss) before accounting changes and extraordinary items per share:                         
     Basic $13.48 $(4.72)$6.30 $9.64 $6.50 $3.96 $5.38 $10.94 
     Diluted  13.48  (4.72) 5.56  8.52  5.75  3.50  4.77  9.92 
      
     
     
     
     
     
     
     
     
    Fully converted tangible book value per share $342.52 $319.98 $312.82 $309.39 $291.27 $282.24 $280.88 $266.96 
      
     
     
     
     
     
     
     
     

    (a)(1)
    The quarterly amounts subsequentIncludes $38.8 million related to March 31, 2001 reflectforeign tax credits that resulted from an extension to the acquisitioncarryforward period under the Jobs Creation Act of OneBeacon on June 1, 2001.2004.

    F-63




    ScheduleSCHEDULE I

    WHITE MOUNTAINS INSURANCE GROUP, LTD.

    SUMMARY OF INVESTMENTS—OTHER THAN
    INVESTMENTS IN RELATED PARTIES
    AT DECEMBERAt December 31, 2002
    2004

    Millions

    Millions

     Cost
     Fair
    Value

    Fixed maturities:Fixed maturities:    


     Cost
     Fair
    Value

    Bonds:    

     (Millions)

    Fixed maturities:    
    Bonds:     U.S. Government and government agencies and authorities(1) $2,444.7 $2,475.5
     U.S. Government and government agencies and authorities(1)  $2,630.8 $2,702.6 Corporate bonds and asset-backed securities 4,210.7 4,349.8
     Corporate bonds and asset-backed securities 3,433.6 3,605.3 States, municipalities and political subdivisions 91.3 92.7
     States, municipalities and political subdivisions 62.7 67.1 Convertibles and bonds with warrants attached 84.2 94.3
     Foreign governments 90.8 93.7 Foreign governments 780.3 794.2
     Redeemable preferred stocks 189.6 200.4 Redeemable preferred stocks 72.9 93.5
     
     
     
     
    Total fixed maturities 6,407.5 6,669.1Total fixed maturities 7,684.1 7,900.0
     
     
     
     
    Short-term investmentsShort-term investments 1,790.6 1,790.6Short-term investments 1,058.2 1,058.2

    Common equity securities:

    Common equity securities:

     

     

     

     

    Common equity securities:

     

     

     

     

     
     Banks, trust and insurance companies 61.0 87.8 Banks, trust and insurance companies 291.2 400.2
     Public utilities 83.3 83.9 Public utilities 138.1 180.4
     Industrial, miscellaneous and other 108.0 103.3 Industrial, miscellaneous and other 346.6 463.3
     
     
     
     
    Total common equity securities 252.3 275.0Total common equity securities 775.9 1,043.9
    Other investmentsOther investments 142.3 164.7Other investments 442.7 527.4
     
     
     
     
     Total investments $8,592.7 $8,899.4Total investments $9,960.9 $10,529.5
     
     
     
     

    (1)
    includesIncludes mortgage-backed securities issued by GNMA, FNMA and FHLMC.

    NOTE—Notefair value was equal to carrying value at December 31, 2002.2004.

    FS-1



    SCHEDULE II

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    (Registrant Only)

    CONDENSED BALANCE SHEETS

     
     December 31,
    Millions

     2004
     2003
    Assets:      
     Common equity securities and other investments $246.8 $
     Short-term investments, at amortized cost  16.2  11.1
     Other assets  13.9  5.3
     Investments in consolidated and unconsolidated affiliates  3,702.4  3,021.0
      
     
      Total assets $3,979.3 $3,037.4
      
     
    Liabilities:      
     Long-term debt $ $
     Accounts payable and other liabilities  95.4  58.2
      
     
     Total liabilities  95.4  58.2
    Convertible preference shares    
    Common shareholders' equity  3,883.9  2,979.2
      
     
      Total liabilities, convertible preference shares and common shareholders' equity $3,979.3 $3,037.4
      
     

    CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
    Revenues (including realized gains and losses) $3.7 $(1.4)$84.7 
    Expenses  65.3  70.7  24.9 
      
     
     
     
    Pretax income (loss)  (61.6) (72.1) 59.8 
    Income tax provision  9.3  (.1)  
      
     
     
     
    Net income (loss)  (52.3) (72.2) 59.8 
    Earnings (losses) from consolidated affiliates  430.3  352.8  672.0 
    Cumulative effect of changes in accounting principles      16.3 
    Excess of fair value of acquired net assets over cost  40.7     
      
     
     
     
    Consolidated net income (loss)  418.7  280.6  748.1 
    Other comprehensive net income (loss) items, after-tax  176.5  79.0  202.3 
      
     
     
     
    Consolidated comprehensive net income (loss) $595.2 $359.6 $950.4 
      
     
     
     
    Computation of net income (loss) available to common shareholders:          
    Consolidated net income (loss) $418.7 $280.6 $748.1 
    Redemption value adjustment—Convertible Preference Shares    (49.5) (19.0)
    Dividends on Convertible Preference Shares      (.4)
      
     
     
     
    Net income (loss) available to common shareholders $418.7 $231.1 $728.7 
      
     
     
     

    FS-2


    SCHEDULE II
    (continued)

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    (Registrant Only)

    CONDENSED STATEMENTS OF CASH FLOWS

     
     Year Ended December 31,
     
    Millions

     
     2004
     2003
     2002
     
    Net income (loss) $418.7 $280.6 $748.1 
    Reconciliation of net income to net cash from operating activities:          
     Excess of fair value of acquired net assets over cost  (40.7)    
     Cumulative effect of change in accounting principles      (16.3)
     Net realized (gains) losses on sales of investments  (1.9) 1.1  (57.9)
     Undistributed current earnings from consolidated subsidiaries  (420.1) (352.8) (648.7)
     Net Federal income tax receipts    32.0   
     Net change in other assets and other liabilities  (7.8) 42.7  17.7 
      
     
     
     
    Net cash (used for) provided from operating activities  (51.8) 3.6  42.9 
      
     
     
     
    Cash flows from investing activities:          
     Net (increase) decrease in short-term investments  (5.1) 4.5  39.0 
     Purchases of investment securities  (242.1) (.2) (.2)
     Contributions to subsidiaries      (300.0)
      
     
     
     
    Net cash (used for) provided from investing activities  (247.2) 4.3  (261.2)
      
     
     
     
    Cash flows from financing activities:          
    Proceeds from issuances of Common Shares and Convertible Preference Shares  307.8  1.5  226.4 
    Dividends paid on Common Shares  (9.1) (8.3) (8.3)
    Dividends paid on Convertible Preference Shares      (.4)
      
     
     
     
    Net cash provided from (used for) financing activities  298.7  (6.8) 217.7 
      
     
     
     
    Net change in cash during year  (.3) 1.1  (.6)
    Cash balance at beginning of year  .3  (.8) (.2)
      
     
     
     
    Cash balance at end of year $ $.3 $(.8)
      
     
     
     

    FS-3



    Schedule IISCHEDULE III

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    (REGISTRANT ONLY)


    CONDENSED BALANCE SHEETS

     
     December 31,
     
     2002
     2001
     
     (Millions)

    Assets:      
     Common equity securities and other investments $30.6 $30.4
     Short-term investments, at amortized cost  15.6  54.7
     Other assets  41.9  51.4
     Investments in consolidated affiliates  2,558.9  1,350.2
      
     
      Total assets $2,647.0 $1,486.7
      
     
    Liabilities:      
     Long-term debt $5.1 $5.1
     Deferred credits    16.3
     Accounts payable and other liabilities  15.0  20.7
      
     
      Total liabilities  20.1  42.1
    Convertible preference shares  219.0  
    Common shareholders' equity  2,407.9  1,444.6
      
     
      Total liabilities, convertible preference shares and common shareholders' equity $2,647.0 $1,486.7
      
     


    CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     (Millions)

     
    Revenues $84.7 $38.4 $26.8 
    Expenses  24.9  69.4  43.5 
      
     
     
     
    Pretax income (loss)  59.8  (31.0) (16.7)
    Income tax provision    (1.0) (26.6)
      
     
     
     
    Net income (loss)  59.8  (32.0) (43.3)
    Earnings (losses) from consolidated affiliates  672.0  (222.5) 356.2 
    Earnings from discontinued operations, after-tax      95.0 
    Cumulative effect of changes in accounting principles  16.3     
    Extraordinary loss on early extinguishment of debt    (4.8)  
      
     
     
     
    Consolidated net income (loss)  748.1  (259.3) 407.9 
    Other comprehensive net income (loss) items, after-tax  202.3  (42.5) 39.7 
      
     
     
     
    Consolidated comprehensive net income (loss) $950.4 $(301.8)$447.6 
      
     
     
     
    Computation of net income (loss) available to common shareholders:          
    Consolidated net income (loss) $748.1 $(259.3)$407.9 
    Redemption value adjustment—Convertible Preference Shares  (19.0) (305.1)  
    Dividends on Convertible Preference Shares  (.4) (.3)  
      
     
     
     
    Consolidated comprehensive net income (loss) $728.7 $(564.7)$407.9 
      
     
     
     

    FS-2



    Schedule II


    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    (REGISTRANT ONLY)


    CONDENSED STATEMENTS OF CASH FLOWS

     
     Year Ended December 31,
     
     
     2002
     2001
     2000
     
     
     (Millions)

     
    Net income (loss) $748.1 $(259.3)$407.9 
    Reconciliation of net income to net cash from operating activities:          
     Cash dividends to holders of Convertible Preference Shares  .4  .3   
     Cumulative effect of changes in accounting principles  (16.3)    
     Loss on early extinguishment of debt    4.8   
     Share appreciation expense for Options and Restricted Shares  16.9  20.0   
     Share appreciation expense for Series B Warrants    58.8   
     Net realized gains on sales of investments and other assets  (57.9) (13.3) (2.7)
     Undistributed current (earnings) losses from consolidated subsidiaries  (648.7) 278.0  (250.1)
     Amortization of deferred credits    (20.7) (20.8)
     Release of tax reserve on sale of former insurance subsidiary      (95.0)
     Net change in other assets and other liabilities  12.4  18.5  (24.3)
     Net change in accounts payable and other liabilities  (11.4) (32.3) 37.3 
      
     
     
     
    Net cash provided from operating activities  43.5  54.8  52.3 
      
     
     
     
    Cash flows from investing activities:          
     Net decrease (increase) in short-term investments, net of balances acquired  39.0  41.7  (84.8)
     Sales of investment securities    31.0  53.8 
     Purchases of investment securities and other assets  (.2) (30.9) (1.4)
     Contributions to subsidiaries  (300.0) (530.7)  
     Investments in consolidated affiliates, net of balances acquired       
     Investments in unconsolidated affiliates       
     Proceeds from sales of affiliates    23.6   
      
     
     
     
    Net cash (used for) provided from investing activities  (261.2) (465.3) (32.4)
      
     
     
     
    Cash flows from financing activities:          
     Proceeds from issuances of Common Shares and Convertible          
      Preference Shares  226.4  444.4   
     Proceeds from issuances and exercises of warrants to acquire          
      Common Shares    75.0   
     Common Shares repurchased and retired    (1.9) (8.8)
     Repayments of long-term debt    (100.8) (4.0)
     Cash dividends paid to holders of Common Shares  (8.3) (5.9) (7.1)
     Cash dividends to holders of Convertible Preference Shares  (.4) (.3)  
      
     
     
     
    Net provided from (cash used) for financing activities  217.7  410.5  (19.9)
      
     
     
     
    Net change in cash during year       
    Cash balance at beginning of year       
      
     
     
     
    Cash balance at end of year $ $ $ 
      
     
     
     

    FS-3


    Schedule III

    WHITE MOUNTAINS INSURANCE GROUP, LTD.

    SUPPLEMENTARY INSURANCE INFORMATION
    (Millions)

    Column A

     Column B
     Column C
     Column D
     Column E
     Column F
    Segment

     Deferred
    acquisition
    costs

     Future policy
    benefits,
    losses, claims
    and loss
    expenses

     Unearned
    premiums

     Other policy
    claims and
    benefits
    payable

     Premiums
    earned

    Years ended:               
    December 31, 2002:               
     OneBeacon $188.4 $7,149.4 $1,269.5 $ $2,870.9
     Reinsurance and other insurance operations  56.5  1,725.9  244.9    705.5

    December 31, 2001:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $267.4 $7,857.4 $1,612.0 $ $2,208.2
     Reinsurance and other insurance operations  45.9  1,670.2  202.5    447.9

    December 31, 2000:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     Reinsurance and other insurance operations $27.2 $1,556.3 $182.0 $ $334.4
    Column A

     Column G
     Column H
     Column I
     Column J
     Column K
    Segment

     Net
    investment
    income(a)

     Benefits,
    claims,
    losses, and
    settlement
    expenses

     Amortization
    of deferred
    policy
    acquisition
    costs

     Other
    operating
    expenses

     Premiums
    written

    Years ended:               
    December 31, 2002:               
     OneBeacon $300.7 $2,131.3 $629.6 $317.4 $2,522.8
     Reinsurance and other insurance operations  57.7  506.9  176.7  97.6  770.7

    December 31, 2001:

    ��

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $228.4 $2,073.8 $456.5 $356.2 $1,878.2
     Reinsurance and other insurance operations  51.7  420.1  127.8  62.4  487.2

    December 31, 2000:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     Reinsurance and other insurance operations $65.7 $287.7 $101.1 $31.6 $355.2
    Column A
     Column B
     Column C
     Column D
     Column E
     Column F
     Column G
     Column H
     Column I
     Column J
     Column K
    Segment

     Deferred acquisition costs
     Future policy benefits, losses, claims and loss expenses
     Unearned premiums
     Other policy claims and benefits payable
     Premiums earned
     Net investment income(1)
     Benefits, claims, losses, and settlement expenses
     Amortization of deferred policy acquisition costs
     Other operating expenses
     Premiums written
    Years ended:                              
     December 31, 2004:                              
      OneBeacon $200.2 $5,475.5 $1,066.8 $ $2,378.5 $221.4 $1,545.2 $442.3 $369.2 $2,459.1
      WM Re  99.1  4,170.3  615.5    1,265.5  98.5  918.9  271.8  122.9  1,246.3
      Esurance  8.9  63.0  57.2    176.5  3.5  122.4  29.4  27.7  199.4
      Other insurance operations    (310.3)       37.5  4.6    1.5  
     December 31, 2003:                              
      OneBeacon $163.3 $6,241.2 $1,035.1 $ $2,160.3 $223.7 $1,475.6 $394.2 $258.7 $1,972.5
      WM Re  67.4  1,777.2  326.3    845.8  50.4  557.6  198.0  57.8  885.7
      Esurance  1.9  39.1  33.9    99.9  1.3  81.0  18.8  20.4  116.4
      Other insurance operations  1.0  (329.3) 14.1     31.7  15.5  23.9  4.0  10.2  33.1
     December 31, 2002:                              
      OneBeacon $188.4 $7,626.6 $1,265.1 $ $2,870.9 $314.0 $2,131.3 $629.6 $329.2 $2,522.8
      WM Re  55.8  1,693.9  219.8    635.0  51.5  442.2  161.2  41.0  688.2
      Esurance    15.5  17.4    40.8  1.2  36.6  9.7  22.4  53.0
      Other insurance operations  0.7  (460.7) 12.1    29.7  (0.7) 28.1  3.8  9.1  29.5

    (a)(1)
    The amounts shown exclude net investment income (expense) relating to non-insurance operations of $(5.7)$29.6 million, $4.4$12.7 million and $20.2$(5.7) million for the twelve months ended December 31, 2002, 20012004, 2003 and 2000,2002, respectively.

    FS-4



    ScheduleSCHEDULE IV

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    REINSURANCE

    Column A

     Column B
     Column C
     Column D
     Column E
     Column F
    Premiums earned

     Gross
    amount

     Ceded to
    other
    companies

     Assumed
    from other
    companies

     Net
    amount

     Percentage
    of amount
    assumed to net

     
     (Dollars in millions)

    Years ended:              

    December 31, 2002:

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $3,181.8 $(815.5)$504.6 $2,870.9 17.6%
     Reinsurance and other insurance operations  42.0  (299.6) 963.1  705.5 136.5%

    December 31, 2001:

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon(a)  $2,374.2 $(230.2)$64.2 $2,208.2 2.9%
     Reinsurance and other insurance operations  36.7  (237.6) 648.8  447.9 144.9%

    December 31, 2000:

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     Reinsurance and other insurance operations $32.5 $(174.6)$476.5 $334.4 142.5%

    (a)
    Amounts shown for OneBeacon in columns B through F represent activity from June 1, 2001 through December 31, 2001.
    Column A

     Column B
     Column C
     Column D
     Column E
     Column F
     
    Premiums earned
    (Millions)

     Gross
    amount

     Ceded to
    other
    companies

     Assumed
    from other
    companies

     Net
    amount

     Percentage
    of amount
    assumed to net

     
    Years ended:               

    December 31, 2004:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $2,253.9 $(206.5)$331.1 $2,378.5 13.9%
     WM Re  310.4  (670.3) 1,625.4  1,265.5 128.4%
     Esurance  153.6  (1.5) 24.4  176.5 13.8%
     Other insurance operations    (.1) .1   %

    December 31, 2003:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $2,234.2 $(443.0)$369.1 $2,160.3 17.1%
     WM Re  6.5  (462.0) 1,301.3  845.8 153.9%
     Esurance  69.2    30.7  99.9 30.7%
     Other insurance operations  39.2  (7.6) .1  31.7 .3%

    December 31, 2002:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     OneBeacon $3,181.8 $(815.5)$504.6 $2,870.9 17.6%
     WM Re  7.1  (294.5) 922.4  635.0 145.3%
     Esurance  9.9    30.9  40.8 75.7%
     Other insurance operations  34.8  (5.1)   29.7 %

    FS-5


    ScheduleSCHEDULE V

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    VALUATION AND QUALIFYING ACCOUNTS

    Column A

    Column A

     Column B

     Column C

     Column D

     Column E

    Column A

     Column B

     Column C

     Column D

     Column E



      
     Additions (subtractions)
      
      
    Millions

    Millions

     Balance at
    beginning
    of period

     Charged to
    costs and
    expenses

     Charged
    to other
    accounts

     Deductions
    described(1)

     Balance
    at end
    of period

    Years ended:Years ended:          

    December 31, 2004:

    December 31, 2004:

     

     

     

     

     

     

     

     

     

     


      
     Additions (subtractions)

      
      
    Reinsurance recoverable on paid losses:          


     Balance at
    beginning
    of period

     Charged to
    costs and
    expenses

     Charged
    to other
    accounts

     Deductions
    described(a)

     Balance
    at end
    of period

     Allowance for reinsurance balances $15.9 $5.7 $3.2 $15.3(2)$40.1


     (Millions)

    Property and casualty insurance and reinsurance premiums receivable:          
    Years ended:          
     Allowance for uncollectible accounts 23.0 (12.1)  12.9(2) 23.8

    December 31, 2003:

    December 31, 2003:

     

     

     

     

     

     

     

     

     

     
    Reinsurance recoverable on paid losses:          
     Allowance for reinsurance balances $18.5 $ $ $(2.6)$15.9
    Property and casualty insurance and reinsurance premiums receivable:          
     Allowance for uncollectible accounts 69.1 (26.0)  (20.1) 23.0
    December 31, 2002:December 31, 2002:          
    December 31, 2002:

     

     

     

     

     

     

     

     

     

     
    Reinsurance recoverable:          Reinsurance recoverable on paid losses:          
     Allowance for reinsurance balances $25.2 $(6.1)$ $(.6)$18.5 Allowance for reinsurance balances $25.2 $(6.1)$ $(.6)$18.5
    Property and casualty insurance:          Property and casualty insurance and reinsurance premiums receivable:          
     Allowance for uncollectible accounts 96.9 (22.0)  (5.8) 69.1 Allowance for uncollectible accounts 96.9 (22.0)  (5.8) 69.1

    December 31, 2001:

     

     

     

     

     

     

     

     

     

     
    Reinsurance recoverable:          
     Allowance for reinsurance balances $1.2 $ $24.0(b)$ $25.2
    Property and casualty insurance:          
     Allowance for uncollectible accounts 1.1  96.8(b) (1.0) 96.9

    December 31, 2000:

     

     

     

     

     

     

     

     

     

     
    Reinsurance recoverable:          
     Allowance for reinsurance balances $1.2 $ $ $ $1.2
    Property and casualty insurance:          
     Allowance for uncollectible accounts 1.1    1.1

    (a)(1)
    Represent charge-offsRepresents net reinstatements (charge-offs) of balances receivables.

    (b)(2)
    Includes $21.9$17.8 million and $95.7$2.2 million of reinsurance recoverable on unpaid losses and property and casualty insurance allowances,and reinsurance premiums receivable, respectively, acquired from OneBeacon. Remaining amounts represent activity for OneBeacon from June 1, 2001 through December 31, 2001.Sirius.

    FS-6



    SCHEDULE VI

    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
    (Millions)


    Schedule VI

    Column A
     Column B
     Column C
     Column D
     Column E
     Column F
     Column G
    Affiliation with registrant
     Deferred
    acquisition
    costs

     Reserves for
    Unpaid Claims
    and Claims
    Adjustment
    Expenses

     Discount, if
    any,
    deducted in
    Column C

     Unearned
    Premiums

     Earned
    Premiums

     Net
    investment
    income

    OneBeacon:                  
     2002 $188.4 $7,149.4 $299.5 $1,269.5 $2,870.9 $300.7
     2001(a)  267.4  7,857.4  278.1(c)  1,612.0  2,208.2  228.4

    Consolidated reinsurance
    and other insurance operations:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     2002 $56.5 $1,725.9   $244.9 $705.5 $57.7
     2001  45.9  1,670.2    202.5  447.9  51.7
     2000  27.2  1,556.3    182.0  334.4  65.7
    50%-or-less owned property
    and casualty investees(b):
                      
     2002 $24.5 $125.8   $86.6 $167.0 $11.5
     2001  21.5  104.9    74.9  143.3  11.2
     2000  18.8  101.1    64.8  127.1  11.8
    Column A

     Column H

     Column I

     Column J

     Column K

     
     Claims and Claims
    Adjustment Expenses
    Incurrred Related to

      
      
      
     
     Amortization
    of deferred
    policy
    acquisition
    costs

      
      
     
     Paid Claims
    and Claims
    Adjustment
    Expenses

      
    Affiliation with registrant
     (1)
    Current
    Year

     (2)
    Prior
    Year

     Premiums
    written

    OneBeacon:               
     2002 $2,073.9 $57.4 $629.6 $2,877.0 $2,522.8
     2001(a)  2,009.2  64.6  456.5  1,952.7  1,878.2
    Consolidated reinsurance and other insurance operations:               
     2002 $474.3 $32.6 $176.7 $367.9 $770.7
     2001  381.4  38.7  127.8  481.8  487.2
     2000  264.1  23.6  101.1  435.7  355.2
    50%-or-less owned property and casualty investees(b):               
     2002 $113.2 $7.8 $47.6 $106.1 $178.7
     2001  95.2  (1.8) 41.4  92.7  153.4
     2000  91.9  (3.3) 37.2  89.0  132.7
    Column A
     Column B
     Column C
     Column D
     Column E
     Column F
     Column G
     Column H
     Column I
     Column J
     Column K
     
      
      
      
      
      
      
     Claims and Claims Adjustment Expenses Incurred Related to
      
      
      
     
      
     Reserves for
    Unpaid Claims
    and Claims
    Adjustment
    Expenses

      
      
      
      
     Amortization
    of deferred
    policy
    acquisition
    costs

      
      
     
      
     Discount, if
    any,
    deducted in
    Column C

      
      
      
     Paid Claims
    and Claims
    Adjustment
    Expenses

      
    Affiliation with registrant

     Deferred
    acquisition
    costs

     Unearned
    Premiums

     Earned
    Premiums

     Net
    investment
    income

     (1)
    Current
    Year

     (2)
    Prior
    Year

     Premiums
    written

    OneBeacon:                                 
     2004 $200.2 $5,475.5 $259.4(2)$1,066.8 $2,378.5 $221.4 $1,444.9 $100.3 $442.3 $2,085.9 $2,459.1
     2003  163.3  6,241.2  294.5(2) 1,035.1  2,160.3  223.7  1,337.2  138.4  394.2  2,284.5  1,972.5
     2002  188.4  7,626.6  299.5(2) 1,265.1  2,870.9  314.0  2,064.8  57.4  629.6  2,870.8  2,522.8

    WM Re:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     2004 $99.1 $4,170.3 $58.1(3)$615.5 $1,265.5 $98.5 $903.8 $15.1 $271.8 $910.6 $1,246.3
     2003  67.4  1,777.2    326.3  845.8  50.4  541.7  14.9  198.0  373.8  885.7
     2002  55.8  1,693.9    219.8  635.0  51.5  440.8  10.5  161.2  341.7  688.2

    Esurance:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     2004 $8.9 $63.0   $57.2 $176.5 $3.5 $127.5 $(5.1)$29.4 $96.6 $199.4
     2003  1.9  39.1    33.9  99.9  1.3  46.9  34.1  18.8  57.4  116.4
     2002    15.5    17.4  40.8  1.2  36.6    9.7  25.0  53.0

    Other insurance operations:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     2004 $ $(310.3) 361.5(4)$ $ $37.5 $ $4.6 $ $(2.2)$
     2003  1.0  (329.3) 413.1(4) 14.1  31.7  15.5  23.1  2.0  4.0  15.0  33.1
     2002  0.7  (460.7) 481.0(4) 12.1  29.7  (0.7) 6.0  22.1  3.8  7.3  29.5

    50%-or-less owned propertyand casualty investees:(1)

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     
     2004 $30.8 $162.8   $144.2 $217.8 $13.2 $144.7 $4.7 $60.0 $132.7 $227.3
     2003  28.2  140.6    132.4  198.0  11.7  127.5  4.4  55.2  119.6  213.8
     2002  24.5  126.7    112.0  167.0  11.5  113.2  7.8  47.6  106.1  178.7

    (a)
    The amounts shown in columns F through K represent activity for OneBeacon from June 1, 2001 through December 31, 2001.

    (b)(1)
    The amounts shown represent White Mountains' share of MSA, its 50% owned unconsolidated property and casualty insurance affiliate. Excludes White Mountains' share of Montpelier, its 21% owned unconsolidated property and casualty reinsurance affiliate whose information is available publicly.

    (c)(2)
    The amounts shown represent OneBeacon's discount on its long-term workers compensation loss and LAE reserves, as such liabilities constitute unpaid but settled claims under which the payment pattern and ultimate costs are fixed and determinable on an individual basis. OneBeacon discounts these reserves using a discount rate which is determined based on the facts and circumstances applicable at the time the claims are settled (4.7% at December 31, 2004, 2003 and 2002).
    (3)
    The amount shown excludes unamortized fair value adjustments to reserves of $10.1 million for unpaid claims and claims adjustment expenses made in purchase accounting as a result of White Mountains' purchase of Sirius during 2004.
    (4)
    The amounts shown exclude unamortized fair value adjustments to reserves of $79.8$43.3 million, $48.6 million and $56.0$79.8 million for unpaid claims and claims adjustment expenses made in purchase accounting as a result of White Mountains' purchase of OneBeacon for the years ended December 31, 20022004, 2003 and 2001,2002, respectively.

    FS-7


    CERTIFICATIONS

    I, Raymond Barrette, certify that:

    1.
    I have reviewed this annual report on Form 10-K of White Mountains Insurance Group, Ltd.;

    2.
    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

    4.
    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a)
    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

    b)
    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

    c)
    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
    5.
    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

    a)
    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
    6.
    The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

    March 27, 2003

    /s/ Raymond Barrette



    President and Chief Executive Officer
    (Principal Executive Officer)

    C-1


    I, Dennis P. Beaulieu, certify that:

    1.
    I have reviewed this annual report on Form 10-K of White Mountains Insurance Group, Ltd.;

    2.
    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

    4.
    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a)
    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

    b)
    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

    c)
    presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
    5.
    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

    a)
    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
    6.
    The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

    March 27, 2003

    /s/ Dennis P. Beaulieu



    Treasurer
    (Principal Financial Officer)

    C-2




    QuickLinks

    DOCUMENTS INCORPORATED BY REFERENCE
    TABLE OF CONTENTS
    PART I
    PART II
    PART III
    Part IV
    SIGNATURES
    WHITE MOUNTAINS INSURANCE GROUP, LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
    CONSOLIDATED BALANCE SHEETS
    CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
    CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    REPORT ON MANAGEMENT'S RESPONSIBILITIES
    REPORT OF INDEPENDENT ACCOUNTANTS
    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES AT DECEMBER 31, 2002
    WHITE MOUNTAINS INSURANCE GROUP, LTD. (REGISTRANT ONLY)
    CONDENSED BALANCE SHEETS
    CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
    WHITE MOUNTAINS INSURANCE GROUP, LTD. (REGISTRANT ONLY)
    CONDENSED STATEMENTS OF CASH FLOWS
    WHITE MOUNTAINS INSURANCE GROUP, LTD.
    SUPPLEMENTARY INSURANCE INFORMATION (Millions)
    WHITE MOUNTAINS INSURANCE GROUP, LTD. REINSURANCE
    WHITE MOUNTAINS INSURANCE GROUP, LTD. VALUATION AND QUALIFYING ACCOUNTS
    WHITE MOUNTAINS INSURANCE GROUP, LTD. SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY UNDERWRITERS (Millions)
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