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
Catastrophe Management

        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 hurricanes, 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 programsuses models (primarily AIR V.9) to estimate the losses its exposures would generate under various scenarios as well as the probability of those losses occurring. OneBeacon uses these model outputs in conjunction with other data 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'sOneBeacon believes that its largest singlesingle-event natural catastrophe risk is Northeast windstorm.exposures are Northeastern United States windstorms and California earthquakes.

        OneBeacon seeks to further reduce its exposure topotential loss from catastrophe lossesexposures through the purchase of catastrophe reinsurance. Effective July 1, 2004,2007, OneBeacon renewed its normal property catastrophe reinsurance program to cover its full estimated PML (one-in-250 year) through June 30, 2005.2008. The program provides coverage for all of OneBeacon's property business including automobile physical damage, as well as terrorism coverage for non-Terrorism Risk Insurance Act of 2002 (the "Terrorism Act") events (excluding nuclear, biological, chemical and radiological). Under that cover,the program, the first $200.0$150 million of losses resulting from anya single catastrophe are retained by OneBeacon and losses from a single event in excess of $200.0$650 million and up to $850.0 million are reinsured for 100% of the loss.next $700 million of losses resulting from the catastrophe are reinsured. Any loss above $850 million would be retained by OneBeacon. In the event of a catastrophe, OneBeacon can reinstate itsOneBeacon's property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium whichthat is based on the percentage of coverage reinstated and the original property catastrophe coverage premium. OneBeacon anticipates this $850 million limit is sufficient to cover Northeast windstorm losses with a 0.4%-0.5% probability of occurrence (1-in-250-year event to 1-in-200-year event) based on OneBeacon's catastrophe modeling. Actual losses incurred by OneBeacon resulting from any particular catastrophic event may be substantially different than modeled losses from such event.

        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,"certified" events as defined under the Terrorism Act, such as foreign terrorism, provided such losses were not caused by nuclear biological or chemical means. The program also covers personal and commercial property losses resulting from other types of domestic terrorist attacks or"non-certified" events not "certified" as defined under the Terrorism Act. The Terrorism Act, provides protection for commercial propertysuch as domestic terrorist attacks, provided such losses for certified events including those arising fromwere not caused by nuclear, biological or chemical attacks.means.

        OneBeacon also purchases individual property reinsurance coverage for certain risks to reduce large loss volatility. The Property per Riskproperty-per-risk reinsurance program reinsures losses in excess of $5.0$5 million up to $75.0$100 million. IndividualOneBeacon may purchase individual risk facultative reinsurance may be purchased above $75.0$100 million where OneBeacon deems it appropriate.in certain circumstances. The Property per Riskproperty-per-risk treaty also reinsuresprovides one limit of reinsurance protection for losses in excess of $10.0$10 million up to $75.0$100 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 whichthat provides protection for individual risk or catastrophe losses involving workers compensation, general liability, automobile liability or automobileumbrella liability in excess of $5.0$6 million up to $60.0$81 million. This program provides one full $55.0 million limitcoverage 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 in 2001, Aviva caused OneBeacon to purchase reinsurance contracts with two reinsurance companies rated "AAA" (Extremely Strong)("Extremely Strong", the highest of twenty-one ratings) by Standard & Poor's and

"A+ "A++" (Superior)("Superior", the highest of fifteen ratings) by A.M. Best: a full risk-transfer cover fromBest. One contract is the NICO forCover, which entitles OneBeacon to recover up to $2.5 billion in oldultimate loss and LAE incurred related primarily to A&E claims arising from business written by OneBeacon's predecessor prior to 1992 for asbestos claims and 1987 for environmental claims (the "NICO Cover") and an adverse developmentclaims. As of December 31, 2007, OneBeacon has ceded estimated incurred losses of approximately $2.1 billion to the NICO Cover. The other contract is a reinsurance cover fromwith General Reinsurance Corporation ("GRC") for up to $400.0$570 million onof additional losses occurring inon all claims arising from accident years 2000 and prior (the "GRC Cover"). As of December 31, 2007, OneBeacon has ceded estimated incurred losses of $550 million to the GRC Cover. 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 intends to only seek reimbursement from GRC for claims which result in payment patterns similar to those supporting the 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 investments. This cost, if any, is expected to be small.

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

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 limiting the aggregate insured value of policies in geographic areas with exposure to losses from terrorist attacks. This is accomplished by either limiting the total insured values exposed, or, where applicable, through the use of terrorism exclusions.

        In December of 2007, the United States government extended the Terrorism Act until December 31, 2014. The Terrorism Act was originally enacted in 2002 and established 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. As extended, the law now covers domestic acts of terrorism. The law limits the industry's aggregate liability by requiring the Federal government to share 85% 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 $100.0 billion. In exchange for this "backstop", primary insurers are required to make coverage available to commercial insureds for losses from acts of terrorism as specified in the Terrorism Act. The following types of coverage are excluded from the program: commercial automobile, burglary and theft, surety, farmowners multi-peril and all professional liability coverage except directors and officers coverage.

        OneBeacon estimates its individual retention level for commercial policies subject to the Terrorism Act to be approximately $170 million in 2008. The aggregate industry retention level is $27.5 billion in 2008. The Federal government will pay 85% of covered terrorism losses that exceed OneBeacon's or the industry's retention levels in 2008 up to a total of $100.0 billion.

        The catastrophe reinsurance protection that OneBeacon currently has obtained provides 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 and Catastrophe Management" section above for a further description of OneBeacon's catastrophe program.

        OneBeacon closely monitors and manages its concentration of risk by geographic area. OneBeacon's guideline is to control its exposures so that its total maximum expected loss from a likely terrorism event within any half-mile radius in a metropolitan area or around a target risk will not exceed $200 million, or $300 million in all other areas. OneBeacon monitors its terrorism exposures from existing policies on a quarterly basis, and the exposure of potential new business located in areas of existing concentration or that individually present significant exposure is evaluated during the underwriting process. As a result, OneBeacon believes that it has taken appropriate actions to limit its exposure to losses from terrorist attacks and it will continue to monitor its terrorism exposure in the future. Nonetheless, risks insured by OneBeacon, including those covered by the Terrorism Act, remain exposed to terrorist attacks and the possibility remains that losses resulting from future terrorist attacks could prove to be material to OneBeacon.

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. See "CRITICAL ACCOUNTING ESTIMATES" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a full discussion regarding OneBeacon's loss reserving process.

        The following information presents (1) OneBeacon's reserve development over the preceding tenseven years and (2) a reconciliation of reserves in accordance with accounting principles and practices prescribed or permitted by insurance 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 lossesloss and LAE. The liability represents the estimated amount of lossesloss 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 lossesloss 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 lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

        Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III 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 lossesloss 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 IIIIV 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, 2004.2007. Section IVV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004.2007. Section VVI shows the cumulative gross (deficiency)/redundancy representing the aggregate change in the liability between original balance sheet dates and the re-estimated liability through December 31, 2007.

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

(1)

In 1998, OneBeacon was formed asbecame a resultwholly-owned subsidiary 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.White Mountains on June 1, 2001.

(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)/redundancyAmounts reported 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 Statementsdo not include adjustments 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 priorpurchase accounting related 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.

        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:

(1)

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

(2)

Primarily representsRepresents 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.

OneBeacon's Intermediate Holding Companies

        OneBeacon's intermediate holding companies include Fund American Enterprises Holdings, Inc. ("FAEH") and Fund American Companies, Inc. ("Fund American"), both U.S.-domiciled companies, as well as various intermediate holding companies domiciled in the United States, Gibraltar, Luxembourg and Bermuda.

        In 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 "Fund American Senior Notes"). The Fund American Senior Notes bear an annual interest rate of 5.9% until maturity in May 2013. White Mountains provides an irrevocable and unconditional guarantee as to the payment of principal and interest on the Fund American Senior Notes. OneBeacon Ltd. pays White Mountains a guarantee fee equal to 25 basis points per annum on the outstanding principal amount of the Fund American Senior Notes. If White Mountains' voting interest in OneBeacon Ltd.'s common shares ceases to represent more than 50% of all of OneBeacon Ltd.'s voting securities, OneBeacon Ltd. will seek to redeem, exchange or otherwise modify the Fund American Senior Notes in order to fully and permanently eliminate White Mountains' obligations under the guarantee. In the event that White Mountains' guarantee is not eliminated, the guarantee fee will increase over time up to a maximum of 450 basis points.

        As part of the financing for the OneBeacon Acquisition, Berkshire Hathaway Inc. ("Berkshire") invested a total of $300 million in cash, of which (1) $225 million was for the purchase of cumulative non-voting preferred stock of Fund American (the "Berkshire Preferred Stock"), which has a $300 million redemption value; and (2) $75 million was for the purchase of warrants to acquire 1,724,200 common shares of the Company. The Berkshire Preferred Stock is entitled to a dividend of no less than 2.35% per quarter and is mandatorily redeemable on May 31, 2008. During 2004, Berkshire exercised its warrants for $294 million in cash.

        Also as part of the financing of the OneBeacon Acquisition, Zenith Insurance Company purchased $20 million in cumulative non-voting preferred stock of FAEH (the "Zenith Preferred Stock"). The Zenith Preferred Stock received dividends of 2.5% per quarter through June 30, 2007. OneBeacon redeemed the Zenith Preferred Stock in the second quarter of 2007 for $20 million, its redemption value.

        In connection with the OneBeacon Offering, OneBeacon created two irrevocable grantor trusts and funded them with assets sufficient to provide for the remaining dividend and redemption payments for the $20 million Zenith Preferred Stock and the $300 million Berkshire Preferred Stock. Assets held in one of the trusts were used to repay the Zenith Preferred Stock in June 2007, while assets held in the remaining trust will be used to repay the Berkshire Preferred Stock in May 2008. The creation and funding of this trust did not legally defease the preferred stock or create any additional rights for the holders of the preferred stock, although the assets in the trust remain segregated from OneBeacon's other general assets and are not available for any use other than the payment of dividends and redemption of the Berkshire Preferred Stock. The assets held in trust remain subject to the claims of Fund American's creditors in the event that Fund American becomes insolvent.

        In connection with the OneBeacon Offering, Fund American established a $75 million revolving credit facility that matures in November 2011 (the "Fund American Bank Facility"). As of December 31, 2007, the Fund American Bank Facility was undrawn.

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 capacityis a global multi-line reinsurance organization that provides reinsurance for reinsurance on most property, casualty, accident & health, agriculture, aviation and liabilityspace, and certain other exposures on a worldwide basis through its subsidiaries, Folksamerica, Sirius International 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.

WMRe (Bermuda). 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 Internationalwhich is the largest reinsurance company domiciled in Scandinavia based on gross written premiums, is a multi-line property and casualty reinsurer that provides reinsurance primarily in Europe, North America and AsiaAsia. During the third and isfourth quarters of 2007, White Mountains Re increased the largestcapital of WMRe (Bermuda), its class III Bermuda domiciled reinsurance company domiciled in Scandinavia (based on gross written premiums). Sirius America is a U.S.-based insurer that specializes in primary insurance programs.company. WMRe (Bermuda)'s capital as of December 31, 2007 was $776 million.

        WMRUS provides reinsurance underwriting advice and reinsurance portfolio analysis services to Sirius International and Folksamerica. In exchange for these services, WMRUS receives fee income on the business it refers.

        White Mountains Re has offices in Belgium, Bermuda, Chicago, Connecticut, Copenhagen, Hamburg, London, Miami, New York, Singapore, Stockholm, Toronto and Zurich.

        At December 31, 2007 and 2006, White Mountains Re had $7.4 billion and $7.3 billion of total assets and $1.9 billion and $2.1 billion of shareholder's equity, respectively. Folksamerica is rated "A-" (Excellent, the fourth highest of fifteen ratings) by A.M. Best and "A-" (Strong, the seventh highest of twenty-one ratings) by Standard & Poor's. Sirius America are bothInternational is rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best and "A-" (Strong, the seventh highest of twenty-one ratings) by Standard & Poor's. WMRe (Bermuda) is rated "A-" (Excellent, the fourth highest of fifteen ratings) by A.M. Best.

        White Mountains Re has completed several significant transactions involving interests in other insurance and reinsurance organizations. In most cases the transactions were acquisitions of entities that were owned by organizations that no longer considered them core businesses. Since 2000, White Mountains Re has completed the following significant transactions:

•

On January 7, 2008, White Mountains Re acquired Helicon Re Holdings, Ltd. and its wholly-owned subsidiary, Helicon Reinsurance Company, Ltd. ("Helicon"), a Bermuda domiciled reinsurance company, for approximately $150 million in cash. White Mountains Re did not acquire any infrastructure or employees.



•

On December 22, 2006, White Mountains Re acquired Mutual Service Casualty Insurance Company ("Mutual Service"), a Minnesota-domiciled, run-off insurer for $34 million in cash. Mutual Service was renamed Stockbridge Insurance Company ("Stockbridge") as part of a sponsored demutualization and conversion to a stock company which was formerly affiliated with Illinois-based Country Insurance & Financial Services ("Country"). As part of the transaction, Country provided Stockbridge with approximately $25 million of reinsurance protection in excess of Stockbridge's carried reserves as of September 30, 2006. White Mountains Re did not acquire any infrastructure or employees and is managing Stockbridge's run-off administration through the use of a TPA under White Mountains Re's direction. On October 1, 2007, substantially all of the assets and liabilities of Stockbridge were transferred to Folksamerica through a Transfer and Assumption Agreement (the "Portfolio Transfer"). As a result of the Portfolio Transfer, Stockbridge was left with minimum capital and surplus to maintain its licenses. During the fourth quarter of 2007, White Mountains Re sold its 100% ownership interest in Stockbridge to a third party for approximately $26 million.



•

On August 2, 2006, White Mountains Re sold Sirius America to an investor group led by Lightyear Capital for $139 million in cash. As part of the transaction, White Mountains acquired an equity interest of approximately 18% in the acquiring entity and accounts for such interest under the equity method within its Other Operations segment.



•

On November 11, 2004, White Mountains Re acquired Denmark-based Tryg-Baltica Forsikring, internationalt forsikringsselskab A/S ("Tryg-Baltica"). Following the closing, White Mountains Re placed Tryg-Baltica into run-off, with select business renewed by Sirius International. White Mountains Re did not acquire any infrastructure or employees and is managing the company's run-off administration.



•

On April 16, 2004, White Mountains Re acquired Sirius Insurance Holdings Sweden AB and its subsidiaries from ABB Ltd. for SEK 3.27 billion (approximately $427.5 million). The principal companies acquired were Sirius International, Sirius America, which was subsequently sold in 2006, and Scandinavian Reinsurance Company, Ltd. ("Scandinavian Re"), a reinsurance company that has been in run-off since 2002.



•

On March 31, 2004, White Mountains Re acquired the Sierra Insurance Group companies (the "Sierra Group"). Subsequent to the acquisition, the Sierra Group companies, which previously wrote mainly workers compensation business, were placed into run-off and all of the acquired companies' run-off claims administration was transferred to TPAs working under White Mountains Re's direction.



•

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 payspaid 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:

•

On November 11, 2004, Sirius International acquired 100% of Denmark-based Tryg-Baltica Forsikring, internationalt forsikringsselskab A/S ("Tryg Baltica"). Following the closing, White Mountains Re placed Tryg Baltica into runoff, 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 runoff administration.



•

On March 31, 2004, Folksamerica acquired 100% of the Sierra Insurance Group companies (the "Sierra Group"). Subsequent to the acquisition, the Sierra Group companies, which previously wrote mainly workers compensation business, were placed into runoff and all of the acquired companies' runoff claims administration was transferred to TPAs working under White Mountains Re's direction.



•

In 2002, FolksamericaWhite Mountains Re acquired 100% of Imperial Casualty and Indemnity Insurance Company, ("Imperial"), a company in run-off.



•

In 2001, Fund AmericanWhite Mountains Re acquired substantially all of the international reinsurance operations of Folksam International Insurance Company and Folksamericaalso acquired 100% of C-F Insurance Company, ("C-F"), a company in run-off.



•

In 2000, FolksamericaWhite Mountains Re acquired substantially all the reinsurance operations of Risk Capital Reinsurance Company ("Risk Capital") and 100% of PCA Property & Casualty Insurance Company ("PCA"), a company in run-off.



•

In 1999, Folksamerica acquired 100% of USF Re Insurance Co. ("USF Re").





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 theWhen underwriting of treaty reinsurance, the reinsurer does not evaluate each individual risk and generally accepts the original underwriting decisions made by the ceding insurer.company. Treaty reinsurance is typically written on either a quota shareproportional or excess of loss basis. A quota shareproportional 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 agreeda specific 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.

        White Mountains Re writes both treaty and facultative reinsurance, as well as direct business. The majority of White Mountains Re premiums are derived from proportional and excess of loss reinsurance contracts, which in 2007 amounted to 43% and 47%, respectively, of its total net written premiums, while primary direct business represented 10% of total net written premiums.

        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 its broker or agent; (2) the reporting by the broker or agent to the ceding company; (2)(3) the reporting of the loss by the ceding company to its reinsurance intermediary or agent; (4) the reporting by the reinsurance intermediary or agent to the reinsurer; (3)(5) the ceding company's adjustment and payment of the loss; and (4)(6) the payment to the ceding company by the reinsurer. During this time, reinsurance companiesreinsurers 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


However, this difference is less significant for reinsurers like White Mountains Re writes three main classesthat write large volumes of reinsurance: liability,short-tailed coverage, or coverage where information about the insured claims is known relatively quickly after the coverage period, such as property and accident and health.reinsurance.

Classes of Business

        The following table shows White Mountains Re's net written premiums by class of business for the years ended December 31, 2004, 20032007, 2006 and 20022005 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

			Year Ended December 31,
Business class Millions
			2007			2006			2005
Property catastrophe excess			$	188.4		$	195.0		$	178.6
Property other				307.5			313.6			190.6
Casualty				175.7			278.6			375.0
Accident & health				178.8			229.1			169.7
Agriculture				69.0			50.4			131.6
Aviation and space				55.9			55.3			31.4
Other(1)				120.4			167.9			227.2
	Total		$	1,095.7		$	1,289.9		$	1,304.1

---

(1)

Primarily consists of marine and credit and bonding business. Also includes $39 million and $87 million in 2006 and 2005, respectively, of net written premiums at Sirius America, which White Mountains Re sold in August of 2006.




        A description of White Mountains Re's classes of business and related lines of business follows:

Property Catastrophe Excess

        Property catastrophe excess of loss treaties cover losses from catastrophic events. White Mountains Re writes a worldwide portfolio with the largest concentration of exposure in Europe, and seeks to set prices and terms on treaties wherever possible. The current U.S. book has a national focus supporting the lower and/or middle layers of large capacity programs. The exposures written in the international portfolio are diversified across many countries and regions.

Property Other

        White Mountains Re is a leader in the broker market for property treaties written on a proportional and excess of loss basis and writes a limited number of large transactions with carefully chosen partners. In the United States, White Mountains Re's focus is primarily on proportional treaties in the excess & surplus lines segment of this market. The excess book contains similar excess & surplus exposures, complemented by a smaller amount of large national company and small regional company standard lines of business. The international book primarily consists of excess of loss, facultative and proportional treaty business in Europe. Over half of this business class is written on a proportional basis.

Casualty

        White Mountains Re writes bothproportional and excess of loss reinsurance on commercial and non-standard automobile liability, general liability, professional liability, umbrella and workers compensation lines. Participation on longer tail business is mostly on a proportional basis, rather than excess of loss.

Accident & Health

        White Mountains Re's accident & health business is composed of three major lines of business. In the largest line of business, White Mountains Re is a surplus lines insurer of international medical expenses written through International Medical Group, which is the agent writing on White Mountains Re's behalf. The second major line of business comprises proportional treaties covering employer medical stop loss for per person (specific) and per employer (aggregate) exposures. The third major line of business comprises medical, health and personal accident coverages written on an excess treaty and facultative basis.

Agriculture

        White Mountains Re primarily provides proportional coverage to companies writing U.S. government-sponsored Multi-Peril Crop Insurance ("MPCI"). White Mountains Re's participation is net of the government's stop loss reinsurance protection. White Mountains Re also provides coverage for crop-hail and certain named perils when bundled with MPCI business.

Aviation & Space

        Aviation insurance covers loss of or damage to an aircraft and the aircraft operations' liability to passengers, cargo and mail as well as to third parties. Additionally, liability arising out of non-aircraft operations such as hangars, airports and aircraft products can be covered. Space insurance covers loss of or damage to a satellite during launch and in orbit.

Other

        Included in this class is marine, credit and contingency business written by Sirius International, proportional marine business written on a direct business. The majority ofbasis, a discontinued marine book and the run-off exposures from various acquisitions. White Mountains Re's premiumsA&E exposures 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 directthe run-off business represented 11% of total net written premium.acquired by Folksamerica.

        During the years ended December 31, 2004, 2003 and 2002,Bermuda Advisory Services

        White Mountains Re received no more than 10% ofhas been in the reinsurance advisory business since January 2002, through its grossBermuda-based subsidiary, WMRUS. WMRUS provides reinsurance premiums from any individual ceding company. Duringunderwriting advice and reinsurance portfolio analysis services to Sirius International and Folksamerica. In exchange for these services, WMRUS receives fee income on 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.business it refers.





Geographic Concentration


        The following table shows White Mountains Re's net written premiums by geographic region for the years ended December 31, 2004, 20032007, 2006 and 2002 were as follows:2005:

			Year Ended December 31,										Year Ended December 31,
Geographic region (Millions)
			2004			2003			2002
Geographic region Millions											Geographic region Millions		Year Ended December 31,
United States	United States		$	846.7		$	702.5		$	529.8	United States		$	696.7		$	864.7		$	878.9
Europe	Europe			303.5			114.0			88.0	Europe			306.8			314.4			315.6
Canada, the Caribbean and Latin America	Canada, the Caribbean and Latin America			42.4			53.6			58.8	Canada, the Caribbean and Latin America			21.1			37.8			47.2
Asia and Other	Asia and Other			53.7			15.6			11.6	Asia and Other			71.1			73.0			62.4
	Total		$	1,246.3		$	885.7		$	688.2	Total		$	1,095.7		$	1,289.9		$	1,304.1


Marketing


        White Mountains Re which conducts its reinsurance business through Folksamerica and Sirius International, obtains most of its reinsurance business from reinsurance brokers.intermediaries. Business submissions come from intermediaries that represent the ceding company. 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. The ceding company and the reinsurance intermediary will often consult with one or through submissions recommendedmore 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 WMU.the lead reinsurer, the reinsurance intermediary will offer participation to qualified reinsurers until the program is fully subscribed. White Mountains Re considers both the reinsurance 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 shareproportional 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,(e.g., 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'sintermediaries' commissions constitute a significant portion of White Mountains Re's total acquisition costs.

        As mentioned above,During the years ended December 31, 2007, 2006 and 2005, White Mountains Re also writes direct program business through Sirius America, which beganreceived no more than 10% of its program insurance operationsgross written premiums from any individual ceding company. During 2007, 2006 and 2005, White Mountains Re received approximately 63%, 52% and 40%, respectively, of its gross reinsurance premiums written from three major, third-party reinsurance intermediaries as detailed 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,the following table:




		Year Ended December 31,
		2007		2006		2005
AON Re		33	%	24	%	18	%
Guy Carpenter		17		12		8
Benfield		13		16		14
		63	%	52	%	40	%




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 maintainsmaintaining a disciplined underwriting strategy which, among other things,while considering overall exposure, 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.

        White Mountains Re derives its business from a broad spectrum of ceding companies, including national, regional, specialty and excess and surplus lines writers, both in the United States and internationally. White Mountains Re's underwriters and pricing actuaries perform reviews of the underwriting, pricing, and general underwriting controls of potential ceding companies 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 on the expected underwriting results of the contract. 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 and the ceding company's underwriting and claims experience. White Mountains Re's underwriters, actuaries and claims personnel perform audits to monitor certain ceding companies' risk selection and pricing. Additionally, White Mountains Re's acquisition strategy has contributedstaff reviews the financial stability and creditworthiness of ceding companies. Such reviews provide important input to its growth. Since 1995,support underwriting decisions.

        White Mountains Re has completed ten acquisitionsand other reinsurance companies have sought to mitigate the risks associated with future terrorist attacks in a similar manner as primary insurers. Reinsurers do not have the stringent regulations with respect to contract terms and policy exclusions that are generally imposed on primary insurers. For example, the Terrorism Act is not applicable to reinsurers. As a result, terrorism exclusions on reinsurance contracts are dictated by the marketplace. White Mountains Re evaluates terrorism exposure from its ceding companies and applies exclusions as it deems appropriate and as are permitted by market conditions. Reinsurance on commercial risks written by White Mountains Re subsequent to the Attacks generally contains clauses that exclude acts of other insuranceterrorism certified under the Terrorism Act. Reinsurance on personal risks written by White Mountains Re subsequent to the Attacks generally contains exclusions related to nuclear, biological and reinsurance organizations. In virtually all caseschemical attacks.

        White Mountains Re enhanced its catastrophe underwriting process by significantly raising its provision for demand surge (i.e., the acquired entities were fundamentally sound, but were ownedrise in costs from shortages of material and labor in regions affected by organizationsa catastrophe) and by employing a more conservative methodology to evaluate exposure than those that no longer considered them core businesses.result from standard actuarial and modeling techniques. Additionally, Folksamerica non-renewed its excess off-shore energy and marine business in the Gulf of Mexico effective January 1, 2006.


Claims Management

        White Mountains Re maintains a staff of experienced reinsurance claim specialists that works closely with reinsurance intermediaries to obtain specific claims information from ceding companies. White Mountains Re's claims staff also regularly perform selective on-site claim reviews to assess reinsureds' claim handling abilities and reserve techniques. In addition, White Mountains Re's claims specialists review loss information provided by reinsureds for adequacy and accuracy. The results of these claim reviews are shared with the underwriters and actuaries to assist them in pricing products and establishing loss reserves.

        White Mountains Re also uses TPAs for certain claims, including claims arising from certain of White Mountains Re's accident & health business and run-off claims related to certain acquired companies. 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 TPAs.

Competition

        The worldwide reinsurance market is highly competitive. Competition in the worldwide reinsurance market is influenced by a variety of factors, including price charged and other terms and conditions offered, financial strength ratings, prior history and relationships, as well as expertise and the speed at which the company has historically paid claims.

        White Mountains Re competes for reinsurance business in the United States, Bermuda, Europe, and other international reinsurance markets with numerous global competitors. White Mountains Re's competitors include reinsurance companies, and underwriting syndicates at Lloyd's of London. Some of the companies that White Mountains Re competes directly with include ACE Limited, Arch Capital Group Ltd., Endurance Specialty Holdings Ltd., Everest Re Group, Ltd., General Reinsurance Protection
Corporation, Hannover Ruckversicherung AG, Lloyd's of London, Montpelier Re Holdings, Ltd. ("Montpelier Re"), Munich Re Group, PartnerRe Ltd., Platinum Underwriters Holdings Ltd., Renaissance Re Holdings Ltd., Swiss Re Group, Transatlantic Holdings, Inc. and XL Capital Ltd.

Catastrophe Risk Management

        White Mountains Re has exposure to losses caused by hurricanes, earthquakes, tornadoes, winter storms, windstorms, floods, tsunamis, 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 assessesmanages its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure,catastrophic events, primarily throughby limiting accumulationconcentrations of exposure to what it deems acceptable levels and, if deemed necessary, the purchasepurchasing reinsurance. In addition,




White Mountains Re seeks to limit loss that might arise from acts of terrorism in its reinsurance contracts by exclusionary provisions, where applicable. White Mountains Re also uses third party global catastrophe reinsurance.models as well as its own proprietary models to calculate expected probable maximum loss ("PML") from various natural catastrophic scenarios. White Mountains Re believes that its largest natural catastrophic exposures, net of reinsurance and based on a 250-year PML single event scenario, are European winter storms, United States Gulf Coast windstorms (i.e., Florida to Texas), California earthquakes, United States Atlantic Coast windstorms (i.e., Massachusetts to Florida) and, to a lesser extent, Japanese windstorms and earthquakes.

        Folksamerica'sWhite Mountains Re currently monitors and prices its property catastrophe contracts using third-party software models and internally developed models as well as other methods. For contracts that White Mountains Re determines to have exposure to natural catastrophic perils, it models and assesses exposure and uses the results in its underwriting process to ensure that the contracts it writes have an appropriate charge for the exposure.

        Catastrophe exposure modeling is inherently uncertain due to process risk (the probability and magnitude of the underlying event, e.g. earthquake) and parameter risk (the probability of making inaccurate model assumptions). In particular, geographic and policy coverage data on the primary policies reinsured by White Mountains Re is essential. Accordingly, White Mountains Re's ability to accurately predict its catastrophe exposure is dependent on the quality and accuracy of data obtained from its clients.

        Additionally, catastrophe modeling is dependent upon several broad economic and scientific assumptions, such as storm surge (the water that is pushed toward the shore by the force of a windstorm), demand surge (the localized increase in prices of goods and services that often follow a catastrophe) and zone density (the percentage of insured perils that would be affected in a region by a catastrophe). Third party modeling software also does not encompass all territories in which White Mountains Re writes business.

        While catastrophe modeling is an important tool, White Mountains Re does not believe that it can be strictly relied upon to measure its exposure to natural catastrophic risk. For example, the losses arising from Hurricane Katrina for both White Mountains Re and the industry were substantially in excess of losses previously predicted by third party models from such an event. This was due to issues such as inadequate storm surge and demand surge assumptions in the models, as well as flooding from levees breaking, which was not fully contemplated in these models. Correspondingly, White Mountains Re assesses catastrophe risk by monitoring total limits exposed to a catastrophe event in key zones.

        The following table provides an estimate of White Mountains Re's three largest PML zones at January 31, 2008. White Mountains Re has much less catastrophic loss exposure to other zones, such as Northeast wind and Japanese windstorm and earthquake risk.

					White Mountains Re Financial Impact
($ in millions)		Modeled Industry Loss			Gross			Net After Reinstatement			Net After Tax			Net After Tax as % of GAAP Capital
		1 in 250 year event
European Winter Storm		$	67,124		$	756		$	480		$	394		14	%
Florida Windstorm			160,758			408			353			285		10	%
California Earthquake			65,369			365			331			260		9	%
		1 in 10,000 year event
European Winter Storm		$	167,756		$	1,175		$	736		$	593		20	%
Florida Windstorm			391,937			596			521			419		14	%
California Earthquake			226,876			485			435			345		12	%

        During 2007, to better manage its aggregate exposure to very large catastrophic events, White Mountains Re introduced an underwriting limit to the maximum net financial impact ("NFI") it would suffer in the worst aggregate loss year modeled in third party software (i.e., the 10,000 year global annual aggregate PML). The calculation of the NFI begins with the 10,000 year global annual aggregate PML and takes account of reinstatement premiums, reinsurance recoverables net of uncollectible balances, and tax benefits net of valuation allowances. This amount is deducted from the most recently forecasted comprehensive net income for the year, to arrive at the NFI. The NFI does not include the potential impact of the loss events on White Mountains Re's investment portfolio.

        For 2008, the NFI limit has been set at $650 million, which is approximately 22% of White Mountains Re's total GAAP capital. At January 1, 2008, White Mountains Re believes that it was under the $650 million limit. Actual losses incurred by White Mountains Re resulting from any particular catastrophic event may be substantially different than modeled losses from such event.




Reinsurance Protection

        White Mountains Re generally enters into retrocessional arrangements in order to reduce its potential loss exposure to any large or series of smaller catastrophe events, stabilize financial ratios and obtain additional underwriting capacity where appropriate. White Mountains Re has several retrocessional arrangements, most of which are with highly rated reinsurers. White Mountains Re also has in place various retrocessions on specified property contracts White Mountains Re has assumed.

        For the three years ended December 31, 2007, the majority of White Mountains Re's reinsurance protection iswas provided through Folksamerica's quota share retrocessional arrangements with Olympus.Olympus Reinsurance Company, Ltd. ("Olympus") and Helicon. Sirius International also purchases excess of loss protection to cover its property catastrophe and aviation exposures. These arrangements arereinsurance protections were designed to increase Folksamerica'sWhite Mountains Re's underwriting capacity, to capitalize on the improved pricing trends that accelerated after the Attackswhere appropriate, and to reduce its potential loss exposure to any large or series of smaller property catastrophe events. UnderFolksamerica ceded 35% of its quota share agreements2007 underwriting year short-tailed excess of loss business, mainly property, to Olympus and Helicon, with each sharing approximately 55% and 45%, respectively. Folksamerica ceded 35% of its 2006 underwriting year short-tailed excess of loss business, mainly property, to Olympus and Helicon, with each sharing approximately 56% and 44%, respectively. Folksamerica cedesceded up to 75% of substantially all of its 2005 underwriting year short-tailed excess of loss business, mainly property and marine, and 50% of its 2005 underwriting year 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 cedesceded 25% of its 2005 underwriting year short-tailed proportional and excess of loss business to Olympus. White Mountains Re receives an override commissionreceived fee income based on the premiums ceded to Olympus.Olympus and Helicon.

        White Mountains Re's reinsurance recoverable balances due from Olympus are fully collateralized in the form of assets in a trust, funds held and offsetting balances payable for all recoverable amounts recorded as of December 31, 2007. Folksamerica did not renew the quota share arrangements with Olympus and Helicon for 2008. Olympus will continue to be responsible for the payment of losses on exposures that have been ceded to it and will continue to earn premiums related primarily to the run-off of underwriting year 2007 business. White Mountains Re acquired Helicon on January 7, 2008.

        ReinsuranceAt December 31, 2007, White Mountains Re had $36 million of reinsurance recoverables on paid losses and $806 million of reinsurance recoverables on unpaid losses that will become recoverable if claims are paid in accordance with current reserve estimates. Because retrocessional reinsurance contracts do not relieve White Mountains Re of its obligation to itsWhite Mountains Re's ceding companies. Therefore,companies, the collectibility of balances due from its retrocessional reinsurersretrocessionaires is critical to its financial strength. White Mountains Re'sRe monitors the financial strength.strength and ratings of its retrocessionaires on an ongoing basis. SeeNote 4—"Third Party Reinsurance" to the accompanyingAccompanying 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"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 ten10 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 lossesloss and LAE. The liability represents the estimated amount of lossesloss and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid lossesloss 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 lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.




        Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III 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 lossesloss 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 IIIIV shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability between original balance sheet dates and the re-estimated liability through December 31, 2007. Section V shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2007. Section VI shows the cumulative gross (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.

  ��     The following table includes the complete loss development history for all periods presented for all companies acquired by White Mountains Re as if the companies had been combined from their inception.




This table includes development on reserves reported by acquired companies before those companies were acquired by White Mountains Re2007.

			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

			White Mountains Re Loss and LAE(1) Years Ended December 31,
($ in millions)
			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
I. Liability for unpaid losses and LAE:
Gross balance			$	739.1		$	723.2		$	768.0		$	1,479.9		$	1,581.4		$	1,588.4		$	1,699.4		$	3,864.3		$	4,308.8		$	3,708.8		$	3,252.3
Less: reins. recoverables on unpaid losses and LAE				(124.0	)		(130.2	)		(137.3	)		(702.8	)		(879.5	)		(809.8	)		(741.1	)		(1,149.8	)		(1,633.6	)		(1,142.5	)		(806.4	)
Net balance			$	615.1		$	593.0		$	630.7		$	777.1		$	701.9		$	778.6		$	958.3		$	2,714.5		$	2,675.2		$	2,566.3		$	2,445.9
II. Cumulative net amount of liability paid through:
	1 year later			155.2			161.3			53.3			350.1			230.6			250.7			321.5			941.0			949.4			721.7			—
	2 years later			267.7			211.4			290.7			492.2			391.2			420.8			521.8			1,369.4			1,442.9
	3 years later			329.0			364.6			500.1			596.9			501.4			559.1			710.8			1,684.9
	4 years later			418.4			544.0			589.3			666.7			602.7			690.9			834.7
	5 years later			576.3			604.8			678.2			735.2			739.3			804.5
	6 years later			619.1			669.5			728.6			833.9			830.6
	7 years later			667.5			721.8			806.4			899.9
	8 years later			706.2			778.3			869.0
	9 years later			746.5			832.6
	10 years later			787.6
III. Net liability re-estimated as of:
	1 year later			618.3			602.3			648.8			782.7			704.9			828.9			984.9			2,771.9			2,893.2			2,575.4			—
	2 years later			629.4			611.3			671.9			767.7			758.7			856.9			1,059.6			2,802.9			3,032.5
	3 years later			632.6			615.9			693.8			815.7			800.5			929.8			1,148.1			2,917.9
	4 years later			626.9			631.5			751.1			850.8			872.2			1,023.8			1,270.2
	5 years later			629.7			677.0			778.8			918.5			968.4			1,138.6
	6 years later			667.7			694.8			857.0			998.2			1,077.8
	7 years later			678.0			768.7			916.6			1,097.7
	8 years later			747.9			807.8			1,016.5
	9 years later			769.4			900.4
	10 years later			856.9

		White Mountains Re Loss and LAE(1) Years Ended December 31,
($ in millions)
		1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
IV. Cumulative net (deficiency)/redundancy		$	(241.8	)	$	(307.4	)	$	(385.8	)	$	(320.6	)	$	(375.9	)	$	(360.0	)	$	(311.9	)	$	(184.7	)	$	(357.3)	(2)	$	(9.1	)	—
Percent (deficient)/redundant			(39.3	)%		(51.8	)%		(61.2	)%		(41.3	)%		(53.6	)%		(46.2	)%		(32.5	)%		(6.8	)%		(13.4	)%		(.4	)%	—
V. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see III. above):
Gross re-estimated liability		$	1,188.8		$	1,290.7		$	1,323.1		$	2,004.8		$	2,093.5		$	2,010.9		$	2,087.9		$	4,270.6		$	4,897.7		$	3,765.1		—
Less: gross re-estimated reinsurance recoverable			(331.9	)		(390.3	)		(306.6	)		(907.1	)		(1,015.7	)		(872.3	)		(817.7	)		(1,352.7	)		(1,865.2	)		(1,189.7	)	—
Net re-estimated liability		$	856.9		$	900.4		$	1,016.5		$	1,097.7		$	1,077.8		$	1,138.6		$	1,270.2		$	2,917.9		$	3,032.5		$	2,575.4		—
VI. Cumulative gross deficiency		$	(449.7	)	$	(567.5	)	$	(555.1	)	$	(524.9	)	$	(512.1	)	$	(422.5	)	$	(388.5	)	$	(406.3	)	$	(588.9	)	$	(56.3	)	—
Percent deficient			(60.8	)%		(78.5	)%		(72.3	)%		(35.5	)%		(32.4	)%		(26.6	)%		(22.9	)%		(10.5	)%		(13.7	)%		(1.5	)%	—

---

(1)

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.



(2)

Folksamerica became a wholly ownedwholly-owned subsidiary of White Mountains during 1998. Reserve development for the yearsyear ended 1994 through 1997 reflects development on reserves established before White Mountains consolidated Folksamerica's results.



(3)(2)

Sirius,Includes prior year development of $223 million on short-tailed losses related to hurricanes Katrina, Rita and Wilma, 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, below.



(4)

Loss and LAE reserves for Tryg Baltica (acquired in November, 2004) are only included as of December 31, 2004, due to lack of availability of loss development history on a comparable basis. Net loss and LAE reserves for Tryg Baltica are $134.5 million as of December 31, 2004.Olympus reimbursement.




        The cumulative net (deficiency)/redundancy in the table above reflectsincludes adverse development recordedfrom A&E claims. White Mountains Re's exposure to A&E claims results mainly from asbestos claims arising from treaty and facultative contracts written prior to 1985 at two companies acquired by Scandinavian Re, whichFolksamerica—MONY Reinsurance in 1991 and Christiania General in 1996. As a result, the table above reflects reserve development on A&E business that was acquirednot underwritten by White Mountains Re.

        White Mountains Re's net incurred losses from A&E claims have totaled $198 million over the past ten years. Although losses arising from A&E claims were on contracts that were not underwritten by White Mountains Re, White Mountains Re is liable for any additional losses arising from such contracts. Accordingly, White Mountains Re cannot guarantee that it will not incur additional A&E losses in 2004the future. Refer to "CRITICAL ACCOUNTING ESTIMATES" in "Management's Discussion and has been in run-off since 2002. This has the effectAnalysis of significantly increasingFinancial Condition and Results of Operations" for further details of White Mountains Re's cumulativeA&E reserves.







deficiency for each of the years presented in the table, including the years prior to White Mountains Re's acquisition of Sirius. The table presented below represents White Mountains Re's cumulative net (deficiency)/redundancy excluding Scandinavian Re:

		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 regulatory basis to loss and LAE reserves determined in accordance with GAAP at December 31, as follows:

		December 31,									December 31,
(Millions)
		2004			2003			2002
Millions											December 31,
Regulatory reserves		$	3,092.0		$	1,325.9		$	1,148.8		$	2,821.6		$	2,866.3		$	3,109.7
Reinsurance recoverable on unpaid losses and LAE(1)			948.2			480.5			513.2			573.5			875.6			1,513.1
Discount on loss reserves			245.2			—			—			121.0			141.6			184.5
Reserves allocated to other segments			(91.2	)		(31.5	)		—			(218.6	)		(123.6	)		(105.6	)
Purchase accounting and other			(23.9	)		2.3			2.3			(45.4	)		(51.1	)		(21.4	)
GAAP reserves		$	4,170.3		$	1,777.2		$	1,664.3		$	3,252.1		$	3,708.8		$	4,680.3

---

(1)

Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under regulatory accounting.

Recent Financing Activities

        In May 2007, White Mountains Re Group, Ltd. ("WMRe Group"), an intermediate holding company of White Mountains Re, issued $250 million non-cumulative perpetual preference shares, with a $1,000 per share liquidation preference (the "WMRe Preference Shares"), and received $246 million of proceeds, net of $4 million of issuance costs and commissions. These shares were issued in an offering that was exempt from the registration requirements of the Securities Act of 1933. Holders of the WMRe Preference Shares receive dividends on a non-cumulative basis when and if declared by WMRe Group. The holders of the WMRe Preference Shares have the right to elect two directors to WMRe Group's board in the event of non-payment of dividends for six quarterly dividend periods. The right ceases upon the payment of dividends for four quarterly periods or the redemption of the WMRe Preference Shares. In addition, WMRe Group may not declare or pay dividends on its common shares (other than stock dividends and dividends paid for purposes of any employee benefit plans of WMRe Group and its subsidiaries) unless it is current on its most recent dividend period. The dividend rate is fixed at an annual rate of 7.506% until June 30, 2017. After June 30, 2017, the dividend rate will be paid at a floating annual rate, equal to the greater of (1) the 3 month LIBOR plus 3.20% or (2) 7.506%. The WMRe Preference Shares are redeemable solely at the discretion of WMRe Group on or after June 30, 2017 at their liquidation preference of $1,000 per share, plus any declared but unpaid dividends. Prior to June 30, 2017, WMRe Group may elect to redeem the WMRe Preference Shares at an amount equal to the greater of (1) the aggregate liquidation preference of the shares to be redeemed and (2) the sum of the present values of the aggregate liquidation preference of the shares to be redeemed and the remaining scheduled dividend payments on the shares to be redeemed (excluding June 30, 2017), discounted to the redemption date on a semi-annual basis at a rate equal to the rate on a comparable treasury issue plus 45 basis points. In the event of liquidation of WMRe Group, the holders of the WMRe Preference Shares would have preference over the common shareholders and would receive a distribution equal to the liquidation preference per share, subject to availability of funds.

        In March 2007, WMRe Group issued $400.0 million face value of senior unsecured debt at an issue price of 99.715% (the "WMRe Senior Notes"), resulting in net proceeds of $392 million, which were distributed to its immediate parent. The WMRe Senior Notes, which were issued in an offering that was exempt from the registration requirements of the Securities Act of 1933, bear an annual interest rate of 6.375%, payable semi-annually in arrears on March 20 and September 20, until maturity in March 2017. Taking into effect the amortization of the original issue discount and all underwriting and issuance expenses, including an interest rate lock agreement, the WMRe Senior Notes yield an effective rate of 6.49% per annum.







ESURANCE


        The Esurance group of companies, which is headquarteredhas its United States headquarters in San Francisco, havehas been part of White Mountains since October 2000. Esurance markets personal auto insurance directly to customers online and through select online agents. Most customer interaction with the company takes place throughvia 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, watch vehicle repairs, make changes to their policy and manage their accounts. At December 31, 2007, Esurance's in-force policy count had grown to 485,000 policies, as compared to 43,000 policies at the end of 2002.

        Esurance's underwriting companies, Esurance Insurance Company, Esurance Insurance Company of New Jersey and Esurance Property and Casualty Insurance Company are both rated "A""A-" (Excellent, the thirdfourth highest of fifteen ratings) by A.M. Best. Additionally,Over the past several years, Esurance has ceded a large percentage of its business to certain other subsidiaries of White Mountains, primarily for capital management purposes. This business is included in the Esurance segment also includes insurance ceded bysegment. At December 31, 2007 and 2006, Esurance to its affiliate, Folksamerica.had $1,103 million and $724 million of total assets and $445 million and $309 million of shareholder's equity, respectively.








Geographic Concentration


        As of December 31, 2004,2007, Esurance is writingwrites business in 17twenty-eight states. These states represent 66%approximately 85% of the premium volume for the entire U.S. personal automobileauto insurance market. For the years ended December 31, 2004, 20032007, 2006 and 2002, Esurance's business was2005, Esurance had net written premiums of $799 million, $596 million and $349 million, respectively, which were produced in the following states:

			Year Ended December 31,								Year Ended December 31,
Net written premiums by state	Net written premiums by state								Net written premiums by state
			2004		2003		2002				2007		2006		2005
California	California		25	%	32	%	43	%	California		22	%	19	%	20	%
Florida	Florida		24		24		14		Florida		16		17		20
New York									New York		7		9		8
Texas	Texas		11		15		12		Texas		6		6		9
Michigan	Michigan		7		5		1		Michigan		5		6		7
Pennsylvania	Pennsylvania		5		7		7		Pennsylvania		5		5		4
New York			5		2		4
Washington									Washington		5		4		3
New Jersey									New Jersey		4		5		3
Other	Other		23		15		19		Other		30		29		26
	Total		100	%	100	%	100	%	Total		100	%	100	%	100	%


Marketing


        Esurance distributes approximately 80% of its 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 savvytechnology-savvy consumers who userely on the Internet for most ofto manage their financial services transactions.

needs. Esurance attractshas a diverse marketing mix and features its target customersanimated icon, "Erin Esurance", across its advertising channels. In 2007, Esurance expanded its national television campaign and its online video campaigns, forming partnerships with new video portals (e.g. Hulu and Joost). In 2007, the company continued to advertise through a continuously optimized mix of onlinepaid search engines (e.g., Google and offline advertising. Esurance advertises onYahoo! Search), and a wide variety of insurance, finance, and automotive sites, along with major portals (e.g., MSN and Yahoo!) and search advertisers, like Google.web sites. Esurance also advertiseshas sponsor relationships with professional and college sports teams, as well as various environmental and community organizations.

        Diversified advertising channels and the presence of "Erin Esurance" have resulted in continued, significant business growth and substantial increases in brand awareness, particularly among Esurance's target customer base of web-savvy individuals. Esurance is not only the third largest issuer of auto insurance quotes on television, radiothe Internet, behind only GEICO and through direct mail.Progressive, but also the third most recognizable brand for online auto insurance among consumers of online goods and services.





Underwriting and Pricing


        With its web-enabled technology,        Esurance collects and verifies detailed underwriting information in real-time while customers transact with the company online. This real-timeReal-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 a greater statistical correlation with historical loss experience than traditional pricing models have shown. As a result, Esurance canis able to quote rates to customers that most closely correspond to the individual 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 automobileauto insurance companies, though Esurance's main competition iscomes from other direct writers like Progressive, GEICO and 21st Century.Progressive.

        Esurance leverages        By leveraging web-enabled technology, allowing it toEsurance can capture data real-time and reactrespond quickly to market shifts. With an array of customer information at its disposal,changing loss trends. Esurance is continually able to continually refine pricing, enhance its auto product, and optimize dollars spent on marketing. Technologymarketing with the assortment of customer information that is at the company's disposal. Web technology also allows Esurance to provide high quality,²⁴/24/7 customer service and claims handling for a competitive price.cost effectively.







        Esurance's paperless business process allowallows 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. Further, Esurance's paperless business model is the foundation of the company's environmental commitment, which helps differentiate Esurance from its competitors.


Claims Management


        Esurance handles its claims through regional claim centers in California, Florida, Texas and New York. Esurance takes the initial notice of claims at its loss at the company's customer service center,reporting unit in South Dakota, which is available for customers 24 hours a day, 365 days a year. The loss reporting unit then assignstransfers claims to the regional claim centers.offices in Arizona, California, Colorado, Florida, Georgia, New Jersey, New York, Texas and Wisconsin where claims are handled and adjusted.

        Esurance's claims organization leverages technology to reduce cycle times.times and achieve strict claims performance metrics. Rapid response to and 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.


Catastrophe Risk
Management

        Esurance's sole line of business is personal automobileauto 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%(81%), resulting in exposure to catastrophe losses at Esurance forfrom hurricanes, hailstorms, earthquakes and other acts of nature. Generally, catastrophe costs are low for personal auto in relation to other lines of business, such as homeowners and commercial property. Additionally, Esurance's broad geographic distribution limits its concentration of risk and the potential for losses to accumulate from a single event. Esurance estimates that its PML for a single event is less than 1% of net written premium.


Loss and Loss Adjustment Expense Information


        Esurance 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 for Esurance is similar to the process described in"Loss and Loss Adjustment Expense Reserves" in the"ONEBEACON" discussioninvolves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. As described previously, uncertaintiesUncertainties 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.(i.e., the "claim-tail."claim-tail). Esurance writes primarily "short-tail"short-tail personal automobileauto insurance policies, which reduces the uncertainty inherent in its loss and LAE reserves when compared to insurance companies that write "long-tail"long-tail policies, such as workers compensation.




        Management believes that Esurance's loss and LAE reserves as of December 31, 20042007 are 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'sEsurance's future results of operations.

        The following information presents (1) Esurance's reserve development over the fourseven 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 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 lossesloss and LAE. The liability represents the estimated amount of lossesloss and LAE for claims that were unpaid at the balance sheet date, including IBNR reserves. In accordance with GAAP, the liability for unpaid lossesloss 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 lossesloss and LAE outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

        Section II shows the cumulative amount of net loss and LAE paid relating to recorded liabilities as of the end of each succeeding year. Section III 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 lossesloss 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 IIIIV 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, 2004.2007. Section IVV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2004.2007. Section VVI shows the cumulative amount of net lossesgross (deficiency)/redundancy representing the aggregate change in the liability from original balance sheet dates and LAE paid relating to recorded liabilities as of the end of each succeeding year.re-estimated liability through December 31, 2007.

			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

			Esurance Loss and LAE(1)(2) Years Ended December 31,
($ in millions)
			2001			2002			2003			2004			2005			2006			2007
I. Liability for unpaid loss and LAE:
Gross balance			$	4.0		$	15.5		$	39.1		$	63.0		$	94.1		$	167.4		$	285.3
Less: reinsurance recoverables on unpaid loss and LAE				—			—			—			(.1	)		(.1	)		(.5	)		(2.2	)
Net balance			$	4.0		$	15.5		$	39.1		$	62.9		$	94.0		$	166.9		$	283.1
II. Cumulative net amount of net liability paid through:
	1 year later			2.5			9.3			18.9			35.8			62.4			125.3			—
	2 years later			3.3			12.2			24.5			47.4			89.9
	3 years later			3.9			13.7			28.2			54.3
	4 years later			4.1			14.6			29.6
	5 years later			4.1			14.6
	6 years later			4.1
III. Net liability re-estimated as of:
	1 year later			4.0			16.0			34.0			54.9			97.2			196.4			—
	2 years later			4.4			15.3			29.4			55.5			107.3
	3 years later			4.3			14.4			29.5			58.2
	4 years later			4.2			14.6			30.3
	5 years later			4.1			14.6
	6 years later			4.1
IV. Cumulative net (deficiency)/redundancy			$	(.1	)	$	.9		$	8.9		$	4.7		$	(13.3	)	$	(29.6	)	$	—
Percent (deficient)/redundant				(3.7	)%		5.8	%		22.6	%		7.5	%		(14.2	)%		(17.7	)%		—
V. Reconciliation of net liability re-estimated as of the end of the latest re-estimation period (see III. above):
Gross unpaid loss and LAE latest re-estimate			$	4.1		$	14.6		$	30.5		$	58.9		$	107.8		$	198.7		$	—
Reinsurance recoverable latest re-estimate				—			—			(.2	)		(.7	)		(.5	)		(2.3	)		—
Net unpaid loss and LAE latest re-estimate			$	4.1		$	14.6		$	30.3		$	58.2		$	107.3		$	196.4		$	—
VI. Cumulative Gross (deficiency)/redundancy			$	(.1	)	$	.9		$	8.6		$	4.1		$	(13.7	)	$	(31.3	)	$	—
Percent (deficient)/redundant				(3.7	)%		5.8	%		22.2	%		6.6	%		(14.6	)%		(18.7	)%		—

---

(1)

The table consists of reserve information for Esurance Insurance Company, Esurance Property & Casualty Insurance Company, and business ceded by Esurance to Folksamerica.Folksamerica, OneBeacon and Sirius.



(2)

Esurance became a wholly owned subsidiary of White Mountains during 2000.




        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,									December 31,
(Millions)
		2004			2003			2002
Millions											December 31,
Statutory reserves		$	16.2		$	7.6		$	15.5		$	64.3		$	43.3		$	30.1
Reserves allocated from other segments			46.7			31.5			—			218.6			123.6			64.0
Reinsurance recoverable on unpaid losses and LAE(1)			.1			—			—			2.4			.5			—
GAAP reserves		$	63.0		$	39.1		$	15.5		$	285.3		$	167.4		$	94.1

---

(1)

Represents adjustments made to add back reinsurance recoverables included with the presentation of reserves under regulatory accounting.


OTHER OPERATIONS


        White Mountains' Other Operations segment consists of the operations of the Company, the Company's intermediate subsidiary holding companies, White Mountains' weather risk management and variable annuity reinsurance businesses, the consolidated results of the Tuckerman Funds, the International American Group, WM Advisors and White Mountains' investments in Symetra, Pentelia, Delos (seeThe CompanyInvestments in Unconsolidated Affiliates below) and Montpelier Re (until its Intermediate Holding Companies
disposition in May 2007).

WM Advisors

        The Company's intermediate holdingWM Advisors is a registered investment adviser that manages White Mountains' investments in fixed income and equity securities, including hedge funds, limited partnerships and private equities. WM Advisors also has investment management agreements with third parties, most notably with Symetra and Montpelier Re. At December 31, 2007, WM Advisors had approximately $29.6 billion in assets under management, $10.6 billion of which related to consolidated subsidiaries of White Mountains.

        WM Advisors has a sub-advisory agreement with Prospector Partners LLC ("Prospector"), a registered investment adviser, under which Prospector manages most of White Mountains' publicly-traded common equity and convertible securities. Prospector also provides consulting and advisory services to White Mountains through a separate agreement with WM Advisors on matters such as capital management, asset allocation, private equity investments and mergers and acquisitions.

Galileo

        During 2006, White Mountains entered into the weather risk management business through its newly formed subsidiary, Galileo. Galileo sells weather and weather contingent risk management products, typically in derivative form, that are designed to assist corporate and governmental customers, primarily energy companies, utilities and construction companies, in managing their economic exposure to variations in weather conditions. Galileo then manages its weather and weather contingent derivative portfolio through the employment of a variety of risk management strategies to preserve its expected margins. These strategies include Fund Americangeographical diversification of risk exposures and Fund American Enterprises Holdings, Inc. ("FAEH")economic hedging through the use of weather and commodity derivatives traded in both the over-the-counter and exchange-traded derivative markets. Additionally, Galileo may economically hedge portions of its risk exposure by buying and selling similar weather risk contracts with different counterparties. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then purchase an option from another counterparty that pays Galileo if it becomes too cold in that same location. Galileo may also diversify its risk exposure by entering into contracts that protect different clients with opposite exposures to the same quantifiable weather element. For example, Galileo may sell an option to protect a customer if it becomes too cold in a certain location and then sell another option that protects a different customer if it becomes too warm in that same location. Risk management is undertaken on a portfolio-wide basis in order to maintain a portfolio that Galileo believes is well diversified and that remains within the aggregate risk tolerance established by senior management.




        Weather derivatives, which usually take the form of swaps or options, are contracts with financial settlements based on the performance of an index linked to a quantifiable weather element, such as temperature, precipitation, snowfall or windspeed. Typical contracts span several months such as a summer or winter season. A weather swap is a contract that requires one of the contractual parties to make a payment to the other contractual party when a weather index rises above or falls below a specified level, or "strike". Therefore, upon settlement of a weather swap, Galileo may make or receive a payment. A weather call option is a contract that entitles the purchaser to receive a payment when the weather index exceeds a specified strike, and a weather put option is a contract that entitles the purchaser to receive a payment when the weather index is less than a specified strike. Every weather derivative is defined by a series of terms, including strike, location, notional payout rate (per unit or event), both U.S.-domiciled companies, as well as various intermediate holding companies domiciledmaximum payout, time period and reference index, which are calculated from weather data collected from a specified weather station.

        Weather contingent derivative products are weather derivatives with an additional commodity price trigger. Due to the dual trigger nature, weather contingent products are usually in the United States, Barbados, Luxembourg, Swedenform of a call or put option. For example, a temperature contingent gas call will usually pay a client if temperatures are colder than an agreed upon trigger and Bermuda. White Mountains arranges the majoritynatural gas prices are above a second trigger.

        Beginning in February 2006, OneBeacon Insurance Company ("OBIC"), a subsidiary of its financing through the Company and these intermediate holding companies.

        In 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 issuanceOneBeacon, agreed to provide guarantees of the Senior Notes were usedobligations of Galileo to repayGalileo's counterparty in certain weather related product transactions. The guarantees require OBIC to pay the full amount of Galileo's obligations to the counterparty in the event of Galileo's failure to pay these obligations. In the event of a payment, OBIC would be eligible to exercise all of the term loans and a portionrights of the revolving loan (with the remainder repaid with cash on hand) under Fund American's previous bank facility.

        In September 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 a new $300 million revolving credit facility (the "Bank Facility"), under which both Fund American and the Company are 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 million and to extend the maturity from September 2006 to August 2009.counterparty against Galileo. As of December 31, 2004,2007, OBIC had eight outstanding guarantees of Galileo transactions, the Bank Facilitytotal principal amount of which was undrawn.

        As partapproximately $49 million. In the event that the total guaranteed principal amount exceeds the lesser of 5% of OBIC's admitted assets of $3.5 billion at December 31, 2007 or 25% of OBIC's statutory surplus of $1.6 billion at December 31, 2007, OBIC would require the approval of the financingPennsylvania Department of Insurance in order to make any further guarantees. OBIC has agreed, at White Mountains' option, to continue to make these guarantees available until October 2008 and will receive from Galileo an annual fee of 25 basis points of the value at risk for providing the guarantees. Pursuant to a separation agreement White Mountains entered into with OneBeacon in connection with the OneBeacon Acquisition, Berkshire Hathaway, Inc. ("Berkshire") investedOffering, White Mountains has agreed that it will take appropriate steps to ensure that OBIC will not be called on to make payment on these guarantees.

WM Life Re

        During 2006, White Mountains entered into the variable annuity reinsurance business through its newly formed subsidiary, WM Life Re. WM Life Re reinsures death and living benefit guarantees associated with certain variable annuities issued in Japan, commencing September 1, 2006. WM Life Re has assumed the risk related to a total of $300 millionshortfall between the account value and the guaranteed value that must be paid by the ceding company to an annuitant or to an annuitant's beneficiary in cash, ofaccordance with the underlying annuity contracts. Generally, the liabilities associated with these guarantees increase with declines in the equity markets, interest rates and currencies against the Japanese Yen, as well as with increases in market volatilities. The liability is also affected by annuitant-related actuarial assumptions, including surrender and mortality rates.

        WM Life Re purchases derivative instruments, which (1) $225 million was forcurrently include put options and futures contracts on major equity indices, currency pairs and futures contracts on bonds, to mitigate the purchase of preferred stock of Fund American (the "Berkshire Preferred Stock"), which has a $300 million redemption value; and (2) $75 million was forrisks associated with changes in the purchase of warrants to acquire 1,724,200 Common Sharesfair value of the Company (the "Warrants"reinsured variable annuity guarantees. WM Life Re measures its net exposure to changes in relevant interest rates, foreign exchange rates and equity markets on a daily basis and adjusts its economic hedge positions within risk guidelines established by senior management. WM Life Re also monitors the effects of annuitant-related experience against actuarial assumptions (including surrender and mortality rates) on a weekly basis and adjusts relevant assumptions and economic hedge positions if required.

Tuckerman Capital, LP and Tuckerman Capital II, LP

        White Mountains owns approximately 96% of Tuckerman Capital, LP and approximately 50% of Tuckerman Capital II, LP (collectively, the "Tuckerman Funds"). The Berkshire Preferred Stock is entitledTuckerman Funds are managed by Tuckerman Capital, a private investment firm that focuses on acquisitions of small manufacturing companies, and are consolidated within White Mountains' financial statements. Tuckerman Capital focuses its acquisition efforts on companies with enterprise values ranging from $5 million to $25 million and with established track records of success. The companies owned by the Tuckerman Funds are manufacturers of highly engineered, non-commodity products across a dividendbroad range of no less than 2.35% per quarter and is mandatorily redeemable on May 31, 2008. During 2004, Berkshire exercised its warrants for $294 million in cash.

        Also as part of the financing of the OneBeacon Acquisition, Zenith Insurance Company ("Zenith") purchased $20 million in cumulative non-voting preferred stock of FAEH (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. 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.industries.







        At December 31, 2007 and 2006, the Tuckerman Funds had $91 million and $101 million of total assets and accounted for $32 million and $38 million of White Mountains' net assets, respectively.


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, 20042007 and 2003,2006, American Centennial had $61.3$78 million and $61.1$80 million of total assets and $21.0$11 million and $22.6$13 million of shareholder's equity, respectively. At December 31, 20042007 and 2003,2006, British Insurance Company had $33.4$18 million and $25.7$37 million of total assets and $4.5$6 million and $5.6$8 million of shareholder's equity, respectively.

        In January 2004,WTM Bank Facility

        During the second quarter of 2007, White Mountains sold Peninsula, which isreplaced its existing credit facility with a Maryland-domiciled propertynew $475 million revolving credit facility that matures in June 2012 (the "WTM Bank Facility"). This new facility removed WMRe Group as co-borrower and casualty insurer, for $23.3 million. Atco-guarantor, added certain intermediate holding companies of White Mountains as co-guarantors and amended and/or removed certain financial and other covenants. As of December 31, 2003 Peninsula had $60.6 million2007, the WTM Bank Facility was undrawn.

INVESTMENTS

        White Mountains' investment philosophy is to maximize its after-tax total risk-adjusted return over the long term. Under this approach, each dollar of total assetsafter-tax investment income and $21.7 millionrealized and unrealized gains and losses is valued equally. White Mountains' investment portfolio mix as of shareholder's equity, respectively. For the years ended December 31, 2003 and 2002, Peninsula had $34.1 million and $29.5 million2007 consisted in large part of net written premiums, respectively.


INVESTMENTS


        The investment portfolios of White Mountains' insurance and reinsurance operations consist primarily ofhigh-quality, fixed maturity investments but also consist, in part, ofand short-term investments, commonas well as equity securitiesinvestments and other investments, (principally investments insuch as hedge funds, limited partnership interests).partnerships and private equities. White Mountains' management believes that prudent levels of investments in common equity securities and other investments within its investment portfolio are likely to enhance long-term 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.portfolio.

        At December 31, 2004, approximately 99% of White Mountains' fixed maturity investments received an investment grade 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 credit quality of companies that have publicly issued debt. An investment grade rating, which is indicative of a strong credit profile of an issuer, is defined as "BBB-" (Adequate, the 10^th highest of 24 ratings) or better by S&P and "Baa3" (Adequate, the 10^th highest of 21 ratings) or better by 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, 2004 White Mountains' consolidated investment portfolio consisted of $7,900.0 million (75%) of fixed maturity investments, $1,058.2 million (10%) of short-term investments, $1,043.9 million (10%) of common equity securities and $527.4 million (5%) of other investments. White Mountains' fixed maturity investments at December 31, 2004 consisted principally of corporate debt securities (49%), U.S. government and agency securities (30%), foreign government obligations (10%), mortgage-backed securities (9%) and preferred equity securities and municipal bonds (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 generallyalso actively manages the interest rate risk associated with holding fixed maturity investments by actively monitoring and maintaining the average duration of the portfolio, about 2.5 years including short-term investments and about 3.0 years excluding short-term investments at December 31, 2007, to seek the highest after-tax, risk-adjusted total returns.

        Prospector's equity investment strategy is to maximize absolute risk-adjusted total return through investments in a variety of equity and equity-related instruments, using a bottom-up, value discipline. Preservation of capital is of the utmost importance. Using a value orientation, Prospector invests in relatively concentrated positions in the United States and other developed markets.

Trust account investments

        In connection with the OneBeacon Offering, Fund American and FAEH each established an irrevocable grantor trust. The assets of each trust were solely dedicated to the satisfaction of the payment of dividends and redemption amounts, respectively, on $300 million liquidation preference of Fund American's Berkshire Preferred Stock, and $20 million liquidation preference of FAEH's Zenith Preferred Stock. Fund American and FAEH funded their respective trusts with cash and purchased a portfolio of fixed maturity securities issued by the U.S. government and government sponsored enterprises, the scheduled interest and principal payments of which are sufficient to pay when due all amounts required under the terms of the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively (including the mandatory redemption of the Berkshire Preferred Stock in May 2008 and the optional redemption of the Zenith Preferred Stock in June 2007, which White Mountains exercised and redeemed).

Prospector Offshore Fund, Ltd.

        White Mountains owns approximately 46% of the Prospector Offshore Fund, Ltd. ("Prospector Fund"). The Prospector Fund is managed by Prospector, a registered investment advisor, and is consolidated within White Mountains' financial statements. The Prospector Fund is an open-ended mutual fund that pursues investment opportunities in a variety of equity and equity-related instruments, with a view towards achieving an adequate after-tax total return without subjectingprincipal focus on the portfolio to an unreasonable level of interest rate risk.financial services sector and a special emphasis on the insurance industry.

        At December 31, 2004,2007 and 2006, the durationProspector Fund had $207 million and $211 million of total assets and accounted for $64 million and $59 million of White Mountains' fixed maturity investments and short-term investments was approximately 3 years.net assets, respectively.




Montpelier Re Holdings Ltd. ("Montpelier")

        In December 2001, White Mountains, the Benfield Group plc and several other private investors established Montpelier Re and its wholly ownedwholly-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 Re 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 Re in exchange for 10.8 million common shares and warrants to acquire 4.8 million additional common shares of Montpelier.Montpelier Re.

        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 Re from an existing warrant holder for $54.1 million in cash, thereby raising the total number of such warrants owned byand White Mountains sold 4.5 million common shares of Montpelier Re to 7.2third parties. During 2006, White Mountains sold an additional 5.4 million shares of its common share investment in Montpelier Re to third parties.

        At December 31, 2006, White Mountains' investment in Montpelier Re warrants and common shares totaled $67 million. TheOn May 1, 2007, White Mountains sold all of its remaining interest in Montpelier Re, which consisted of 939,039 common shares and warrants haveto purchase 7,172,376 common shares, for total proceeds of $65 million and recognized an exercise priceafter tax loss of $16.67 per share (as adjusted for stock splits) and are exercisable until December 2011.$1.8 million.


Investments in Unconsolidated Affiliates


Symetra Financial Corporation ("Symetra")

        On August 2,In 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$195 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 eightseven member board of directors. White Mountains accounts for its investment in Symetra under the equity method as an investment in an unconsolidated affiliate.

        On October 26, 2007, Symetra executed a 7.7-for-1 stock dividend (substantially equivalent to an 8.7-for-1 stock split) that increased White Mountains' investment in Symetra's common shares from 2.0 million to 17.4 million, and the number of warrants to acquire additional common shares from 1.1 million at $100 per share to 9.5 million at $11.49 per share. The stock split, effected in the form of a dividend, had no effect on White Mountains' percentage of ownership in Symetra.

        Symetra's total revenues and net income for the five monthsyears ended December 31, 20042007, 2006, and 2005 were $701.9$1,590 million and $54.3$167 million, respectively.$1,568 million and $159 million, and $1,628 million and $146 million. Symetra's total assets and shareholders' equity as of December 31, 20042007 and 2006 were $22.1$19.6 billion and $1.4$1.3 billion, respectively, and $20.1 billion and $1.3 billion, respectively. Symetra's principal insurance operating subsidiaries are rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best and "A-" (Strong, the seventh highest of twenty-one ratings) by Standard & Poor's.

        As of December 31, 2004,2007 and 2006, White







Mountains' total investment in Symetra was $248.4$324 million and $307 million, respectively, excluding $56.6$6 million and $4 million, respectively, of equity in unrealized gainslosses from Symetra's fixed maturity investments. During 2007 and 2006, White Mountains received special cash dividends from Symetra of $31 million and $16 million on its common share investment and $17 million and $9 million on its warrant investment.

Pentelia

        In April of 2007, White Mountains invested $50 million in Pentelia, a fund that invests in insurance-related investment assets. White Mountains has determined that its investment in Pentelia is a variable interest entity. However, since White Mountains is not the primary beneficiary, it accounts for its interests in Pentelia as an equity method investment in an unconsolidated affiliate. White Mountains' exposure to loss is limited to the carrying value of its investment in Pentelia, which, as of December 31, 2007, was $52 million.

Delos

        On August 3, 2006, White Mountains Re sold Sirius America to Delos. As part of the transaction, White Mountains invested $32 million in Delos, representing an equity interest of approximately 18%, which is accounted for as an equity method investment in an unconsolidated affiliate. As of December 31, 2007, White Mountains' total investment in Delos was $34 million.




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

        MSA is a subsidiary of National GrangeMain Street America Group Mutual Insurance CompanyHoldings, Inc. ("NGM"Main Street Group"), a New Hampshire-domiciledFlorida-domiciled mutual property and casualty insurance holding company, which insures risks located primarily in New York, Massachusetts, Connecticut, Pennsylvania, New Hampshire, Virginia and Florida. White Mountains ownsowned 50% of the outstanding common stock of MSA and accounts for this investment using the equity method.from March 1998 until October 2006, when White Mountains'Mountains received a $70 million cash dividend from MSA, following which White Mountains sold its 50% common stock 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)to Main Street America Group, Inc. ("MSA Group") for (i) $70.0 million in 2004, 20039.0% non-voting cumulative perpetual preferred stock of MSA Group, and 2002. MSA's total assets(ii) 4.9% of the common stock of MSA Group. As a result of this transaction, White Mountains no longer accounts for its investment in MSA under the equity method 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.an investment in an unconsolidated affiliate.


REGULATION


United States


        White Mountains' U.S.-based insurance and reinsurance operating subsidiaries are subject to regulation and supervision in each of the states 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 insurers 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 operating 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 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 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 voluntarily 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, 2004,2007, the reserve for such assessments at OneBeacon totaled $18.3$17 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, setshad previously set virtually all aspects of automobile insurance rates, including agent commissions. SuchWhile the state is now transitioning to a system of managed competition, existing regulations oftencontinue to 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 MountainsMountains' investment portfolio at December 31, 20042007 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 states 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. See "Dividend Capacity" in the "LIQUIDITY AND CAPITAL RESOURCES" section of 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 SharesWhite Mountains' 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 Sharescommon shares, or in some states as little as 5%, 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 federal lawIn December of 2007, the United States government extended the Terrorism Act until December 31, 2014. The Terrorism Act was originally enacted in 2002 the Terrorism Act, providesand established a "back-stop" toFederal "backstop" for commercial property and casualty insurers inlosses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. As extended, the eventlaw now covers domestic acts 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.terrorism. In exchange for this "back-stop""backstop", 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" `sectionsection of this Item for a further discussion of the Terrorism Act.)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 at OneBeacon; however, there can be no assurance that the coverage provided under the NICO Cover will ultimately prove to be adequate.


Sweden

        Sirius International is subject to regulation and supervision by the Swedish Financial Supervisory Authorities (the "FSA"). As Sweden
is a member of the European Union (the "EU"), this supervision covers all locations within the EU. Generally, the FSA has broad supervisory and administrative powers over such matters as licenses, standards of solvency, investments, methods of accounting, form and content of financial statements, minimum capital and surplus requirements, 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 on non-compliance.

        In accordance with provisions of Swedish law, Sirius International can voluntarilyis permitted to transfer up to the full amount of its pretax earnings, or a portion thereof,pre-tax income, 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, underwhich equaled $1.4 billion at December 31, 2007. Under GAAP, an amount equal to Sirius International'sthe 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 shareholder's 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 and loss reserves 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. Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International's safety reserve ($398 million at December 31, 2007) is included in solvency capital. Access to the safety reserve is restricted to coverage of aggregate losses and requires the approval of Swedish regulatory authorities.

Bermuda Insurance Regulation

        The Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"), regulates the insurance business of WMRe (Bermuda) and Scandinavian Re, and provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority ("BMA"). The BMA, in deciding whether to grant registration, has broad discretion to act as it thinks fit in the public interest. The BMA is required by the Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it has, or has available to it, adequate knowledge and expertise to operate an insurance business. In addition, the BMA is required by the Insurance Act to determine whether a person who proposes to control 10 percent, 20 percent, 33 percent or 50 percent (as applicable) of the voting powers of a Bermuda registered insurer or its parent company is a fit and proper person to exercise such degree of control.

        The continued registration of an applicant as an insurer is subject to the applicant complying with the terms of its registration and such other conditions as the BMA may impose from time to time. The Insurance Act also grants to the BMA powers to supervise, investigate and intervene in the affairs of insurance companies.

        The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards as well as auditing and reporting requirements. 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 on non-compliance.

Certain Other Bermuda Law Considerations

        White Mountains is an exempted company organized under the Companies Act 1981 of Bermuda (the "Companies Act"). As a result, White Mountains needs to comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions from contributed surplus. A company is prohibited from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are reasonable grounds for believing that:

(1)

the company is, or would after the payment be, unable to pay its liabilities as they become due; or



(2)

the realizable value of the company's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.




        Under White Mountains' bye-laws, each common share is entitled to dividends if, and when, dividends are declared by its board of directors, subject to any preferred dividend right of the holders of any preference shares. Issued share capital is the aggregate par value of the company's issued shares, and the share premium account is the aggregate amount paid for issued shares over and above their par value. Share premium accounts may be reduced in certain limited circumstances. In addition, the Companies Act regulates return of capital, reduction of capital and any purchase or redemption of shares by White Mountains.

        Although White Mountains is incorporated in Bermuda, it has been designated as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to its non-resident status, White Mountains may hold any currency other than Bermuda dollars and convert that currency into any other currency, other than Bermuda dollars, without restriction.

        Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 and the Exchange Control Act 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA in its policy dated June 1, 2005 provides that where any equity securities, including White Mountains' common shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident, for as long as any equities securities of such company remain so listed. The New York Stock Exchange is deemed to be an appointed stock exchange under Bermuda law. Notwithstanding the above general permission, the BMA has granted White Mountains permission to, subject to its common shares being listed on an appointed stock exchange, (a) issue and transfer its shares, up to the amount of its authorized capital from time to time, to persons resident and non-resident of Bermuda for exchange control purposes; (b) issue and transfer options, warrants, depositary receipts, rights, and other securities; and (c) issue and transfer loan notes and other debt instruments and options, warrants, receipts, rights over loan notes and other debt instruments to persons resident and non-resident of Bermuda for exchange control purposes.

        Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place in Bermuda. As exempted companies, White Mountains may not, without the express authorization of the Bermuda legislature or under a license granted by the Bermuda Minister of Finance, participate in various specified business transactions, including:

•

the acquisition or holding of land in Bermuda, except land held by way of lease or tenancy agreement which is required for White Mountains' business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for White Mountains' officers and employees and held with the consent of the Bermuda Minister of Finance, for a term not exceeding 21 years;



•

the taking of mortgages on land in Bermuda in excess of $50,000;



•

the acquisition of any bonds or debentures secured by any land in Bermuda, other than certain types of Bermuda government or public authority securities; or



•

subject to some exceptions, the carrying on of business of any kind in Bermuda for which White Mountains is not licensed in Bermuda.

        Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian) is available who meets the minimum standard requirements for the advertised position. In 2001, the Bermuda government announced a new policy limiting the duration of work permits to six years, with certain exemptions for key employees. In addition, exempted companies, such as White Mountains, must comply with Bermuda resident representation provisions under the Companies Act which require that a minimum number of offices must be filled by persons who are ordinarily resident in Bermuda.








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 ability to pay claims. A.M. Best currently rates OneBeacon's, White Mountains Re's and Esurance's principal operating insurance subsidiaries "A" (Excellent, the third highest of fifteen ratings) and NFU "A-" (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 and ceding companies.

        Rating agencies also evaluate the general creditworthiness of debt securities issued by companies. Their ratings are then used by existing or potential investors to assess the likelihood of repayment on a particular debt issue. White Mountains believes that strong debt ratings are important factors that provide better financial flexibility when issuing new debt or restructuring existing debt.

        The following table presents the financial strength ratings assigned to White Mountains' principal insurance and reinsurance operating subsidiaries and the debt ratings for White Mountains' principal financial instruments as of February 28, 2008:

			A.M. Best(1)		Standard & Poor's(2)		Moody's(3)		Fitch(4)
OneBeacon
	Rating		"A" (Excellent)		"A" (Strong)		"A2" (Good)		"A" (Strong)
	Outlook		Stable		Stable		Stable		Stable
Folksamerica
	Rating		"A-" (Excellent)		"A-" (Strong)		"A3" (Good)		"A-" (Strong)
	Outlook		Stable		Stable		Stable		Stable
Sirius International
	Rating		"A" (Excellent)		"A-" (Strong)		"A3" (Good)		"A-" (Strong)
	Outlook		Stable		Stable		Stable		Stable
WMRe (Bermuda)
	Rating		"A-" (Excellent)		No Rating		No Rating		No Rating
	Outlook		Stable		N/A		N/A		N/A
Esurance
	Rating		"A-" (Excellent)		No Rating		No Rating		No Rating
	Outlook		Stable		N/A		N/A		N/A
Fund American Senior Notes(5)
	Rating		"bbb" (Adequate)		"BBB" (Adequate)		"Baa2" (Medium Grade)		"BBB" (Good)
	Outlook		Stable		Stable		Stable		Stable
WMRe Senior Notes
	Rating		"bbb-" (Adequate)		"BBB-" (Adequate)		"Baa3" (Medium Grade)		"BBB" (Good)
	Outlook		Stable		Stable		Stable		Stable
WMRe Preference Shares
	Rating		"bb" (Speculative)		"BB" (Speculative)		"Ba2" (Speculative)		"BBB-" (Good)
	Outlook		Stable		Stable		Stable		Stable

---

(1)

"A" is the third highest of fifteen financial strength ratings, "A-" is the fourth highest of fifteen financial strength ratings, "bbb" is the ninth highest of twenty-two creditworthiness ratings, "bbb-"is the tenth highest of twenty-two creditworthiness ratings, and "bb" is the twelfth highest of twenty-two creditworthiness ratings assigned by A.M. Best.



(2)

"A" is the sixth and "A-" is the seventh highest of twenty-one financial strength ratings and "BBB" is the ninth highest of twenty-two creditworthiness ratings, "BBB-"is the tenth highest of twenty-two creditworthiness ratings, and "BB" is the twelfth highest of twenty-two creditworthiness ratings assigned by Standard & Poor's.



(3)

"A2" is the sixth and "A3" is the seventh highest of twenty-one financial strength ratings and "Baa2" is the ninth highest of twenty-one creditworthiness ratings, "Baa3" is the tenth highest of twenty-one creditworthiness ratings, and "Ba2" is the twelfth highest of twenty-one creditworthiness ratings assigned by Moody's.



(4)

"A" is the sixth and "A-" is the seventh highest of twenty-one financial strength ratings, "BBB" is the ninth highest of twenty-three creditworthiness ratings, and "BBB-"is the tenth highest of twenty-three creditworthiness ratings assigned by Fitch.



(5)

The Fund American Senior Notes are fully and unconditionally guaranteed as to the payment of principal and interest by the Company.







EMPLOYEES


        As of December 31, 2004,2007, White Mountains employed 5,0305,045 persons (consisting of 6540 persons at the Company and its intermediate holding companies, 3,8682,673 persons at OneBeacon, 542522 persons at White Mountains Re, 5421,754 persons at Esurance, 32 persons at WM Advisors, 9 persons at WM Life Re, 6 persons at Galileo and 139 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 SEC. 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 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.www.whitemountains.com.

        The Company will provide to any shareholder, upon request and without charge, copies of these documents (excluding any applicable exhibits unless specifically requested). 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.

Item 1A.    Risk Factors


        The information contained in this report 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 of 1934.See "FORWARD-LOOKING STATEMENTS"(page 95) for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements. The Company's actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.

Unpredictable catastrophic events could adversely affect our financial condition or results of operations.

        We write insurance and reinsurance policies that cover catastrophic events. Our policies cover unpredictable natural and other disasters, such as hurricanes, windstorms, earthquakes, floods, fires and explosions. In recent years, the frequency of major weather-related catastrophes has increased. Our exposure to catastrophic windstorm damage in the Northeastern United States is the largest single natural risk to our business. In the case of OneBeacon, some extremely remote modeled catastrophic events, or series of catastrophic events, could be of sufficient size to cause OneBeacon to become insolvent, which could adversely effect our financial condition and results of operations. We also have significant exposure to a major earthquake in California or Japan and windstorm damage in Northern Europe, the United States Atlantic Coast (i.e., Massachusetts to Florida) and the United States Gulf Coast region (i.e., Florida to Texas). In addition, we are exposed to losses from terrorist attacks, such as the attacks on the United States on September 11, 2001.

        The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Increases in the value of insured property, the effects of inflation and changes in cyclical weather patterns may increase the severity of claims from catastrophic events in the future. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year and adversely affect our financial condition. Our ability to write new insurance and reinsurance policies could also be impacted as a result of corresponding reductions in our surplus levels.

        We manage our exposure to catastrophic losses by limiting the aggregate insured value of policies in geographic areas with exposure to catastrophic events and by estimating a PML for many different catastrophe scenarios and by buying reinsurance. To manage and analyze aggregate insured values and PML, we use a variety of tools, including catastrophe modeling software packages. Our estimates of PML are dependent on many variables, including assumptions about the demand surge and storm surge, loss adjustment expenses, insurance-to-value and storm intensity in the aftermath of weather-related catastrophes utilized to model the event, the relationship of the actual event to the modeled event and the quality of data provided to us by ceding companies (in the case of our reinsurance operations). Accordingly, if our assumptions about the variables are incorrect, the losses we might incur




from an actual catastrophe could be materially higher than our expectation of losses generated from modeled catastrophe scenarios and our financial condition and results of operations could be materially adversely affected.

We may not be able to successfully alleviate risk through reinsurance and retrocessional arrangements. Additionally, we may be unable to collect all amounts due from our reinsurers under our existing reinsurance and retrocessional arrangements.

        We attempt to limit our risk of loss through reinsurance and retrocessional arrangements. Retrocessional arrangements refer to reinsurance purchased by a reinsurer to cover its own risks assumed from primary ceding companies. The availability and cost of reinsurance and retrocessional protection is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements, which could have a material adverse effect on our financial condition and results of operations.

        We are not relieved of our obligation to our policyholders or ceding companies by purchasing reinsurance. Accordingly, we are subject to credit risk with respect to our reinsurance and retrocessions in the event that a reinsurer is unable to pay amounts owed to us as a result of a deterioration in its financial condition. A number of reinsurers in the industry experienced such a deterioration in the aftermath of the 2001 terrorist attacks and the active 2005 hurricane season. It is possible that one or more of our reinsurers will be significantly adversely affected by future significant loss events, causing them to be unable to pay amounts owed to us. We also may be unable to recover amounts due under our reinsurance and retrocessional arrangements if our reinsurers choose to withhold payment due to a dispute or other factors beyond our control.

Our loss reserves may be inadequate to cover our ultimate liability for losses and as a result our financial results could be adversely affected.

        We are required to maintain adequate reserves to cover our estimated ultimate liabilities for loss and loss adjustment expenses. Loss and LAE reserves are typically comprised of (1) case reserves for claims reported and (2) IBNR reserves for losses that have occurred but for which claims have not yet been reported, or IBNR, which include a provision for expected future development on case reserves. These reserves are estimates based on actuarial and statistical projections of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. Because of the uncertainties that surround estimating loss and LAE reserves, we cannot be certain that our reserves are adequate and actual claims and claim expenses paid might exceed our reserves due to the uncertainties that surround estimating loss and LAE reserves. If we determine in the future that our reserves are insufficient to cover our actual loss and LAE, we would have to strengthen our reserves, which could have a material adverse effect on our financial condition and results of operations.

        For further discussion of our loss and LAE, including our asbestos and environmental reserves, see "Loss and Loss Adjustment Expenses" in "CRITICAL ACCOUNTING ESTIMATES" in Item 7.

We may not maintain favorable financial strength or creditworthiness ratings which could adversely affect our ability to conduct business.

        Third party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers and reinsurers. These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of the criteria relate to general economic conditions and other circumstances outside the rated company's control. These financial strength ratings are used by policyholders, agents and brokers as an important means of assessing the suitability of insurers as business counterparties and have become an increasingly important factor in establishing the competitive position of insurance companies. These financial strength ratings do not refer to our ability to meet non-insurance obligations and are not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold or sell our securities.

        Rating agencies periodically evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. See "RATINGS" in Item 1 for a summary of financial strength ratings on our significant subsidiaries and creditworthiness ratings on our financial instruments. A downgrade or withdrawal of our financial strength ratings could severely limit or prevent our insurance subsidiaries from writing new insurance or reinsurance policies or renewing existing insurance policies, which could have a material adverse effect on our financial condition and results of operations. A downgrade or withdrawal of our creditworthiness ratings could severely limit our ability to raise new debt or could make new debt more costly and/or have more restrictive conditions.




        Additionally, the majority of White Mountains Re's assumed reinsurance contracts contain optional cancellation, commutation and/or funding provisions that would be triggered if A.M. Best and/or S&P were to downgrade the financial strength ratings of either Folksamerica or Sirius International below "A-" or if the surplus of Folksamerica or Sirius International were to substantially decrease (generally, in excess of 20%). A client may choose to exercise these rights depending on, among other things, the reasons for such a downgrade, the extent of the downgrade, the prevailing market conditions, the degree of unexpired coverage, and the pricing and availability of replacement reinsurance coverage. We cannot predict in advance how many of our clients would actually exercise such rights or what effect such cancellations would have on our financial condition, results of operations and/or liquidity, but such an effect could be materially adverse.

Our debt, preferred stock and related service obligations could adversely affect our business.

        As of December 31, 2007, we had approximately $1,193 million face value of indebtedness, $300 million face value of mandatorily redeemable preferred stock and $250 million face value of non-cumulative perpetual preference shares outstanding. In connection with the OneBeacon Offering, we established and funded trusts that are solely dedicated to the payment of dividends and redemption amounts of our outstanding mandatorily redeemable preferred stock with a deposit of U.S. government securities.

        Our ability to meet our debt and related service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulation. We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. If we do not have enough cash, we may be required to refinance all or part of our existing debt, sell assets, borrow more cash or sell equity. We cannot assure you that we will be able to accomplish any of these alternatives on terms acceptable to us, if at all.

        We could incur additional indebtedness and issue additional preferred stock in the future. To the extent new debt, new preferred stock and other obligations are added to our and our subsidiaries' current debt and preferred stock levels, the risks described in the previous paragraph would increase.

Our investment portfolio may suffer reduced returns or losses which could adversely affect our results of operations and financial condition. Any increase in interest rates or volatility in the equity and debt markets could result in significant losses in the fair value of our investment portfolio.

        Our investment portfolio consists of fixed maturity securities, short-term investments, common equity securities and other investments such as hedge funds, limited partnerships and private equities. Our investment selections are designed to maximize after-tax, total risk-adjusted return over the long term; however, investing entails substantial risks. We cannot assure you that we will achieve our investment objectives, and our investment performance may vary substantially over time.

        Investment returns are an important part of our growth in book value, and fluctuations in the fixed income or equity markets could impair our results of operations or financial condition. A significant period of time normally elapses between the receipt of insurance premiums and the disbursement of insurance claims. During this time, we generate investment income, consisting primarily of interest earned on fixed maturity investments and dividends earned on equity securities, by investing our capital as well as insurance premiums allocated to support unpaid loss and LAE reserves. We also recognize unrealized investment gains and losses on the securities we hold in our investment portfolio and we generate investment gains and losses from sales of securities from our investment portfolio.

        The investment income and fair market value of our investment portfolio are affected by general economic and market conditions, including fluctuations in interest rates and volatility in the stock market. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to manage the risks of investing in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. In particular, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse affect on our results of operations. In addition, we are exposed to changes in the level or volatility of equity prices that affect the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. Further, because a portion of our investment portfolio is invested in securities denominated in currencies other than U.S. dollar, the value of our portfolio is sensitive to changes in foreign currency rates. These conditions are outside of our control and could adversely affect the value of our investments and our results of operations and financial condition.




The property and casualty insurance and reinsurance industries are highly competitive and we may not be able to compete effectively in the future.

        The property and casualty insurance and reinsurance industries are highly competitive and have, from time to time, experienced severe price competition. OneBeacon competes with numerous regional and national insurance companies, including The St. Paul Travelers Companies, Inc., Zurich Financial Services Group, CNA Financial Corporation, Hartford Financial Services Group, Inc., The Hanover Insurance Group, Inc., W.R. Berkley Corporation, The Chubb Corporation, The Progressive Corporation, Allstate Insurance Company, Liberty Mutual, American International Group, Inc. and the regional Farm Bureaus. White Mountains Re competes with numerous reinsurance companies throughout the world, including ACE Limited, Arch Capital Group Ltd., Endurance Specialty Holdings Ltd., Everest Re Group, Ltd., Hannover Ruckversicherung AG, Lloyd's of London, Munich Re Group, Partner Re Ltd., Platinum Underwriters Holdings Ltd., Renaissance Re Holdings Ltd., Swiss Re Group, Transatlantic Holdings, Inc., XL Capital Ltd and General Reinsurance Corporation. Esurance competes with national and regional personal automobile insurance companies, though Esurance's main competition comes from other direct writers like Progressive, GEICO, and 21st Century. Many of these competitors have greater financial, marketing and management resources than we do and have established long-term and continuing business relationships throughout the insurance industry, which can be a significant competitive advantage for them.

        The agents upon whom OneBeacon relies compete with direct writers of insurance, who are often able to offer substantial discounts in pricing as compared to OneBeacon's insurance products. If OneBeacon's agents experience increased competition from direct writers of insurance, we in turn could be adversely affected if OneBeacon's agents are unable to maintain a competitive position in their respective markets. In addition, substantial new capital and competitors have entered the reinsurance market in recent years, and we expect to face further competition in the future. If we are unable to maintain our competitive position, our insurance and reinsurance businesses may be adversely affected and we may not be able to compete effectively in the future.

We may suffer losses from unfavorable outcomes from litigation and other legal proceedings.

        In the ordinary course of business, we are subject to litigation and other legal proceedings as part of the claims process, the outcomes of which are uncertain. We maintain reserves for these legal proceedings as part of our loss and LAE reserves. We also maintain separate reserves for legal proceedings that are not related to the claims process. In the event of an unfavorable outcome in one or more legal matters, our ultimate liability may be in excess of amounts we have currently reserved for and such additional amounts may be material to our results of operations and financial condition. For a description of our material legal proceedings, see "Item 3. Legal Proceedings."

        As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our financial condition and results of operations by either extending coverage beyond our underwriting intent or by increasing the number and size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance and reinsurance contracts that are affected by the changes.

Regulation may restrict our ability to operate.

        The insurance and reinsurance industries are subject to extensive regulation under U.S., state and foreign laws. Governmental agencies have broad administrative power to regulate many aspects of the insurance business, which include premium rates, marketing practices, advertising, policy forms and capital adequacy. These governmental agencies are concerned primarily with the protection of policyholders rather than shareholders. Insurance laws and regulations impose restrictions on the amount and type of investments, prescribe solvency standards that must be met and maintained and require the maintenance of reserves. In our insurance underwriting, we rely heavily upon information gathered from third parties such as credit report agencies and other data aggregators. The use of this information is also highly regulated and any changes to the current regulatory structure could materially affect how we underwrite and price premiums.

        Changes in laws and regulations may restrict our ability to operate and/or have an adverse effect upon the profitability of our business within a given jurisdiction. For example, legislation has been passed in Florida that significantly changes the reinsurance protection provided by the Florida Hurricane Catastrophe Fund to companies that write business in Florida. The new legislation also contains a provision that will disallow insurers that write homeowners insurance elsewhere in the United States to write automobile insurance in Florida unless they also write homeowners insurance in Florida. The impact of the new legislation, which could be adverse, upon White Mountains' insurance and reinsurance business in Florida cannot be determined until regulations interpreting the




legislation are promulgated. In addition, state and Federal legislation has been proposed to establish catastrophe funds and underwriting in coastal areas which could impact our business.

In recent years we have successfully created shareholder value through acquisitions and dispositions of insurance and reinsurance entities. We may not be able to continue to create shareholder value through such transactions in the future.

        In the past several years, we have completed numerous acquisitions and dispositions of insurance and reinsurance entities, many of which have contributed significantly to our growth in tangible book value. Failure to identify and complete future acquisition and disposition opportunities could limit our ability to achieve our target returns. Even if we were to identify and complete future acquisition opportunities, there is no assurance that such acquisitions will ultimately achieve their anticipated benefits.

We may become subject to taxes in Bermuda after 2016.

        We may become subject to taxes in Bermuda after 2016. We have received a standard assurance from the Bermuda Minister of Finance, under Bermuda's Exempted Undertakings Tax Protection Act 1966, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance tax, then the imposition of any such tax will not be applicable to us or to any of our operations or our shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance's assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. In the event that we become subject to any Bermuda tax after such date, it would have a material adverse effect on our financial condition and results of operations.

Changes in tax laws or tax treaties may cause more of the income of certain non-U.S. companies in our group to become subject to taxes in the United States.

        The taxable income of our U.S. subsidiaries is subject to U.S. Federal, state and local income taxes and other taxes. The income of the non-U.S. companies in our group is generally not subject to tax in the United States other than withholding taxes on interest and dividends. Certain of our non-U.S. companies are eligible for the benefits of tax treaties between the United States and other countries. We believe our non-U.S. companies will continue to be eligible for treaty benefits. However, it is possible that factual changes or changes to U.S. tax laws or changes to tax treaties that presently apply to our non-U.S. companies could impact income subject to tax in the United States. Similarly, changes to the applicable tax laws, treaties or regulations of other countries could subject the income of members of our group to higher rates of tax outside the United States.

We have significant foreign operations that expose us to certain additional risks, including foreign currency risks and political risk.

        White Mountains Re, in particular Sirius International and WMRe (Bermuda), conducts a significant portion of its business outside of the United States. As a result, a substantial portion of our assets, liabilities, revenues and expenses are denominated in currencies other than the U.S. dollar and are therefore subject to foreign currency risk. Our foreign currency risk cannot be eliminated entirely and significant changes in foreign exchange rates may adversely affect our financial condition or our results of operations.

        Our foreign operations are also subject to legal, political and operational risks that may be greater than those present in the United States. As a result, our operations at these foreign locations could be temporarily or permanently disrupted.

We depend on our key personnel to manage our business effectively and they may be difficult to replace.

        Our performance substantially depends on the efforts and abilities of our management team and other executive officers and key employees. Furthermore, much of our competitive advantage is based on the expertise, experience and know-how of our key management personnel. We do not have fixed term employment agreements with any of our key employees nor key man life insurance and the loss of one or more of these key employees could adversely affect our business, results of operations and financial condition. Our success also depends on the ability to hire and retain additional personnel. Difficulty in hiring or retaining personnel could adversely affect our results of operations and financial condition.




Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.

        We are organized under the laws of Bermuda, and a portion of our assets will be located outside the United States. As a result, it may not be possible for our shareholders to enforce court judgments obtained in the United States against us based on the civil liability provisions of the Federal or state securities laws of the United States, either in Bermuda or in countries other than the United States where we will have assets. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the Federal or state securities laws of the United States or would hear actions against us or those persons based on those laws.

        Our corporate affairs are governed by the Companies Act. The Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company's memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company's shareholders than that which actually approved it.

        When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company's affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.

The reinsurance business historically has been cyclical and, in the future, we expect to experience periods with excess underwriting capacity and unfavorable premium rates, terms and conditions.

        Historically, reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. The supply of reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return earned in the reinsurance industry. As a result, the reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excess underwriting capacity as well as periods when shortages of capacity permitted favorable premium rate levels. For example, the industry experienced a soft casualty market of lower prices and less favorable terms from 1997 to 2001 during which profitability suffered while the losses incurred from the 2005 U.S. hurricanes triggered price increases. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers significantly affect the reinsurance industry cycle. Any of these factors could lead to a significant reduction in premium rates, less favorable contract terms, fewer submissions for our underwriting capacity and potential regulatory response. We expect to continue to experience the effects of the industry's cyclicality.

We are largely dependent upon our ceding companies' evaluation of risk.

        White Mountains Re, like other reinsurance companies that write treaty reinsurance, generally does not evaluate separately each of the individual risks assumed under our reinsurance contracts. As such, we are largely dependent upon the cedents' original underwriting decisions. We are subject to the risk that the cedents may not have adequately or accurately evaluated the risks that they have insured, and we have reinsured, and that the premiums




ceded may not adequately compensate us for the risks we assume. If our reserves are insufficient to cover our actual loss and LAE arising from our treaty reinsurance business, we would have to strengthen our reserves and incur charges to our earnings. These charges could be significant and could have a material adverse effect on our results of operations and financial condition.

We have surety bonds in Latin America and write credit and bond reinsurance that could expose us to an economic downturn, or changes to the regulatory or legal environment, in certain countries and regions as a whole.

        White Mountains, through Folksamerica, has run-off operations that include a material amount of Latin American facultative surety exposure (our "Surety Book"). Surety bonding describes a class of business where insurance companies guarantee various contractual commitments assumed by contractors and other businesses. The majority of Folksamerica's Surety Book is comprised of performance bonds, which is insurance obtained by service providers, such as construction firms, to protect against their failure to complete service engagements according to contractual terms. As of January 31, 2008, the maximum certificate or bonding value in our Surety Book (a measurement which does not factor in the percentage to completion of any of the projects supported by the bonds) was approximately $750 million. Approximately 81% of our Surety Book is represented by contracts in Colombia and 13% is represented in Brazil. While our Surety Book is comprised of a large number of contracts with relatively small individual exposures, a severe economic downturn that adversely affects the capital supply or business environment in Colombia or Brazil individually, or Latin America generally, or a significant shift in the regulatory or legal environments governing access to collateral in these markets, could have a material adverse effect on our results of operations and financial condition. An example of this type of a regional downturn is the Asian financial crisis that occurred in the mid-to-late 1990s principally affecting Thailand, South Korea and Hong Kong.

        In addition, White Mountains Re, through Sirius International, writes credit and bond reinsurance, mostly on companies with worldwide operations. Most debtors are based in Europe, with companies in Germany, France and Italy representing approximately 40% of White Mountains Re's exposure. The bulk of the business is traditional short term commercial credit insurance, covering pre-agreed domestic and export sales of goods and services with typical coverage periods of 60 to 120 days.

        Losses under these policies (protection of undisputed debts against declared insolvency and protracted default) are closely correlated to reductions in a respective country's gross national product. As such, a recession that occurs in a relatively short period of time and impacts multiple countries could result in higher than expected losses. As of December 31, 2007, White Mountains Re's contractual loss exposure for this business is approximately $1 billion. However, because of the short-term nature of this business, ceding companies can actively adjust credit exposures and substantially mitigate the effect of an economic crisis or a major bankruptcy. The limit of liability given above does not consider the positive impact of dynamic limit management nor does it include the credit for recoveries.

Item 1B.    Unresolved Staff Comments


        As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the Exchange Act.


Item 2.    Properties


        The Company maintains two professional offices in Hamilton, Bermuda which serve as its headquarters and its registered office. The Company's principal executive office is in Hanover, New Hampshire. In addition, the Company maintains professional offices in Guilford, Connecticut, which house its investment and corporate finance functions.

        The United States headquarters of OneBeacon is located in Canton, Massachusetts, while its principal executive office is located in Minnetonka, Minnesota. OneBeacon also maintains offices in various cities throughout the United States.

White Mountains Re's headquarters is in Hamilton, Bermuda with an additionaland its principal executive office is located in New Jersey.York, New York. Folksamerica is headquartered in New York, New York with branch offices in various cities throughout the United States.States and in Toronto, Canada. Sirius International is headquartered in Stockholm, Sweden with various branch offices in Europe and Asia. WMUWMRUS maintains officesan office 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 office in Guilford, Connecticut, which houses its investment and corporate finance functions.




        The Company's headquarters, registered office, principal executive office and investment and corporate finance officeoffices are leased. Sirius International's home office in Sweden and substantially all of its branch offices, as well as WMU's officesWMRUS's office in Ireland and Bermuda, are leased. Folksamerica's home office and its branch offices are leased as well. TheOneBeacon owns its home officeoffice. Most of OneBeacon and most of itsOneBeacon's branch offices are leased with the exception of branch offices located in New York, whichYork. Esurance's home office and its branch offices are owned by OneBeacon. Certain leased and owned OneBeacon office locations have been leased or subleased to







Liberty Mutual in connection with the Liberty Agreement for a period of no more than three years.leased. 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.

OneBeacon

        In NovemberAugust 2004, OneBeacon Insurance Group received a subpoena fromasserted claims against Liberty Mutual in the Attorney GeneralCourt of Common Pleas in Philadelphia, Pennsylvania (the "Court") for breach of contract and negligence with respect to agreements with Liberty Mutual (the "Liberty Agreements"). The portion of the State of New York requesting documents and seeking informationcontract claim relating to OBIC was submitted to arbitration and the conductCourt stayed the remaining claims, including OneBeacon's claims on behalf of business betweenits other insurance brokers and OneBeacon. Subsidiariessubsidiaries that were signatories to the Liberty Agreements, pending resolution of the Company have also received information requests from various state insurance departments regarding producer compensation arrangements. White Mountains believes these requests are partarbitration. In August 2007, the arbitration panel issued an award in favor of OneBeacon on the portion of the ongoing, industry-wide investigationbreach of contract claim submitted to it finding that Liberty Mutual breached the Liberty Agreements. The panel awarded OneBeacon $4.5 million plus interest.

        Subsequent to the award, in September 2007, Liberty Mutual filed petitions in the U.S. District Court for the District of Massachusetts ("USDC") and the Court to vacate the arbitral award and dismiss or arbitrate the remaining Court claims. In October 2007, OneBeacon (on behalf of its other insurance subsidiaries that were signatories to the Liberty Agreements) filed suit against Liberty Mutual in Suffolk County Superior Court in Massachusetts to recover damages caused by Liberty Mutual's claims conduct. Concurrently, a demand for arbitration was served on Liberty Mutual to preserve the rights and interests of OneBeacon (on behalf of the same subsidiaries). In December 2007, the Court confirmed the arbitral award. Liberty Mutual has appealed the Court's confirmation of the award to the Pennsylvania Superior Court. Liberty Mutual's motion to vacate the award is still pending in USDC. Resolution of the outstanding motions is expected in the near future.

        In January 2005 Liberty Mutual initiated arbitration against OneBeacon (the "ULAE Arbitration") seeking payment of approximately $67 million relating to claims-related services under the Liberty Agreements. In September 2006, OneBeacon initiated an arbitration against Liberty Mutual (the "Reinsurance Arbitration") seeking payment of approximately $57 million relating to reinsurance arrangements under the Liberty Agreements. In January 2007, the Reinsurance Arbitration was consolidated into the ULAE Arbitration. In July 2007, the reinsurance payment issues in the Reinsurance Arbitration were favorably resolved. Arbitration hearings regarding industry sales practices.ULAE issues and damages related thereto are scheduled to occur in the second and third quarters of 2008, respectively.

        As of December 31, 2007, OneBeacon believes its loss and LAE reserves are sufficient to cover reasonably anticipated outcomes of all disputes with Liberty Mutual.

Esurance

        On May 15, 2002, The Robert Plan Corporation and several of its subsidiariesNovember 29, 2007, Dennis J. Czerwinski filed a lawsuit against Esurance Property and Casualty Insurance Company and Esurance Insurance Company in the Company, certainU.S. District Court, Eastern District of its subsidiaries and several individuals employed by the subsidiaries. The suit alleges that the defendants misappropriated confidential informationWisconsin, Milwaukee Division alleging violations of the plaintiffsFair Credit Reporting Act ("FCRA") and used such information to enter intoseeking class certification. Czerwinski alleged that Esurance's accessing of consumer credit reports in connection with prescreened offers of insurance violated the New York automobile assigned risk business in direct competition withFCRA because the plaintiffs.offers allegedly did not qualify as firm offers of insurance. The plaintiffs have recently increased their damages demand from $66 million to approximately $185 million, which they allege represents two yearsproposed class consists of their lost profitsall persons in the subject business. White Mountains, its named subsidiariesUnited States to whom Esurance sent a solicitation in the form of the one mailed to Czerwinski after February 1, 2006 through the date a class is certified. Esurance is disputing the allegations and 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 intendintends 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 $9 million as a result of the breach by the plaintiffs of the LAD servicing contract that OneBeacon had entered into with them.this action.

        On January 30, 2001, an 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 the assets of Executive Life Insurance Company ("ELIC"), a California insurer, in the 1991 sale of those assets conducted by the California 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 purchase ELIC's assets. Sierra Holdings settled its claims against Credit Lyonnais and certain other defendants for a total of $87 million. After expenses, White Mountains share 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 additional amounts from any settlements or judgments resulting from the ongoing lawsuit by the California Commissioner of 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 originally claimed $410 million in compensatory damages for lost commissions, although Aramarine has recently reduced its demand to $158 million. OneBeacon does not believe it has engaged in any actionable conduct. During 2004, OneBeacon prevailed on a motion for summary judgment to dismiss the 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 a Vote of Security Holders


        At 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 fiveThere were no matters submitted to a vote of the Company's directors to Class I ("Proposal I"),shareholders during the Electionfourth quarter of 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.2007.




        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)
February 28, 2008)

Name		Position		Age		Executive officer since		Position		Age		Executive officer since
Raymond Barrette		President and CEO		54		1997		Chairman and CEO		57		2007
John P. Cavoores		Managing Director, President and CEO of OneBeacon		47		2002
Reid T. Campbell								Managing Director of White Mountains Capital, Inc.		40		2007
Charles B. Chokel		Managing Director of White Mountains Capital, Inc.		51		2002		Managing Director and Chief Financial Officer of White Mountains Re		54		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		Executive Vice President and Chief Financial Officer		41		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		President and CEO of White Mountains Financial Services LLC		51		2005
T. Michael Miller								President and CEO of OneBeacon		49		2005
J. Brian Palmer		Chief Accounting Officer		32		2001		Chief Accounting Officer		35		2001
Robert L. Seelig		Vice President and General Counsel		36		2002		Vice President and General Counsel		39		2002
Gary C. Tolman								President and CEO of Esurance		56		2005
Allan L. Waters								President and CEO of White Mountains Re		50		2007

        All executive officers of the Company and its subsidiaries are elected by the Board for a term of one-yearone 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 has served as Chairman and CEO of the Company since January 2007. He served as a director of the Company from 2000 to 2005 and was appointedre-appointed as a director in August 2006. He previously served as President and CEO of the Company on January 1,from 2003 and has been a director since 2000. Mr. Barrette wasto 2005, as CEO of OneBeacon from June 2001 to December 2002, as President of the Company from 2000 to 2001 and remains its Chairman. Mr. Barrette joined White Mountains Insurance Group in November 1997 as Executive Vice President and Chief Financial Officer.Officer of the Company from 1997 to 2000. Mr. Barrette also serves as a director of OneBeacon Ltd.

Mr. Campbell has served as a Managing Director of White Mountains Capital, Inc. since January 2004. He was President from January 2000 to June 2001.joined White Mountains in 1994 and has served in a variety of financial management positions with White Mountains. Prior to joining White Mountains, Mr. Barrette had 23Campbell spent three years of experience in the insurance







business, mostly at Fireman's Fund Insurance Company. He iswith KPMG LLP. Mr. Campbell also Chairman of Esurance, Lead Director of Montpelier andserves as 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.Ltd.

        Mr. Chokel has served as Managing Director and Chief Financial Officer of White Mountains Re since August 2006. Prior to that he served as Managing Director of White Mountains Capital, Inc. since September 2003. Prior to that he served2003, as Managing Director and Chief Administrative Officer of OneBeacon since January 2003 and as Managing Director of OneBeacon 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 withjoined Progressive sincein 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 2003Symetra 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.OneBeacon Ltd.

        Mr. Lusardi was appointed Executive Vice President and Managing DirectorCEO of White Mountains Capital, Inc.Financial Services LLC 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. Lusardi also serves as a director of OneBeacon Ltd., Symetra and Primus Guaranty, Ltd.

Mr. Miller was appointed President and CEO of OneBeacon in July 2005 and joined OneBeacon as its Chief Operating Officer in April 2005. Mr. Miller also serves as a director of OneBeacon Ltd. Prior to joining White Mountains, Mr. Miller spent 10 years at St. Paul Travelers, most recently as Co-Chief Operating Officer. Prior to joining St. Paul Travelers, Mr. Miller spent 14 years with The Chubb Corporation.

        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.

Mr. Tolman has served as President and CEO of Esurance since 2000. Prior to joining Esurance, Mr. Tolman was with Talegen Holdings for 6 years, serving most recently as its President. Prior to joining Talegen, Mr. Tolman was with Fireman's Fund Corporation for more than 15 years.




Mr. Waters was elected Director, President and CEO of White Mountains Re on March 6, 2007. Mr. Waters was a director of White Mountains from 2003 to 2004 and was re-elected as a director in November 2005. From 1998 to 2007, Mr. Waters was the founder and Managing Member of Mulherrin Capital Advisors, LLC. Mr. Waters formerly served as Senior Vice President and Chief Financial Officer of White Mountains from 1993 to 1998, as Vice President and Controller from 1990 to 1993, as Vice President of Finance from 1987 to 1990 and as Assistant Vice President of Finance from 1985 to 1987.


PART II


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


        As of February 15, 2005,28, 2008, there were 394378 registered holders of Common Shares,White Mountains' common shares, par value $1.00 per share.

        During each of 20042007 and 20032006, the Company declared and paid cash dividends on Common Sharescommon shares of $1.00$8.00 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.share.

        Common Sharesshares are listed on the New York Stock Exchange (symbol WTM) and the Bermuda Stock Exchange (symbol WTM-BH). The quarterly range of the daily closinghigh and low sales price for Common Sharescommon shares during 20042007 and 20032006 is presented below:

			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

			2007						2006
			High			Low			High			Low
Quarter ended:
	December 31		$	566.50		$	492.00		$	603.00		$	496.00
	September 30			608.96			507.00			537.00			447.00
	June 30			611.02			548.76			591.00			465.01
	March 31			590.40			532.35			594.50			517.00

        As permittedOn October 26, 2007, White Mountains repurchased 282,341 of its common shares for $500 per share, or $141 million, in a transaction with an institutional investor. On November 26, 2007, White Mountains repurchased an additional 8,500 of its common shares for $500 per share, or $4 million. These transactions were the first repurchases under the previously announced share repurchase plan authorized by White Mountains' Board of Directors on November 17, 2006. There are 709,159 shares remaining for future share repurchases under the agreement governingplan.

        For information on securities authorized for issuance under the Company's outstanding options to acquire Common Shares ("Options"),equity compensation plans, see "Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

        The following graph shows the Company accepted 97five-year cumulative total return for a shareholder who invested $100 in common shares in partial satisfaction(NYSE symbol "WTM") as of January 1, 2003, assuming re-investment of dividends. Cumulative returns for the strike price relating tofive-year period ended December 31, 2007 are also shown for the exercise of 435 Options duringStandard & Poor's 500 Stocks (Property & Casualty) Capitalization Weighted Index ("S&P P&C") and 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).Standard & Poor's 500 Stocks Capitalization Weighted Index ("S&P 500") for comparison.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN










Item 6.    Selected Financial Data


        Selected consolidated income statement data and ending balance sheet data for each of the five years ended December 31, 2004,2007, follows:

			Year Ended December 31,
$ in millions, except share and per share amounts
			2004			2003			2002			2001(a)(l)			2000(l)
Income Statement Data:
Revenues			$	4,553		$	3,794		$	4,208		$	3,234		$	851
Expenses				4,305			3,422			4,089			3,662			493
Pretax earnings (loss)				248			372			119			(428	)		358
	Income tax (provision) benefit			(47	)		(127	)		(11	)		179			(43	)
	Accretion and dividends on preferred stock of subsidiaries			—			(21)	(j)		(41	)		(23	)		—
	Equity in earnings (loss) of unconsolidated affiliates			37			57			14			1			(2	)
Net income (loss) from continuing operations				238			281			81			(271	)		313
	Net income from discontinued operations			—			—			—			—			95	(b)
	Cumulative effect of changes in accounting principles			—			—			660	(i)		—			—
	Extraordinary gains			181	(k)		—			7			12			—
Net income (loss)			$	419		$	281		$	748		$	(259	)	$	408
Net income (loss) from continuing operations per share:
	Basic		$	24.05		$	26.48		$	7.47		$	(86.52	)	$	53.08
	Diluted		$	22.67		$	23.63		$	6.80		$	(86.52	)	$	52.84
Balance Sheet Data:
Total assets			$	19,015		$	15,882		$	17,267		$	18,410		$	3,545
Short-term debt				—			—			33			358			—
Long-term debt				783			743			760			767			96
Deferred credits				—			—			—	(i)		683	(c)		92
Convertible preference shares				—			—			219			—			—
Mandatorily redeemable preferred stock of subsidiaries				212			195	(j)		181			170			—
Common shareholders' equity(d)				3,884			2,979			2,408			1,445			1,046
Book value per share(e)			$	349.60		$	293.15		$	254.52		$	160.36		$	177.07
Fully converted tangible book value per share(f)			$	342.52		$	291.27		$	258.82		$	225.81		$	187.65
Share Data:
Cash dividends paid per Common Share			$	1.00		$	1.00		$	1.00		$	1.00		$	1.20
Ending Common Shares (000's)(g)				10,773			9,007			8,351			8,245			5,880
Ending equivalent Common Shares (000's)(h)				47			1,775			2,455			1,803			81
Ending Common and equivalent Common Shares (000's)				10,819			10,782			10,806			10,048			5,961

			Year Ended December 31,
$ in millions, except share and per share amounts
			2007			2006			2005			2004			2003
Income Statement Data:
Revenues			$	4,734		$	4,794	(g)	$	4,632		$	4,555		$	3,794
Expenses				4,052			4,064			4,327			4,297			3,420
Pre-tax earnings				682			730	(g)		305			258			374
	Income tax provision			(211	)		(99	)		(37	)		(47	)		(127	)
	Minority interest			(93	)		(16	)		(12	)		(11	)		(2	)
	Equity in earnings of unconsolidated affiliates			29			37			34			38			57
	Accretion and dividends on preferred stock of subsidiaries			—			—			—			—			(21)	(a)
Net income before extraordinary items				407			652			290			238			281
	Extraordinary gains			—			21	(b)		—			181	(b)		—
Net income			$	407		$	673		$	290		$	419		$	281
Net income before extraordinary items per share:
	Basic		$	37.96		$	60.52		$	26.96		$	24.05		$	26.48
	Diluted		$	37 89		$	60.33		$	26.56		$	22.67		$	23.63
Balance Sheet Data:
Total assets			$	19,106		$	19,444		$	19,418		$	19,015		$	15,882
Long-term debt				1,193	(h)		1,107	(h)		779			783			743
Mandatorily redeemable preferred stock of subsidiaries				278			262			234			212			195
Minority interest—OneBeacon Ltd				517			491	(g)		—			—			—
Minority interest—WMRe Preference Shares				250	(i)		—			—			—			—
Minority interest—consolidated limited partnerships				100			113			96			59			5
Common shareholders' equity				4,713			4,455			3,833			3,884			2,979
Book value per share(c)			$	446.83		$	408.62		$	347.00		$	349.60		$	293.15
Fully diluted tangible book value per share(d)			$	444.47		$	406.00		$	342.51		$	342.52		$	291.27
Share Data:
Cash dividends paid per common share			$	8.00		$	8.00		$	8.00		$	1.00		$	1.00
Ending common shares (000's)(e)				10,554			10,783			10,779			10,773			9,007
Ending equivalent common shares (000's)(f)				(37	)		29			34			46			1,775
Ending common and equivalent common shares (000's)				10,517			10,812			10,813			10,819			10,782

---

(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.




(b)

Relates to a tax reserve release associated with the 1991 sale of Fireman's Fund Insurance Company.



(c)

Deferred credits added during 2001 resulted from the purchase of OneBeacon.



(d)

Increase in 2001 included effects of capital raising activities undertaken in connection with the OneBeacon Acquisition. Increase in 2002 included the recognition of $660 million in net deferred credits as a result of a change in accounting principles. See Note 1.



(e)

Includes the dilutive effects of outstanding Options and, for years prior to 2004, warrants to acquire Common Shares.



(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.



(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, Options and warrants to acquire Common Shares, when applicable.



(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)(b)

The extraordinary gain in 2006 resulted from the excess of the fair value over the cost of net assets acquired in the Mutual Services acquisition. 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)(c)

ForIncludes the dilutive effects of outstanding incentive options to acquire common shares ("Options") and, for years prior to 2004, warrants to acquire common shares.



(d)

Fully diluted tangible book value per share is a descriptionnon-GAAP measure which is derived by expanding the GAAP book value per share calculation to include the effects of assumed conversion of all in-the-money convertible securities and to exclude any unamortized goodwill and net unrealized gains from Symetra's fixed maturity portfolio. See the reconciliation of fully diluted tangible book value per share to book value per share on page 47.



(e)

During 2007, the Company repurchased and retired 290,841 common shares in two transactions with institutional investors. During 2004, 1,724,200 common shares were issued in satisfaction of warrants exercised.



(f)

Includes outstanding Options and warrants to acquire common shares, when applicable. In addition, for periods subsequent to December 31, 2006, the number of common shares outstanding used in the calculation of fully diluted tangible book value per share is adjusted to exclude unearned shares of restricted stock representative of the historical factors affecting OneBeacon's loss and LAE reserves priorproportion of unamortized compensation cost at the date of the calculation to the OneBeacon Acquisition, see "Non-Asbestos and Environmental Reserves" under the caption "Loss and Loss Adjustment Expense Reserves" in the "OneBeacon" sectionvalue of the business description contained withinrestricted stock on the Company's Amendment No. 6 to Form S-3 dated July 17, 2003 (the "Form S-3"). Suchdate of issuance.



(g)

In connection with the OneBeacon Offering, White Mountains recognized a $171 million gain in other revenues and recorded a $491 million minority interest liability.



(h)

At December 31, 2006, White Mountains had $320 million outstanding under its credit facility. During 2007, White Mountains Re issued the $400 million WMRe Senior Notes, a portion of the Form S-3 is incorporated by reference into this Form 10-K.proceeds of which were used to repay the borrowings under White Mountains' credit facility.



(i)

In May 2007, WMRe Group, an intermediate holding company of White Mountains Re, issued $250 million non-cumulative perpetual preference shares.





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


        The following discussion contains "forward-looking statements". White Mountains intends statements whichthat are not historical in nature, andwhich 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"for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

        The following discussion also includes twofive non-GAAP financial measures, adjusted comprehensive net income, and fully converteddiluted tangible book value per share, tangible capital, OneBeacon's adjusted book value per share and OneBeacon's specialty, commercial and personal lines' loss and LAE ratios and combined ratios prior to a reserve reallocation, that have been reconciled to their most comparable GAAP financial measures (see page 55)64). White Mountains believes these measures to be more relevant than comparable GAAP measures in evaluating White Mountains' financial performance.performance and condition.








RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 20032007, 2006 and 2002
2005

Overview


        White Mountains ended 20042007 with a fully converteddiluted tangible book value per Common Sharecommon share of $343,$444, which representsrepresented an increase of 18%11.4% (including dividends) over the fully converteddiluted tangible book value per Common Sharecommon share of $291$406 as of December 31, 2003. During 2003, fully converted2006. This increase reflects favorable weather conditions and strong investment results in 2007. Fully diluted tangible book value per Common Share increasedshare at December 31, 2007 was reduced by 13%$2 from the impact of share repurchases during the fourth quarter of 2007.

        White Mountains ended 2006 with a fully diluted tangible book value per common share of $406, which represented an increase of 21% (including dividends) from $259over the fully diluted tangible book value per common share of $343 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 by2005. This increase reflected favorable weather conditions and strong investment results particularly equities which returned 20%, and $180 million in transaction gains. This more than offsetwhen compared to 2005. Additionally, during the impactfourth quarter 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 2004.2006, White Mountains Re had a combined ratiorecognized an after-tax gain of 104% due to 11 points$171 million, or $16 per common share, 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.OneBeacon Offering.








Fully ConvertedDiluted Tangible Book Value Per Share


        The following table presents the Company's tangible book value per share for the years ended December 31, 2004, 2003,2007, 2006, and 20022005 and reconciles this non-GAAP measure to the most comparable GAAP measure.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

			December 31,
			2007			2006			2005
Book value per share numerators (in millions):
Common shareholders' equity			$	4,713.4		$	4,455.3		$	3,833.2
	Benefits to be received from share obligations under employee benefit plans			1.7			4.7			5.1
	Remaining accretion of subsidiary preferred stock to face value(1)			(15.8	)		(41.8	)		(86.0	)
Book value per share numerator				4,699.3			4,418.2			3,752.3
	Equity in net unrealized (gains) losses from Symetra's fixed maturity portfolio			5.6			4.1			(24.2	)
	Goodwill			(30.4	)		(32.5	)		(24.4	)
Fully diluted tangible book value per share numerator			$	4,674.5		$	4,389.8		$	3,703.7
Book value per share denominators (in thousands of shares):
Common shares outstanding				10,553.6			10,782.8			10,779.2
	Unearned restricted shares			(46.5	)		—			—
	Share obligations under employee benefit plans			9.9			29.5			34.3
Fully diluted tangible book value per share denominator				10,517.0			10,812.3			10,813.5
Book value per share			$	446.83		$	408.62		$	347.00
Fully diluted tangible book value per share				444.47			406.00			342.51

---

(1)

Remaining adjustment of subsidiary preferred stock to face value, which is based on White Mountains' ownership interest in OneBeacon Ltd. of 72.9%, 72.4% and 100% as of December 31, 2007, 2006 and 2005.





Review of Consolidated Results


        A tabular summary of White Mountains' consolidated financial results for the years ended December 31, 2004, 20032007, 2006 and 20022005 follows:

				Year Ended December 31,												Year Ended December 31,
Millions	Millions												Millions
				2004			2003			2002						2007			2006			2005
	Gross written premiums			$	4,792.1		$	3,823.4		$	4,421.6		Gross written premiums			$	4,189.9		$	4,312.4		$	4,601.6
	Net written premiums			$	3,904.8		$	3,007.7		$	3,293.5		Net written premiums			$	3,758.6		$	3,843.5		$	3,776.1
Revenues	Revenues												Revenues
													Earned insurance and reinsurance premiums			$	3,783.7		$	3,712.7		$	3,798.6
	Earned insurance and reinsurance premiums			$	3,820.5		$	3,137.7		$	3,576.4		Net investment income				533.0			435.5			491.5
	Net investment income				360.9			290.9			366.0		Net realized investment gains				263.2			272.7			112.6
	Net realized investment gains				181.1			162.6			156.0		Gain on sale of shares through the OneBeacon Offering				—			171.3			—
	Other revenue				190.5			202.6			109.5		Other revenue				153.9			202.0			229.2
		Total revenues			4,553.0			3,793.8			4,207.9			Total revenues			4,733.8			4,794.2			4,631.9
Expenses	Expenses												Expenses
	Losses and LAE				2,591.1			2,138.1			2,638.2		Losses and LAE				2,406.4			2,452.7			2,858.2
	Insurance and reinsurance acquisition expenses				743.5			615.0			804.3		Insurance and reinsurance acquisition expenses				776.6			754.8			761.2
	Other underwriting expenses				521.3			347.1			401.7		Other underwriting expenses				509.0			505.4			424.7
	General and administrative expenses				309.3			201.8			92.7		General and administrative expenses				200.5			218.3			148.8
	Accretion of fair value adjustment to loss and LAE reserves				43.3			48.6			79.8		Accretion of fair value adjustment to loss and LAE reserves				21.4			24.5			36.9
	Interest expense—debt				49.1			48.6			71.8		Interest expense—debt				73.0			50.1			44.5
	Interest expense—dividends and accretion on preferred stock subject to mandatory redemption				47.6			22.3			—		Interest expense—dividends and accretion on preferred stock				65.4			58.6			52.4
		Total expenses			4,305.2			3,421.5			4,088.5			Total expenses			4,052.3			4,064.4			4,326.7
Pretax income				$	247.8		$	372.3		$	119.4
Pre-tax income													Pre-tax income			$	681.5		$	729.8		$	305.2
	Income tax expense				(47.0	)		(127.6	)		(11.7	)	Income tax provision				(210.5	)		(98.9	)		(36.5	)
	Accretion and dividends on mandatorily redeemable preferred stock of subsidiaries				—			(21.5	)		(40.9	)	Equity in earnings of unconsolidated affiliates				29.4			36.9			33.6
	Equity in earnings of unconsolidated affiliates				37.4			57.4			14.0		Minority interest				(93.0	)		(16.0	)		(12.2	)
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
Net income before extraordinary items													Net income before extraordinary items			$	407.4		$	651.8		$	290.1
	Cumulative effect of changes in accounting principles				—			—			660.2		Excess of fair value of acquired net assets over cost				—			21.4			—
Net income	Net income			$	418.7		$	280.6		$	748.1		Net income			$	407.4		$	673.2		$	290.1
	Other comprehensive income				176.5			79.0			202.3		Other comprehensive income (loss)				71.9			32.9			(254.1	)
Comprehensive net income	Comprehensive net income			$	595.2		$	359.6		$	950.4		Comprehensive net income			$	479.3		$	706.1		$	36.0
Less: Change in net unrealized gains from Symetra's fixed maturity portfolio					(56.6	)		—			—
Change in net unrealized (gains) losses from Symetra's fixed maturity portfolio													Change in net unrealized (gains) losses from Symetra's fixed maturity portfolio				1.5			28.3			32.4
Adjusted comprehensive net income	Adjusted comprehensive net income			$	538.6		$	359.6		$	950.4		Adjusted comprehensive net income			$	480.8		$	734.4		$	68.4

Consolidated Results—Year Ended December 31, 20042007 versus Year Ended December 31, 20032006

        White Mountains reported adjusted comprehensive net income of $481 million for 2007, compared to $734 million in 2006. Net income was $407 million in 2007, compared to $673 million in 2006. These results reflect favorable weather conditions and strong investment results in both years. During 2006, White Mountains benefited from an after-tax gain of $171 million from the OneBeacon Offering, an after-tax gain of $21 million on the purchase of Mutual Service, $29 million in after-tax transaction gains from the sales of Sirius America and OneBeacon's Agri business and $33 million in gains from the settlements of United States Federal and state income tax audits.

        White Mountains' total revenues increaseddecreased by 20%1% to $4,734 million in 20042007 compared to 2003. Growth$4,794 million in 2006, mainly due to the $171 million gain from the OneBeacon Offering in 2006 and a $48 million decrease in other revenues, was drivenmainly at White Mountains Re. These revenue decreases were partially offset by the 22%a $98 million increase in net investment income, due mainly to a higher invested asset base in 2007, and a 2% increase in earned premiums. The increase in earned premiums due to the Sirius Acquisition and Atlantic Specialty transactions. Net investment income grew 24% in 2004was primarily due to the income earned on the additional invested assets acquired in the Sirius Acquisitionan increase at Esurance, partially offset by decreased net invested assetsdecreases at OneBeacon.OneBeacon and White Mountains Re.







        White Mountains' total expenses grew 26%were relatively flat at $4,052 million for 2004 as loss and LAE, insurance acquisition and underwriting expenses were all up due2007 when compared to the Sirius Acquisition and Atlantic Specialty transactions. General and administrative costs were up 53%2006. Interest expense on debt increased 46% in 2004,2007, primarily due to interest on the WMRe Senior Notes that were issued in March of 2007. This was partially offset by an increase in incentive compensation accruals, which were driven by a 41% rise in White Mountains' stock price during the year. White Mountains expenses its full cost of all incentive compensation programs. This expense is spread among loss and LAE, other underwriting expense and general and administrative expense for White Mountains' insurance and reinsurance operating subsidiaries, depending upon the function of the employees being compensated. For Other Operations, it is entirely included8% decrease in general and administrative expenses.

        White Mountains' net incomeexpenses, due primarily to lower incentive compensation expense in 2004 also benefitted from $181 million in transaction gains: $111 million from the Sirius Acquisition, $41 million for the Symetra investment, $20 million from the Tryg-Baltica acquisition and $9 million from the Sierra Group acquisition.2007.

Consolidated Results—Year Ended December 31, 20032006 versus Year Ended December 31, 20022005

        White Mountains reported adjusted comprehensive net income of $734 million for 2006, compared to $68 million in 2005. Net income was $673 million in 2006, compared to $290 million in 2005. The increase in 2006 adjusted comprehensive net income resulted primarily from the $171 million gain from the OneBeacon Offering, favorable weather conditions, strong investment returns and a $21 million after-tax gain on the purchase of Mutual Service. In addition, the 2005 results included $288 million in after-tax losses from hurricanes Katrina, Rita and Wilma, while 2006 included $70 million in after-tax losses from adverse development on those storms and a $95 million after-tax loss from the Olympus reimbursement (see description on page 58). 2005 also included $104 million of after-tax comprehensive net loss from the Montpelier Re investment, compared to $10 million in after-tax comprehensive net income in 2006. Adjusted comprehensive net income for 2006 also benefitted from $59 million of after-tax unrealized foreign currency gains, compared to $70 million of after-tax unrealized foreign currency losses in 2005, primarily from currency fluctuations of the U.S. dollar against the Swedish Krona and the Euro.

        White Mountains' total revenues decreasedincreased by 10%4% to $4,794 million in 20032006 compared to 2002, as an$4,632 million in 2005, mainly due to the $171 million gain on the sale of OneBeacon shares and a $160 million increase in earned reinsurance premiums at Folksamerica was more thannet realized investment gains, primarily due to $165 million of pre-tax losses in the value of the Company's investment in Montpelier Re realized during 2005, compared to a $5 million pre-tax gain realized in 2006. These increases were partially offset by a $56 million decrease in net investment income, primarily due to the receipt in 2005 of a $74 million special dividend from Montpelier Re, and a 2% decrease in earned insurance premiums, primarily due to decreases at OneBeacon as a result of the business transferred to Liberty Mutual under the Liberty Agreement. Total revenues in 2003and White Mountains Re, which were also impacted by decreased net investment income due to the run-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 a $30 million increase in fees and commissions for business placed by WMU.at Esurance.

        TotalWhite Mountains' total expenses decreased by 16%6% to $4,064 million for 2006, primarily due to a $406 million decrease in 2003 as compared to 2002, as losslosses and LAE, as well as insurance acquisition and other underwriting expenses, decreased at OneBeacon aspartially offset by a result of improved underwriting performance on its on-going businesses and as the continued run-off of unprofitable business through the Liberty Agreement. In addition, interest expense on debt decreased 32% in 2003 as a result of the repayment of the $260$70 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 decrease as those acquired reserves are paid over time. Partially offsetting these expense decreases was an increase in general and administrative expense of $109expenses. The decrease in losses and LAE was due mainly to lower catastrophe losses in 2006 compared to 2005. In 2005, White Mountains reported $422 million in 2003 over 2002,pre-tax loss and LAE on hurricanes Katrina, Rita and Wilma, compared to $106 million in loss and LAE from adverse development on those storms, as well as a $137 million loss and $9 million in forgone override commissions from the Olympus reimbursement in 2006. The increase in general and administrative expenses in 2006 when compared to 2005 was primarily due to an increase inincreased incentive compensation accruals, which were driven by a 42% rise in White Mountains' stock price during 2003.expenses.


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 2004, 20032007, 2006 and 20022005 represents an effective tax rate of 19.0%30.9%, 34.3%13.6% and 9.8%12.0%, respectively. White Mountains' effective tax raterates for 2004 was2007, 2006 and 2005 were lower than the U.S. statutory rate of 35% due primarily fromto income generated in jurisdictions other than the United States and from the recognition of foreign tax credits, offset by taxes incurred from an internal restructuring of the company.States. In addition, White Mountains' effective tax rate for 2002 was lower than the2006 reflected tax benefits related to settlements of U.S. statutory rate of 35% primarily fromFederal income generated in jurisdictions other than the United States.tax audits for years 2001 and 2002.








I. Summary of Operations By Segment


        White Mountains conducts its operations through four segments: (i) "OneBeacon", (ii) "White(1) OneBeacon, (2) White Mountains Re" (consisting primarily of the operations of Folksamerica, SiriusRe, (3) Esurance and WMU), (iii) "Esurance" and (iv) "Other Operations" (consisting of the Company and its intermediate subsidiary holding companies, White Mountains' investments in its Montpelier and Symetra warrants and the International American Group).(4) Other Operations. White Mountains manages allthe majority of its investments through its wholly ownedwholly-owned subsidiary, White MountainsWM Advisors, LLC ("WM Advisors"), therefore, a discussion of White Mountains' consolidated investment operations is included after the discussion of operations by segment. White Mountains' segment information is presented inNote 1316—"Segment Information" to the Consolidated Financial Statements.

OneBeacon

        Financial results for OneBeacon for the years ended December 31, 2004, 20032007, 2006 and 2002 follows:2005 follow:

				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

				Year Ended December 31,
($ in millions)
				2007			2006			2005
	Gross written premiums			$	2,092.1		$	2,088.4		$	2,266.5
	Net written premiums			$	1,864.4		$	1,957.6		$	2,121.1
	Earned insurance and reinsurance premiums			$	1,873.6		$	1,944.0		$	2,118.4
	Net investment income				208.5			187.6			242.4
	Net realized investment gains				173.7			156.4			122.8
	Other revenue				17.2			38.8			50.3
		Total revenues			2,273.0			2,326.8			2,533.9
	Losses and LAE				1,089.8			1,180.3			1,401.5
	Insurance and reinsurance acquisition expenses				318.9			332.3			390.7
	Other underwriting expenses				329.4			360.1			278.9
	General and administrative expenses				9.8			15.3			8.4
	Accretion of fair value adjustment to loss and LAE reserves				16.0			23.0			26.0
	Interest expense on debt				45.2			45.6			44.1
	Interest expense—dividends and accretion on preferred stock				65.4			58.6			52.4
		Total expenses			1,874.5			2,015.2			2,202.0
Pre-tax earnings				$	398.5		$	311.6		$	331.9

        The following table presents OneBeacon's adjusted book value per common share and reconciles this non-GAAP measure to book value per common share, the most comparable GAAP measure.

			December 31,
(Millions, except per share amounts)
			2007			2006
OneBeacon book value per share numerators:
OneBeacon common shareholders' equity			$	1,906.5		$	1,777.2
	Remaining accretion of subsidiary preferred stock to face value			(21.6	)		(57.7	)
Adjusted OneBeacon common shareholders' equity				1,884.9			1,719.5
OneBeacon Ltd. common shares outstanding				98.5			100.0
OneBeacon book value per common share			$	19.36		$	17.77
OneBeacon adjusted book value per common share			$	19.14		$	17.20
Growth in adjusted book value per common share, including dividends, for the year(1)				16.2	%

---

(1)

OneBeacon Ltd. has paid quarterly dividends of $.21 per common share beginning in March 2007.




        The following tables provide GAAP ratios, net written premiums and earned insurance premiums for OneBeacon's ongoing businesses and in total for the years ended December 31, 2004, 2003,2007, 2006, and 2002:2005:

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

			Year Ended December 31, 2007
($ in millions)
			Specialty			Commercial			Personal			Total(1)
GAAP Ratios:
Loss and LAE prior to reserve reallocation				58	%		51	%		60	%		58	%
	Effect of reserve reallocation(2)			(20	)%		0	%		(3	)%		n/a
Loss and LAE				38	%		51	%		57	%		58	%
Expense				31	%		37	%		34	%		35	%
	Total GAAP combined			69	%		88	%		91	%		93	%
	Total combined prior to reserve reallocation			89	%		88	%		94	%		93	%
Net written premiums			$	446.2		$	727.7		$	690.4		$	1,864.4
Earned insurance premiums			$	436.4		$	712.0		$	725.0		$	1,873.6

			Year Ended December 31, 2006
($ in millions)
			Specialty			Commercial			Personal			Total(1)
GAAP Ratios:
Loss and LAE				55	%		56	%		64	%		61	%
Expense				34	%		39	%		32	%		35	%
	Total combined			89	%		95	%		96	%		96	%
Net written premiums			$	437.6		$	718.3		$	800.6		$	1,957.6
Earned insurance premiums			$	432.3		$	689.3		$	822.3		$	1,944.0

			Year Ended December 31, 2005
($ in millions)
			Specialty			Commercial			Personal			Total(1)
GAAP Ratios:
Loss and LAE prior to reserve reallocation				56	%		61	%		63	%		66	%
	Effect of reserve reallocation(2)			(2	)%		(2	)%		(1	)%		n/a
Loss and LAE				54	%		59	%		62	%		66	%
Expense				31	%		38	%		29	%		32	%
	Total GAAP combined			85	%		97	%		91	%		98	%
	Total combined prior to reserve reallocation			87	%		99	%		92	%		98	%
Net written premiums			$	548.8		$	654.4		$	910.2		$	2,121.1
Earned insurance premiums			$	521.9		$	654.7		$	933.7		$	2,118.4

---

(1)

Includes results from reciprocals (consolidated beginning April 1, 2004)run-off operations.



(2)

During 2007 and 2005, OneBeacon reallocated loss and LAE reserves between its ongoing and run-off operations. Results from reciprocals are netoperations, which had the effect of business assumed by OneBeacon, which is contained in Personal Lines.lowering the combined ratios for the ongoing businesses. The reserve reallocation had no impact on OneBeacon's total combined ratio.

OneBeacon Results—Year Ended December 31, 20042007 versus Year Ended December 31, 20032006

Overview


        OneBeacon's pretax        OneBeacon grew its adjusted book value per share by 16.2% during 2007, including dividends. Pre-tax income for 20042007 was $391$399 million compared to pre-tax income of $405$312 million for 20032006, and its GAAP combined ratio was 99%93% for 2007 compared to 96% for 2006. The improved underwriting results in 2007 reflected lower catastrophe losses and favorable development on prior accident year losses. The 2007 results also benefited from a $26 million gain from OneBeacon's partial pension settlement (SeeNote 11—Retirement and Postretirement Plans).

        The decrease in OneBeacon's 2007 GAAP combined ratio was primarily due to a 3 point decrease in its loss and LAE ratio. The 2007 results included 3 points of favorable development on prior accident year losses due to lower than expected frequency for professional liability in specialty lines and lower than expected severity for automobile liability in personal lines, partially offset by unfavorable development for multiple peril and workers compensation, primarily for accident years 2001 and prior. The 2006 results included 1 point of adverse development on prior




accident year losses, mainly due to adverse development on catastrophe losses, primarily related to hurricanes Katrina and Wilma and two 2004 catastrophes, partially offset by favorable development on prior accident year non-catastrophe losses in specialty lines and commercial lines.

        OneBeacon's total revenues decreased by 2% in 2007 to $2,273 million, compared to $2,327 million in 2006, due principally to a 4% decrease in earned premiums in 2007. 2006 included $65 million of premium from OneBeacon's Agri division, the renewal rights to which were sold on September 30, 2006. Net other revenues decreased 56% in 2007 to $17 million, compared to $39 million in 2006. The 2006 period included a $30 million gain on the sale of renewal rights of Agri to QBE. Partially offsetting the Agri gain was a $13 million pre-tax loss on the sale of OneBeacon's investment in MSA (after tax, the MSA exchange resulted in an $8 million net realized gain). OneBeacon's 2007 net other revenues included an $11 million gain from the sale of one of its inactive licensed insurance subsidiaries.

        During 2007, OneBeacon reallocated reserves from ongoing lines of business to run-off reserves, particularly on run-off reserves for construction defect and workers compensation related to accident years 2001 and prior. The reallocation shifted $117 million of reserves from specialty lines ($88 million), commercial lines ($6 million) and personal lines ($23 million) to run-off claims. This reallocation had the effect of lowering the combined ratios for specialty, commercial and personal lines, but had no net impact on OneBeacon's overall results. The ratio discussions by line of business that follow are based on the ratios as computed prior to the reallocation of reserves to run-off claims. OneBeacon believes that a presentation excluding the effect of the reserve reallocation on specialty, commercial and personal lines' loss and LAE ratios and GAAP combined ratios is meaningful for investors to understand the performance of its underwriting units during 2007.

        Specialty lines.    Net written premiums for specialty lines increased by 2% to $446 million in 2007 from $438 million in 2006. Excluding the business transferred in the Agri Sale, net written premiums increased by 20% in 2007 due to a $35 million increase in net written premiums in specialty liability products at OBPP, a $19 million increase in net written premiums at IMU and $15 million in net written premiums in the Accident & Health business, which commenced operations in 2007.

        The specialty lines combined ratio for 2007 was 89%, consistent with the 2006 combined ratio. The loss and LAE ratio increased 3 points to 58%, primarily due to unfavorable large non-catastrophe current accident year losses in the Agri run-off business, while the expense ratio for 2007 decreased 3 points to 31%, primarily due to a 3 point reduction of commission expense from fees received in 2007 from QBE for fronting services performed on renewals of Agri business.

        Commercial lines.    Net written premiums for commercial lines increased by 1% to $728 million in 2007 from $718 million in 2006. The increase was mostly due to a $36 million increase in net written premiums in the small business division, principally driven by small business package products. Partially offsetting this increase was a $26 million decrease in the middle market division, due primarily to lower premiums at OBSP as a result of OneBeacon's strategy to manage its exposure to potential catastrophe losses.

        The commercial lines combined ratio for 2007 decreased to 88% from 95% for 2006. The loss and LAE ratio decreased 5 points to 51%, primarily due to 3 points of favorable development on prior accident year losses in 2007, mostly from property and general liability claims, compared to 2 points of adverse development on prior accident years in 2006, which were primarily at OBSP related to hurricanes Katrina and Wilma and two 2004 catastrophes. This decrease was partially offset by a 1 point increase in the current accident year loss ratio in 2007, partly driven by the pricing environment and partly driven by unusually low large losses in 2006. The expense ratio decreased by 2 points to 37% in 2007, primarily due to lower policy acquisition expenses as a result of an increased deferral rate of commercial lines policy acquisition costs from the expansion into new states, as well as a 1 point favorable impact from the partial pension settlement. Both periods included 1 point of office consolidation costs.

        Personal lines.    Net written premiums for personal lines decreased by 14% to $690 million in 2007 from $801 million in 2006. The decrease was primarily attributable to reduced writings at AutoOne due to significant declines in New York's assigned risk pool. Market trends indicate that New York's assigned risk volumes are expected to decline to approximately $137 million in 2008, down from $170 million in 2007, $253 million in 2006, and $383 million in 2005. Market trends indicate that the assigned risk pool in New Jersey is also expected to decline to approximately $61 million in 2008, down from $77 million in 2007, $141 million in 2006, and $247 million in 2005. The Company expects a reduction in AutoOne's premium volume reflective of these trends. In traditional personal lines, net written premium decreased in 2007 due to an increasingly competitive automobile market and Massachusetts state-mandated rate decreases. In September 2007, OneBeacon notified agents that it plans to seek regulatory approval of a withdrawal




plan to cease writing business in Houston General Insurance Exchange and also took actions to better align personal lines staffing with business needs. Net written premiums for Houston General Insurance Exchange were $15 million in 2007, compared to $4 million in 2006.

        The personal lines combined ratio for 2007 decreased to 94% from 96% for 2006. The loss and LAE ratio decreased 4 points to 60%, primarily due to 3 points of favorable development on prior accident years in automobile liability in traditional personal lines and at AutoOne, compared to 1 point of adverse development on prior accident years in 2006. Partially offsetting this decrease was higher large loss activity experienced in the first half of 2007. The expense ratio increased by 2 points to 34% from 32% in 2006. The increase was primarily due to the adverse effect of a lower earned premium base compared to 2006. The expense ratio in 2007 included the impact of non-recurring favorable items in 2007, including 1 point from a state premium tax refund and 1 point from the partial pension settlement. The 2006 expense ratio also included the benefit of non-recurring favorable items, including 1 point from a reduction of contingent commission accruals and 1 point related to the favorable settlement of a state franchise tax audit. Both periods included 1 point of office consolidation costs. In addition, the expense ratio for 2007 included 1 point of expense incurred in connection with the decision to cease writing business in Houston General Insurance Exchange and actions taken to reduce the personal lines workforce.

        Run-off.    For 2007, run-off business generated an underwriting loss of $39 million (excluding $117 million from the reserve reallocation), compared to an underwriting loss of $44 million in 2006. The results for both 2007 (excluding the reserve reallocation) and 2006 included $9 million in adverse development.

OneBeacon Results—Year Ended December 31, 2006 versus Year Ended December 31, 2005

Overview

        OneBeacon's pre-tax income for 2006 was $312 million compared to $332 million for 2005, and its GAAP combined ratio was 96% for 2006 compared to 98% for 2003.2005. OneBeacon's 2005 results included the results of NFU prior to its sale on September 30, 2005. The earnings andinclusion of NFU in the results for the first nine months of 2005 reduced the 2005 combined ratio by one point. During 2005, OneBeacon reallocated $34 million of IBNR reserves from ongoing lines of business to run-off. This reallocation had the effect of lowering the combined ratios for each period were relatively consistent as each periodspecialty, commercial and personal lines, but had solid performance for the current underwriting year, partially offset by someno impact on OneBeacon's overall results.

        Lower adverse development inon prior year's reserves. In total,accident year losses caused OneBeacon's 2006 combined ratio to decrease four points from 2005. OneBeacon's 2006 results included $23 million of adverse development was $100on prior accident years compared to $95 million in 2004 (relating2005, which primarily related to 2002 and prior accident years) and $147years. Lower current accident year catastrophe losses also caused OneBeacon's 2006 combined ratio to decrease two points from 2005. OneBeacon's 2006 results included $29 million in 2003 (relatingcurrent accident year catastrophe losses compared to $81 million in 2005, which included $69 million from hurricanes Katrina, Rita and Wilma. Offsetting these decreases was a one point increase from higher incentive compensation expenses in 2006 and a one point increase from $20 million of expenses associated with actions taken to reduce long-term occupancy costs, including OneBeacon's move to its new U.S. headquarters in Canton, Massachusetts. In addition, OneBeacon's 2005 results included a $54 million gain from the settlement of its retiree medical plan, which reduced the 2005 combined ratio by three points. The retiree medical plan, which had been frozen in 2002, was terminated and an independent trust was established and funded to provide benefits to covered participants. These actions relieved OneBeacon of its future retiree medical obligations and triggered recognition of the gain. The majority of the gain was recorded as a reduction of other underwriting expenses with a portion of the gain reflected as a reduction in loss and LAE because a portion of the expense of the retiree medical program was allocated to the claims department.

        OneBeacon's total revenues decreased 8% in 2006 to $2,327 million from $2,534 million in 2005. The decrease was due principally to a 6% decrease in earned premiums in 2006, primarily due to 2000the aforementioned sale of NFU, which had $130 million of earned premium in 2005. Net investment income decreased to $188 million in 2006 compared to $242 million in 2005, primarily due to the receipt of a $35 million special dividend on Montpelier Re common shares in the first quarter of 2005. Net realized investment gains increased to $156 million in 2006 compared to $123 million in 2005. The 2005 period included a realized loss of $55 million due to an other-than-temporary impairment on OneBeacon's investment in Montpelier Re common shares. Other revenues in 2006 included a pre-tax




gain of $30 million from OneBeacon's sale of the renewal rights to its Agri business and a pre-tax loss on the exchange of its investment in MSA of $13 million (after tax, the MSA exchange resulted in an $8 million net realized gain). Other revenues in 2005 included $34 million in gains recorded from the sales of two subsidiaries, NFU and Traders and Pacific Insurance Company.

        Specialty Lines.    Net written premiums for specialty lines decreased by 20% to $438 million in 2006 from $549 million in 2005, mainly due to the aforementioned sales of NFU and Agri. Excluding NFU and Agri, specialty lines net written premiums increased $41 million, or 12%, from 2005. The increase was mainly due to a $30 million increase in net written premiums at OBPP to $179 million in 2006 from $149 million in 2005, principally driven by long-term care and lawyers professional liability products. Net written premiums for all other specialty lines businesses increased modestly or were essentially flat when compared with the prior year.

        The specialty lines combined ratio for 2006 increased to 89% from 87% for 2005. The increase was primarily due a higher expense ratio, which rose to 34% in 2006 from 31% in 2005. The increased expense ratio was primarily due to a one point increase in incentive compensation expense in 2006 and the favorable impact in 2005 of the settlement of the retiree medical plan, which lowered that year's expense ratio by two points. The loss and LAE ratio for 2006 was essentially flat when compared to 2005. Excluding the impact of the aforementioned reallocation of reserves to run-off, which reduced the 2005 loss ratio by three points, the loss and LAE ratio improved in 2006.

        Commercial Lines.    Net written premiums for commercial lines increased by 10% to $718 million in 2006 from $654 million in 2005, as net written premiums increased for both the middle market division and the small business division. The increase in net written premiums in the middle market division was experienced in property and inland marine products as well as at OBSP. The increase in small business was experienced in small business package products.

        The commercial lines combined ratio for 2006 decreased to 95% from 99% for 2005. Lower catastrophe losses caused the commercial lines 2006 combined ratio to decrease six points from 2005. Commercial lines 2006 results included $31 million in current and prior accident years).year catastrophe losses, which included $21 million in losses incurred from hurricanes Katrina, Rita and Wilma, compared to $64 million in 2005, which included $56 million in losses incurred from hurricanes Katrina, Rita and Wilma. Partially offsetting this decrease was the favorable impact of one point related to the benefit of the settlement of the retiree medical plan in 2005 and two points related to the reallocation in 2005 of IBNR reserves to run-off.

        Personal Lines.    Net written premiums for personal lines decreased by 12% to $801 million in 2006 compared to $910 million in 2005. The 2004decrease was primarily attributable to reduced writings at AutoOne due to the size of New York's assigned risk pool significantly decreasing and reduced writings in traditional personal lines due to an increasingly competitive automobile market and state-mandated rate decreases in Massachusetts. With respect to the New York assigned risk pool, assigned risk volumes declined to $253 million in 2006, down from $383 million in 2005 and $629 million in 2004. Assigned risk volumes in New Jersey are also expected to decline. The assigned risk pool in New Jersey declined to $141 million in 2006, down from $247 million in 2005 and $375 million in 2004. OneBeacon expects a continued reduction in AutoOne's premium volume in 2007 reflective of these trends.

        The personal lines combined ratio for 2006 increased to 96% from 92% for 2005. The loss and LAE ratio increased 1 point to 64% in 2006 from 63% in 2005, primarily due to favorable items in 2005. The personal lines 2005 loss and LAE ratio included the benefit of the settlement of the retiree medical plan and the favorable impact of the reallocation of IBNR reserves to run-off, which each reduced the loss and LAE ratio by approximately one point. The expense ratio increased to 32% in 2006, compared to 29% in the prior year, mainly due to increased incentive compensation expenses of approximately one point in 2006 and the benefit of the settlement of the retiree medical plan in 2005, which decreased the 2005 expense ratio by approximately two points. In addition, the 2006 expense ratio was higher than the 2005 expense ratio by approximately one point as expense reductions were not proportional to reductions in earned premiums.

        Run-off.    For 2006, run-off business generated an underwriting loss of $44 million compared to an underwriting loss of $133 million in 2005. The 2005 results included $107 million in adverse development, relatedmainly from 2002 and prior accident years, which was primarily due 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 than anticipated defense costs and higher damages from liability assessments. The 2003 development was primarily related to construction defect claims. Adverse developmentassessments in 2004general liability and 2003, respectively, was partially offset by the releasemultiple peril lines. As described above, 2005 also included a reallocation of approximately $20 million and $30$34 million of the New York assigned risk liability due 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 earned premiums resulting primarilyIBNR reserves from the Atlantic Specialty Transaction. Total revenues for 2004 were also impacted by an increase in other revenues due mainly to the commencementongoing lines 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 2004, OneBeacon sold two of its subsidiaries, Potomac Insurance Company of Illinois ("Potomac") and Western States Insurance Company ("Western States"), as well as its boiler inspection service business, and recognized gains on the sales of $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 relating to the four storms in the southeastern 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 OBSP 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 the 2003 combined ratio of 91%. The 2004 personal lines combined ratio was adversely impacted by seven points as a result of increased 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 net investment income due to the 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 increased 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 and 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 reserves, which positively impacted the combined ratio by two points. OneBeacon wrote specialty lines premiums of $734 million in 2003, up 5% over 2002, mostly due to an increase in business written by OBPP and IMU.

        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 2003 flowed through into underwriting results. In addition, the 2003 period reflected the reduction in OneBeacon's New York assigned risk liability, discussed above, which lowered the combined ratio by three points. OneBeacon's personal lines written premium volume for 2003 decreased 20% from 2002, primarily due to re-underwriting efforts such as actions to reduce exposure to windstorms on property located in coastal areas. Also contributing to the decrease were declines in written premiums relating to the transfer of OneBeacon's private passenger automobile business in New Jersey to New Jersey Skylands Insurance Association in 2002.

        Commercial Lines.    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 written premium volume for 2003 decreased 6% from 2002, primarily due to the continued effects of actions taken to reduce the concentration of risks subject to terrorism, such as reducing total insured values in 11 major cities, and reductions in workers compensation writings.

        Run-off Operations.    Pursuant to the Liberty Agreement, Liberty Mutual assumed control of OneBeacon's claims offices in the regions subject to the Liberty Agreement and was responsible for servicing claims from the OneBeacon policies written prior to November 1, 2001, as well as policiesrun-off.







which renewed in those regions since that date. Effective July 11, 2003, the servicing agreement with Liberty Mutual was amended and OneBeacon took back substantially all remaining outstanding claims related to policies written prior to the Liberty Agreement.

        During the second quarter of 2003, OneBeacon claims and actuarial 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 most 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 stemming from increased litigation and resulting adverse court decisions. As a result, OneBeacon recorded an increase for construction defect claim reserves of $98 million in the third quarter of 2003. SeeConstruction Defect Claims in CRITICAL ACCOUNTING ESTIMATES below for further background on construction defect claims.

White Mountains Re

        Financial results and GAAP combined ratios for White Mountains Re for the years ended December 31, 2004, 20032007, 2006 and 20022005 follows:

				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	%




				Year Ended December 31,
Millions
				2007			2006			2005
	Gross written premiums			$	1,295.3		$	1,624.5		$	1,981.3
	Net written premiums			$	1,095.7		$	1,290.0		$	1,304.1
	Earned insurance and reinsurance premiums			$	1,146.8		$	1,241.2		$	1,371.6
	Net investment income				210.5			182.7			148.9
	Net realized investment gains				63.7			59.0			76.8
	Other revenue				5.0			47.8			33.5
		Total revenues			1,426.0			1,530.7			1,630.8
	Losses and LAE				701.0			884.6			1,237.9
	Insurance and reinsurance acquisition expenses				255.0			287.2			279.6
	Other underwriting expenses				118.5			94.7			107.0
	General and administrative expenses				26.2			24.2			12.4
	Accretion of fair value adjustment to loss and LAE reserves				5.4			1.5			10.9
	Interest expense on debt				23.2			1.5			.4
		Total expenses			1,129.3			1,293.7			1,648.2
Pre-tax earnings (loss)				$	296.7		$	237.0		$	(17.4	)

				Year Ended December 31,
				2007		2006		2005
GAAP ratios:
	Loss and LAE			61	%	71	%	90	%
	Expense			33	%	31	%	28	%
		Total Combined		94	%	102	%	118	%

White Mountains Re Results—Year Ended December 31, 20042007 versus Year Ended December 31, 20032006

        White Mountains Re's pre-tax income for 2007 was $297 million compared to a $237 million for 2006, and its GAAP combined ratio increasedwas 94% for 2007 compared to 102% for 2006. The loss and LAE ratio for 2007 included $76 million, or 7 points, of pre-tax catastrophe losses, net of reinsurance and reinstatement premiums, primarily from 96% in 2003 to 104% in 2004, due primarily to $135 million of claims incurred related to significant property catastrophe eventsEuropean windstorms Kyrill and Hanno in the second halffirst quarter of 2004. These catastrophes, which are discussed further below, increased2007, floods that impacted the combined ratio in 2004 by 11 points. In general, White Mountains Re has experienced favorable underwriting conditions for the past 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 these natural disasters. Net written premiums, total revenues, and total expenses were all up substantially in 2004 due to the Sirius Acquisition.

        Gross written premiums increased $518 million, or 37% from 2003 to 2004, 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 approximately $177 million, of which $129 million was recorded as gross written premium and $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 activityUnited Kingdom during the last half of 2004, includingsecond and third quarters, the fourPeru earthquake, hurricanes which affected the Southeast United StatesDean and the Caribbean, where White Mountains Re has historically been a significant participantFelix, and floods in the property reinsurance market. Additionally, Sirius International was exposedJakarta, Slovenia, and Mexico. In addition 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,catastrophes, White Mountains Re recorded $11$9 million of net unfavorable development in 2007, which consisted of $63 million related to A&E exposures, $28 million in strengthening of certain of its U.S. casualty reserves and $7 million related to surety business. These losses were largely offset by favorable development of $91 million, primarily on property lines from prior accident years. The loss reserveand LAE ratio for 2006 included net adverse development which contributed 1 point to the loss ratio in 2004, as compared to $46of $218 million, or 518 points, which included a charge of $137 million arising from the Olympus reimbursement described below, $92 million ($86 million net of reinstatement premiums) in 2003. The 2003 unfavorableadverse development is describedon hurricanes Katrina, Rita and Wilma, and $55 million of adverse development from casualty losses associated with the Risk Capital acquisition 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 was2000. These losses were partially offset by favorable development on various lines, including $46 million and $19 million of favorable development on the property and agriculture lines of business, respectively.

        White Mountains Re's gross written premiums decreased by 20% to $1,295 million in 2007, compared to $1,625 million in 2006, and net written premiums decreased by 15% to $1,096 million in 2007 compared to $1,290 million in 2006. Excluding written premiums from Sirius America, which White Mountains Re sold during the Sirius International reserve portfolio, stemming mainly from the threethird quarter of




2006, gross written premiums decreased by $258 million, or 17%, and net written premiums decreased by $155 million, or 12%, reflecting reductions in most recent underwriting years, and is indicativelines of the favorablebusiness. These decreases were primarily due to pricing, terms and conditions that have existed in the global reinsurance marketplace during that time. Additionally,no longer met White Mountains Re's underwriting guidelines. White Mountains Re recorded $10has been experiencing significant price competition in the reinsurance market due to excess underwriting capacity. This excess underwriting capacity, combined with fewer catastrophic events in 2007, has resulted in downward pressure on pricing. Higher ceding company retentions also reduced White Mountains Re's premium volume. Decreases in net written premiums were partially offset by the non-renewal in 2007 of a series of ceded property Second Event Industry Loss Warranty Covers that White Mountains Re had purchased during the first quarter of 2006. White Mountains Re ceded approximately $20 million in premiums related to the Second Event Industry Loss Warranty Covers in the first quarter of unfavorable loss development on its workers compensation reserves acquired as part2006. The decreases in volume were also partially offset by more favorable foreign currency exchange rates versus the U.S. dollar, particularly the Swedish Krona.

        Net investment income in 2007 increased by 15% to $211 million compared to the prior year mainly due to an increase in invested assets from the transfer of White Mountains Re's investment in Symetra to White Mountains for cash in December 2006, proceeds from the issuance of the Sierra acquisitionpreference shares in 2004. This adverse development was offset dollar-for-dollar by the adjustable note discussedMay 2007, as well as capital contributions of $100 million from White Mountains in Note 2—Significant Transactions.June 2006.

        White Mountains Re receivesrecognized fee income on reinsurance placements referred toof $10 million from Olympus and is entitledHelicon in 2007, $8 million of which was recorded as other revenues, compared to $12 million of fee income from Olympus and Helicon in 2006, $9 million of which was recorded as other revenues. White Mountains Re did not renew its quota share arrangements with Olympus and Helicon for 2008. Olympus continues to be responsible to pay losses on exposures that have been ceded to it and will continue to earn premiums related primarily to the run-off of underwriting year 2007. White Mountains Re acquired Helicon on January 7, 2008.

        Other revenues for 2007 also included $13 million of realized foreign exchange losses compared to $21 million of foreign exchange gains for the comparable prior period. During the fourth quarter 2007, White Mountains Re sold its' wholly-owned subsidiary Stockbridge Insurance Company for $26 million in cash to a profit commission basedthird party and recognized a $10 million pre-tax gain on netthe sale through other revenues. In 2006, other revenues included a $14 million pre-tax gain from the sale of Sirius America, a wholly-owned subsidiary of White Mountains Re.

        Other underwriting profits on referred business. The additional capacity providedexpenses in 2007 increased by $24 million to $119 million compared to 2006. This increase is due to increased incentive compensation accruals, movement in foreign exchange rates as the reinsurance relationship with Olympus supportsSwedish Krona strengthened against the U.S. dollar, as well as increased expenses arising from the expansion of White Mountains Re's abilityBermuda advisory operations. In addition, during the first quarter of 2006, Scandinavian Re reduced its unallocated loss adjustment expense reserve by approximately $7 million as a result of an evaluation of the remaining run-off contracts.

        General and administrative expenses in 2007 increased by $2 million to offer significant reinsurance protection.$26 million compared to 2006. This increase is mainly due to costs expensed in connection with the issuance of $250 million of non-cumulative perpetual preference shares during the second quarter of 2007 and $400 million face value of senior unsecured notes during the first quarter of 2007, as further discussed below.

        In May 2007, WMRe Group issued $250 million of non-cumulative perpetual preference shares and received $246 million of proceeds, net of $4 million of issuance costs and commissions. Holders of the WMRe Preference Shares receive dividends on a non-cumulative basis only when, as and if declared by White Mountains Re recognized net fee incomeat a fixed dividend rate of $69 million7.506% for the period from Olympus in 2004 as compared to $98 in 2003.issuance until June 30, 2017 and a variable dividend rate thereafter. The decline inWMRe Preference Shares are redeemable only at the fee income earned is







due primarily to the negative impactoption of the four hurricanes on the profit commission arrangement betweenWhite Mountains Re. During 2007, White Mountains Re declared and Olympus.paid $11 million in dividends to holders of the WMRe Preference Shares.

        In March 2007, White Mountains Re issued $400 million face value of senior unsecured notes that have an annual effective yield of 6.5% for net proceeds of $392 million. In anticipation of the issuance of the WMRe Senior Notes, White Mountains Re entered into an interest rate lock agreement to hedge its interest rate exposure and recorded a $2 million loss in accumulated other comprehensive income related to this agreement, which is being amortized into interest expense over the life of the WMRe Senior Notes. White Mountains Re deferred $4 million in expenses related to the issuance of the WMRe Senior Notes (including a $3 million underwriting discount), which are also being recognized into interest expense over the life of the WMRe Senior Notes.

        White Mountains Re's interest expense in 2007 increased by $22 million, primarily due to the interest on the aforementioned WMRe Senior Notes.




White Mountains Re Results—Year Ended December 31, 20032006 versus Year Ended December 31, 20022005

        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 writtenpre-tax income for 2006 was $237 million compared to a pre-tax loss of $17 million for 2005, and its GAAP combined ratio was 102% for 2006 compared to 118% for 2005. The improved combined ratio and the increase in pre-tax income resulted primarily from significantly lower catastrophe losses. During 2006, White Mountains Re recorded $86 million of unfavorable development, net of reinstatement premiums increased 44%and reinsurance, related to hurricanes Katrina, Rita and Wilma and $137 million in losses and $9 million of forgone override commissions related to the Olympus reimbursement. During 2005, White Mountains Re recognized $351 million in pre-tax losses, net of reinstatement premiums and reinsurance from 2002 to 2003, while net written premiums increased 29%hurricanes Katrina, Rita and earned premiums increased 33%. The increasesWilma. 2005 also included $57 million of other significant property catastrophe losses, primarily from European storm Erwin and floods in net writtenEurope.

        Excluding the unfavorable development from Katrina, Rita and earned premiums were due to increased pricing onWilma and the Olympus reimbursement, White Mountains Re's expiringunderwriting units performed well in 2006, reflecting generally more favorable weather conditions and renewed contracts, increased sharescontinued favorable prices, terms and conditions within the reinsurance marketplace. Excluding the additional losses from hurricanes Katrina, Rita and Wilma and the Olympus reimbursement, favorable development on renewed contractsprior year reserves of $11 million resulted primarily from continued favorable run off of recent underwriting years at Sirius International of $46 million and new contracts resultingfavorable development of $19 million arising from Folksamerica's agriculture line of business, offset by unfavorable development of $55 million from casualty losses associated with the increased demand of reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers.Risk Capital acquisition.

        White Mountains Re's total revenues were2006 gross written premiums decreased by 18% to $1,625 million and net written premiums decreased by 1% to $1,290 million from $1,304 million in 2005. White Mountains Re reduced its overall property exposure and Folksamerica non-renewed its excess offshore energy and marine business in the Gulf of Mexico starting on January 1, 2006, which caused gross written premiums to decline substantially in 2006 versus 2005. All of the non-renewed excess offshore energy and marine business was subject to Folksamerica's reinsurance treaty with Olympus, under which Folksamerica ceded up 27%to 75% of this business in 2003 over 2002, primarily driven by2005. As a 33% increaseresult, the impact on the change in earned premiums. The increase in earned (and net written) premiums was due to increased pricing on White Mountains Re's expiringnet written premiums from 2005 to 2006 was significantly less than the impact on the change in its gross written premiums over the same period. Gross and renewed contracts,net written premiums were also lower during 2006 due to lower reinstatement premiums on property catastrophe reinsurance, which had primarily resulted from reinstated coverage after hurricanes Katrina and Rita in 2005, and lower premiums from Sirius America, which was sold in August 2006. Sirius America contributed $71 million and $39 million of gross and net written premiums, respectively, in 2006, compared to $248 million and $87 million, respectively, in 2005. Additionally, gross and net written premiums on casualty lines were lower in 2006, due mainly to pricing, terms and conditions that did not meet White Mountains Re's pricing guidelines and due to higher ceding company retentions. These decreases were partially offset by increases in certain non-catastrophe exposed classes, particularly in specialty lines.

        White Mountains Re's net investment income increased shares on renewed contractsby $34 million in 2006 as a result of higher overall yields and new contractsa larger investment asset base, principally due to contributions from White Mountains. Other underwriting expenses decreased in 2006 by $12 million, or 11%, from 2005, primarily due to a reduction in unallocated loss adjustment expense reserves of approximately $7 million during the first quarter of 2006 resulting from an evaluation of the remaining run-off contracts at Scandinavian Re, as well as a reduction in incentive compensation accruals. General and administrative expenses increased demand of reinsurance buyers for placing reinsurance with responsible, well-capitalized reinsurers. Also contributingto $24 million in 2006 from $12 million in 2005. The increase is primarily due to accruals related to the increaserelocation of the underwriting advisory operations from Ireland to Bermuda and costs associated with expanding the Bermuda advisory operations.

        Accretion of the fair value adjustment to loss and LAE reserves decreased in 2006 by $9 million, or 86%, from $11 million in 2005 as a result of a change in the rate of accretion of the fair value adjustment to loss and LAE reserves that was established in the purchase accounting for the Sirius Acquisition. The change in accretion resulted from the aforementioned evaluation of the remaining run-off contracts at Scandinavian Re and will be made prospectively over the remaining amortization period.

        White Mountains Re recognized fee income of $12 million from Olympus and Helicon in 2006, $9 million of which was recorded as other revenues, compared to $61 million of fee income from Olympus in 2005, $28 million of which was recorded as other revenues. The decrease in fee income was primarily the result of a reduction in amounts ceded to Olympus and Helicon in 2006 compared to 2005 and due to Folksamerica Holdings Company ("Folksamerica Holdings") waiving $9 million of override commission due from Olympus in accordance with the




Olympus reimbursement. Other revenues in 20032006 also included a $14 million gain from the sale of Sirius America and $21 million of realized foreign exchange gains. In 2005, other revenue also included a $5 million gain from the sale of California Indemnity Insurance Company, a wholly-owned subsidiary of White Mountains Re acquired in 2004 as part of the Sierra acquisition.

        Olympus reimbursement.    In June 2006, following the receipt of new claims information reported from several ceding companies and subsequent reassessment of the ultimate loss exposures, White Mountains Re increased its gross loss estimates for hurricanes Katrina, Rita and Wilma by $201 million. This was mostly on Folksamerica's off-shore energy and marine exposures attributable to retrocessional arrangements and business interruption coverage. As a $49result, Folksamerica set its gross loss and LAE reserves as of June 30, 2006 on offshore energy and marine exposures for hurricanes Katrina and Rita at full contract limits. Starting January 1, 2006, Folksamerica non-renewed its excess offshore energy and marine business in the Gulf of Mexico.

        Under the terms of Folksamerica's 2005 quota share reinsurance treaty with Olympus, $139 million increase ($98of the loss, net of reinstatement premiums, from hurricanes Katrina, Rita and Wilma recorded in the second quarter of 2006 was ceded to Olympus. However, Folksamerica Holdings entered into an indemnity agreement with Olympus on June 16, 2006, under which it agreed to reimburse Olympus for up to $137 million in 2003 vs $49 million in 2002) in advisory feesof these losses, which were recorded as loss and profitLAE during the second quarter of 2006. Folksamerica Holdings also waived override commissions receivedon premiums earned by Olympus after March 31, 2006 for reinsurance contracts recommended by White Mountains Re on reinsurance placements referred to Olympus, due principally towith an increase in the volumeeffective date of business ceded to Olympus in 2003.

December 31, 2005 and prior. White Mountains Re experiencedexpects that the commission waivers will total approximately $46 million$12 million. Folksamerica ceded 35% of unfavorableits 2007 underwriting year short-tailed excess of loss reserve development during 2003, primarily due to strengthening of A&E reservesbusiness, mainly property 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 compared Folksamerica's share of industry paid losses to estimated industry carried reservesmarine, with Olympus and resultedHelicon sharing approximately 55% and 45%, respectively, in Folksamerica increasing its IBNR by approximately $25 million.2007.







Esurance

        Esurance's financial results and GAAP combined ratios for the years ended December 31, 2004, 20032007, 2006 and 20022005 follows:

				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	%

				Year Ended December 31,
Millions
				2007			2006			2005
	Gross written premiums			$	802.5		$	599.5		$	351.9
	Net written premiums			$	798.5		$	595.9		$	349.1
	Earned insurance and reinsurance premiums			$	763.3		$	527.5		$	306.8
	Net investment income				29.6			18.4			9.8
	Net realized investment gains				4.5			6.9			2.1
	Other revenue				13.6			7.4			3.0
		Total revenues			811.0			560.2			321.7
	Losses and LAE				622.4			383.9			206.2
	Insurance and reinsurance acquisition expenses				202.7			135.3			90.8
	Other underwriting expenses				58.4			48.8			37.2
	General and administrative expenses				.2			.2			—
		Total expenses			883.7			568.2			334.2
Pre-tax loss				$	(72.7	)	$	(8.0	)	$	(12.5	)

				Year Ended December 31,
				2007		2006		2005
GAAP ratios:
	Loss and LAE			82	%	73	%	67	%
	Expense			34	%	35	%	42	%
		Total Combined		116	%	108	%	109	%




Esurance Results—Year Ended December 31, 20042007 versus Year Ended December 31, 20032006

        Esurance's pretax incomepre-tax loss for 2007 was $73 million compared to a pre-tax loss of $4$8 million for 2004 represented an improvement over the pretax loss of $19 million in 2003.2006. Esurance's 2004GAAP combined ratio improvedwas 116% for 2007 compared to 102% from 120% in 2003 due to improvements in both loss and expense ratios.108% for 2006. Esurance's loss ratio improvementincreased to 82% in 2007 from 73% in 2006 due to a higher current year loss ratio and $30 million, or 4 points, of prior period adverse loss development. During the second quarter of 2007, Esurance began to experience higher than expected paid loss severity for injury claims. A review of all open liability claim files was completed third quarter. As a result, case reserves were increased to reflect the higher loss severity for injury claims. Esurance is seeing higher injury claim severities reported by its peer group and in industry data, indicating that the trend is not unique to Esurance's business. In response to higher claim costs, Esurance has increased prices for injury coverages. Due to these rate increases and effects of competition in the personal auto market, Esurance expects to grow more slowly in 2008 than in previous years. Esurance's expense ratio decreased to 34% in 2007 from the prior period expense ratio of 35% as lower operating expenses offset higher acquisition costs that resulted from increased competition in the continued rollout and refinement of Esurance's proprietarypersonal 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.market.

        The auto program, combined with Esurance's self-service, web-enabled operating platform, allowed EsuranceNet written premium increased to $799 million in 2007, a 34% increase premium volume and in-force policy count while reducing the expense ratio from 39% to 33%.2006. As of December 31, 2004,2007, Esurance's in-force policy count was 118,513 policies,totaled 485,000, a 60%30% increase over December 31, 2003. Increased advertising, particularly2006. During 2007, Esurance expanded its marketing programs through online video, search, and television while making site changes that improved the conversion rate (i.e. the ratio of policies written to quotes generated).

        During 2007, Esurance wrote business in radio28 states, the largest of which were California (with 22% of direct premium written), Florida (16%), New York (7%), Texas (6%) and TV, drove policy count growth.Michigan (5%).

Esurance Results—Year Ended December 31, 20032006 versus Year Ended December 31, 20022005

        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 pretaxpre-tax loss for Esurance decreased by $72006 was $8 million in 2003 and thecompared to a pre-tax loss of $13 million for 2005. Esurance's GAAP combined ratio fell 49was 108% for 2006 compared to 109% for 2005. Esurance's loss ratio increased to 73% in 2006 from 67% in the prior period, due to rate reductions and one point of unfavorable development on loss reserves in 2006 compared to three points while netof favorable development on loss reserves in the prior year. The expense ratio decreased to 35% in 2006 from the prior period expense ratio of 42% due to lower acquisition costs and additional operating efficiencies.

        Net written premiums more than doubled.premium increased to $596 million, a 71% increase from 2005. As of December 31, 2006, Esurance's in-force policy count totaled 372,688, a 76% increase over 2005. During 2006, Esurance continued to expand through national and local television advertising, online marketing, direct mail, and online agency channels. More site traffic and improved conversion rates lowered the costs of acquiring new customers during 2006.

        During 2006, Esurance wrote business in 24 states, the largest of which were California (with 19% of direct premium written), Florida (17%), New York (9%), Texas (6%) and Michigan (6%).







Other Operations

        Other Operations consists of the operations of the Company, and the Company's intermediate subsidiary holding companies, White Mountains' weather risk management and variable annuity reinsurance businesses, the consolidated results of the Tuckerman Funds, the International American Group, as well asWM Advisors and White Mountains' investments in Symetra, Pentelia, Delos and Montpelier and Symetra warrants.Re (until its disposition in May 2007).

        A summary of White Mountains' financial results from its Other Operations segment for the years ended December 31, 2004, 20032007, 2006 and 20022005 follows:

				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 its holding companies. In this regard, the results of its Other Operations segment primarily relate to financing activities, 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.

				Year Ended December 31,
Millions
				2007			2006			2005
	Gross written premiums			$	—		$	—		$	1.9
	Net written premiums			$	—		$	—		$	1.8
	Earned insurance and reinsurance premiums			$	—		$	—		$	1.8
	Net investment income				84.4			46.8			90.4
	Net realized investment gains (loss)				21.3			50.4			(89.1	)
	Gain on sale of shares through the OneBeacon Offering				—			171.3			—
	Other revenue—Tuckerman Funds				102.1			89.5			93.2
	Other revenue				16.0			18.5			49.2
		Total revenues			223.8			376.5			145.5
	Losses and LAE				(6.8	)		3.9			12.6
	Insurance and reinsurance acquisition expenses				—			—			.1
	Other underwriting expenses				2.7			1.8			1.6
	General and administrative expenses—Tuckerman Funds				95.0			76.9			78.4
	General and administrative expenses				69.3			101.7			49.6
	Interest expense on debt				4.6			3.0			—
		Total expenses			164.8			187.3			142.3
Pre-tax income				$	59.0		$	189.2		$	3.2

Other Operations Results—Year Ended December 31, 20042007 versus Year Ended December 31, 2003

        White Mountains' Other Operations segment reported a pre-tax loss of $235 million for 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 2004, and higher gains from the sale of real estate in 2003 ($13 million in 2004 and $43 million in 2003). In addition, interest expense on preferred stock was up $25 million in 2004 due to the inclusion of a full year of expense 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 operating company in the segment, 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, 20022006

        White Mountains' Other Operations segment reported pre-tax lossesincome of $159$59 million for both 2003 and 2002. Incentive compensation accruals2007, compared to $189 million for 2006, which included a $171 million gain on the sale of OneBeacon shares. Excluding the gain on OneBeacon shares, pre-tax income from Other Operations increased by $72$41 million in 2003, but this increase was offset by, among other items,2007, due mainly to a $43$35 million decrease in losses on interest rate swap agreementsincentive compensation expense, a $26 million increase in pre-tax income from the Symetra warrants ($17 million increase in net realized gains and a $31$9 million decreaseincrease in the accretionnet investment income) and $11 million of the fair value adjustment on loss reserves acquired in the OneBeacon Acquisition. Interest expense on debt decreased by $24 million in 2003,favorable development during 2007, primarily due to the pay-offsettlement of a $260large claim at British Insurance Company. These increases in pre-tax income were partially offset by a $6 million loanincrease in other non-incentive compensation expenses. In addition, White Mountains' weather risk management and variable annuity reinsurance businesses had pre-tax income (losses) of $(5) million and $(11) million, respectively, in 2007 compared to $(3) million and $2 million, respectively, in 2006.

Other Operations Results—Year Ended December 31, 2006 versus Year Ended December 31, 2005

        White Mountains' Other Operations segment reported pre-tax income of $189 million for 2006, compared to $3 million for 2005. The increase was primarily attributable to the refinancing$171 million gain on the sale of $700OneBeacon shares. In addition, the Montpelier Re investment accounted for $13 million in pre-tax income during 2006, compared to $63 million of senior debt and amortizationpre-tax losses during 2005, which included $39 million of net investment income from the previous credit facility. This decrease wasspecial dividend. These increased gains were partially offset by a $58 million increase in incentive compensation expense in 2006 compared to 2005. In addition, White Mountains' weather risk management and variable annuity reinsurance businesses contributed $(3) million and $2 million, respectively, to pre-tax income for the inclusionOther Operations segment in their first year of $22 million of interest expense on preferred stock as a result of SFAS 150.operation.




II. Summary of Investment Results

        A summary of White Mountains' consolidated pre-tax investment results for the years ended December 31, 2007, 2006 and 2005 follows:

			Year Ended December 31,
Millions
			2007			2006			2005
Net investment income			$	533.0		$	435.5		$	491.5
Net realized investment gains				263.2			272.7			112.6
Net unrealized investment gains (losses)				62.5			114.0			(285.7	)
	Total GAAP pre-tax investment results		$	858.7		$	822.2		$	318.4

        Gross investment returns versus typical benchmarks for the years ended December 31, 2007, 2006 and 2005 are as follows. For purposes of discussing rates of return, all percentages are presented gross of management fees and trading expenses in order to produce a more relevant comparison to benchmark returns, while all dollar amounts are presented net of any management fees and trading expenses.

			Year Ended December 31,
			2007		2006		2005
Fixed maturity investments			6.4	%	6.0	%	2.6	%
Short-term investments			5.2		6.1		5.6
	Total fixed maturities		6.2		6.0		3.0
	Lehman U.S. Aggregate Index		7.0		4.3		2.4
Convertible fixed maturities			4.3		9.4		6.4
Common stock			9.0		22.0		5.2
Other investments			29.7		16.4		3.7
	Total equities		14.9		20.2		4.7
	S&P 500 Index (total return)		5.5		15.8		4.9
Total consolidated portfolio			7.6	%	8.4	%	3.3	%

Investment Philosophy
Returns—Year Ended December 31, 2007 versus Year Ended December 31, 2006

        White Mountains manages allMountains' total pre-tax investment result was a gain of its consolidated investments through its wholly-owned subsidiary, WM Advisors.$859 million, a return of 7.6% for 2007 compared to a gain of $822 million, a return of 8.4% for 2006. White Mountains' total fixed maturity portfolio returned 6.2% during 2007, compared to 6.0% in 2006. White Mountains' fixed maturity portfolio provided positive results, as it avoided the sub-prime mortgage difficulties that have tainted many other investment philosophy is to investportfolios, and its assets with a view towards maximizing its after-tax total return over extended periods of time. Under this approach, each dollar of after-taxequity portfolio again exceeded industry benchmarks. Both benefited from the weakening U.S. dollar.

        Net investment income of $533 million in 2007 increased by 22% from $436 million in 2006, principally due to a higher average invested asset base in 2007, resulting from the sale of OneBeacon shares late in 2006 and the issuance of the WMRe Senior Notes and Preference Shares early in 2007. Net realized andinvestment gains in 2007 of $263 million were relatively consistent with the $273 million reported in 2006. Pre-tax net unrealized gains and losses is valued equally. White Mountains' overall fixed maturity investment strategy isdecreased to purchase securities that are attractively priced$63 million in relation2007, from $114 million in 2006, mainly due 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 ofa higher foreign currency exchange unrealized gains in 2006 than in 2007.

Investment Returns—Year Ended December 31, 2004 consisted in large part of high-quality, fixed maturity investments and short-term investments, as well as some equity investments and limited partnerships. 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 when balanced with leverage and insurance risk considerations. White Mountains seeks to maximize after-tax risk-adjusted returns over the long term.


Investment Returns
2006 versus Year Ended December 31, 2005

        White Mountains generated strongMountains' total pre-tax investment returnsresult was a gain of $822 million, a return of 8.4% for 2006 compared to a gain of $318 million, a return of 3.3% for 2005. White Mountains' total fixed maturity portfolio returned 6.0% during 2006 versus 3.0% during 2005. The higher return in 2004. The GAAP2006 was primarily due to a more favorable interest rate environment, where the rate of increase in interest rates during 2006 was lower than during 2005. In addition, the weakening of the U.S. dollar during 2006 reversed a trend from 2005 and produced unrealized currency exchange




gains of $112 million in White Mountains' foreign denominated fixed maturity securities portfolio. White Mountains' total return on invested assets was 7%, while the equity portfolio returned 20% for the year.20.2% during 2006 versus 4.7% during 2005. The equity return in 2005 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 primarilyadversely impacted by 12.1 points due to the decline in reserves at OneBeacon as its premium volume was reduced.the Montpelier Re investment.

        White Mountains sold a portionNet investment income of its investment in Montpelier common shares$436 million during the first quarter of 2004 resulting in a $352006 decreased 11% from $492 million pre-tax realized gain and, as a result, changed the method of accounting for its remaining Montpelier common sharesduring 2005, principally due to the fair value method, resulting inreceipt of a $33$74 million special dividend on the Montpelier Re common share and warrant investments during 2005. Net realized investment gains of $273 million during 2006 increased by 142% from $113 million during 2005, primarily due to a $170 million increase in after-taxrealized gains from the Montpelier Re common share and warrant investment (a $5 million realized gain in 2006 period versus a $165 million realized loss in 2005, which included a $55 million other-than-temporary impairment charge). Net unrealized gains on investments of $114 million during 2006 improved from net unrealized losses of $286 million during 2005, primarily due to the effect of interest rate movements and foreign currency fluctuations, as described above. In addition, 2005 included a $65 million pre-tax unrealized loss from the Montpelier Re common share investment.

Portfolio composition

        The following table presents the composition of White Mountains' investment portfolio as of December 31, 2007 and 2006:

			As of December 31, 2007					As of December 31, 2006
$ in millions			Carrying value			% of total		Carrying value			% of total
Fixed maturity investments			$	7,371.5		63.3	%	$	7,475.3		66.0	%
Common equity securities				1,550.7		13.3			1,212.6		10.7
Short-term investments				1,327.3		11.4			1,344.9		11.9
Other investments				603.3		5.2			524.8		4.6
Convertible fixed maturity investments				490.6		4.2			436.2		3.8
Trust account investments				305.6		2.6			338.9		3.0
	Total investments		$	11,649.0		100.0	%	$	11,332.7		100.0	%

        The breakdown of White Mountains' fixed maturity investments, including trust account investments, at December 31, 2007 by credit class, based upon issue credit ratings provided by Standard & Poor's, or if unrated by Standard & Poor's, long term obligation ratings provided by Moody's, is as follows:

			As of December 31, 2007
$ in millions			Amortized cost			% of total
U.S. government and government-sponsored entities			$	3,419.6		45.6	%
AAA/Aaa				1,900.1		25.3
AA/Aa				133.2		1.8
A/A				845.0		11.3
BBB/Baa				986.5		13.2
Other/not rated				214.2		2.8
	Total fixed maturity investments		$	7,498.6		100.0	%

        The weighted average duration of White Mountains' fixed maturity portfolio, excluding short-term investments, at December 31, 2007 was 3.0 years. The cost or amortized cost and carrying value of White Mountains' fixed maturity and convertible fixed maturity investments at December 31, 2007 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, 2007
Millions		Cost or amortized cost			Estimated fair value
Due in one year or less		$	933.1		$	972.3
Due after one year through five years			2,951.2			3,056.5
Due after five years through ten years			487.0			504.1
Due after ten years			575.8			563.7
Asset-backed securities			2,882.6			2,898.6
Preferred stocks			159.5			173.8
Total		$	7,989.2		$	8,169.0

Mortgage-backed, Asset-backed Securities

        White Mountains purchases commercial and residential mortgage-backed securities to maximize its fixed income portfolio's risk adjusted returns and diversify the portfolio risk from primarily corporate credit risk to a mix of credit and cash flow risk. White Mountains is not an originator of residential mortgage loans and does not hold any residential mortgage-backed securities categorized as sub-prime as of December 31, 2007. In addition, White Mountains' investments in hedge funds, limited partnerships and private equities contain negligible amounts of sub-prime mortgage-backed securities at December 31, 2007. White Mountains is not directly exposed to potential losses on sub-prime mortgage-backed securities, other than approximately $11 million of sub-prime mortgage-backed securities that are in the first quarter.

collateral account under its securities lending program at December 31, 2007. SeeNote 1—Summary of Significant Accounting Policies,ImpairmentSecurities Lending in the accompanying financial statements for a description of White Mountains' securities lending program. White Mountains considers sub-prime mortgage-backed securities to be those that are issued from dedicated sub-prime shelves, dedicated second-lien shelves (i.e., White Mountains considers investments backed primarily by second-liens to be a sub-prime risk regardless of credit score or other metrics) or otherwise have underlying loan pools that exhibit weak credit characteristics.

        There are also mortgage-backed securities that White Mountains categorizes as "non-prime" (also called "Alt A" or "A-") that are backed by collateral that has overall credit quality between prime and sub-prime, based on a review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. As of December 31, 2007, $149 million of White Mountains' mortgage-backed securities holdings were classified as non-prime. All of these non-prime securities continue to have the highest rating ascribed by Moody's ("Aaa") or Standard & Poors ("AAA"). White Mountains does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.

        The following table summarizes White Mountains' mortgage-backed and asset-backed securities holdings as of December 31, 2007 and 2006:

			December 31,
Millions
			2007			2006
Mortgage-backed securities:
	Agency(1)		$	1,019.2		$	469.4
	Non-agency			1,438.9			1,819.9
Total mortgage-backed securities				2,458.1			2,289.3
Asset-backed securities:
	Credit card			428.9			604.2
	Auto			8.4			59.0
	Other			3.2			9.1
Total asset-backed securities				440.5			672.3
Total mortgage-backed and asset-backed securities			$	2,898.6		$	2,961.6

---

(1)

Represents publicly traded residential mortgage-backed securities which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (e.g., FNMA, FHLMC).




Impairment

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








NON-GAAP FINANCIAL MEASURES


        This report includes twofive non-GAAP financial measures that have been reconciled to their most comparable GAAP financial measures. White Mountains believes these measures to be more relevant than comparable GAAP measures in evaluating White Mountains' results of operations and financial performance.condition.

        Adjusted comprehensive net income is a non-GAAP financial measure that excludes the change in net unrealized gains and losses from Symetra's fixed maturity portfolio from comprehensive net income. In the calculation of comprehensive net income under GAAP, requires these assets to befixed maturity investments are marked-to-market which results in gains during periods when interest rates fall and losses in periods when interest rates rise. Becausewhile the liabilities related to which those assets are matched are not. Symetra attempts to earn a "spread" between what it earns on its investments and what it pays out on its products. In order to try to fix this spread, Symetra invests in a manner that tries to match the duration and cash flows of its investments with the required cash outflows associated with its life insurance and structured settlements products. As a result, Symetra typically earns the same spread on in-force business whether interest rates fall or rise. Further, at any given time, some of Symetra's structured settlement obligations may extend 40 or 50 years into the future, which is further out than the longest maturing fixed maturity investments regularly available for purchase in the market (typically 30 years). For these long-dated products, Symetra is unable to fully match the obligation with assets until the remaining expected payout schedule comes within the duration of securities available in the market. If at that time, these assets supportfixed maturity investments have yields that are not marked-to-market, it is likely thatlower than the economic impact onyields expected when the structured settlement product was originally priced, the spread for the product will shrink and Symetra will ultimately harvest lower returns for its shareholders. GAAP comprehensive net income increases when rates decline, which would be suggest an increase in the value of Symetra—the opposite of that shown under GAAP (i.e., in general, Symetra'swhat is happening to the intrinsic value increasesof the business. Therefore, White Mountains' management and Board of Directors use adjusted comprehensive net income when interest rates riseassessing Symetra's quarterly financial performance. In addition, this measure is typically the predominant component of growth in fully diluted tangible book value per share, which is used in calculation of White Mountains' performance for both short-term (annual bonus) and decreases when interest rates fall).long-term incentive plans. The reconciliation of adjusted comprehensive net income to comprehensive net income is included on page 43.48.

        Book value per share is derived by dividing the Company's total GAAP shareholders' equity as of a given date by the number of Common Sharescommon shares outstanding as of that date, including the dilutive effects of outstanding Optionsoptions and warrants to acquire Common Shares,common shares, as well as the unamortized accretion of preferred stock. Fully converteddiluted tangible book value per share is a non-GAAP measure which is derived by expanding the GAAP book value per share calculation to include the effects of assumed conversion of all in-the-money convertible securities and to exclude any unamortized goodwill and net unrealized gains from Symetra's fixed maturity portfolio. In addition, for periods subsequent to December 31, 2006, the number of common shares outstanding used in the calculation of fully diluted tangible book value per share are adjusted to exclude unearned shares of restricted stock representative of the proportion of unamortized compensation cost at the date of the calculation to the value of the restricted stock on the date of issuance. This adjustment was not made to fully diluted tangible book value per share for periods prior to December 31, 2006 as the impact was not significant. The reconciliation of fully converteddiluted tangible book value per share to book value per share is included on page 42.47.

        Total capital at White Mountains is comprised of common shareholders' equity, debt and minority interest in OneBeacon Ltd. Tangible capital excludes from total capital the unamortized goodwill of consolidated limited partnerships and the equity in net unrealized gains from Symetra's fixed maturity portfolio. The reconciliation of total capital to total tangible capital is included on page 68.

        Adjusted book value per common share at OneBeacon is a non-GAAP financial measure which is derived by excluding the impact of economically defeasing OneBeacon's mandatorily redeemable preferred stock from book value per common share, the most closely comparable GAAP measure. Management believes that adjusted book value per common share is a useful supplement to understanding the OneBeacon's earnings and profitability. A reconciliation of OneBeacon's book value per common share to OneBeacon's adjusted book value per common share is included on page 50.





        During 2005 and 2007, OneBeacon reallocated loss and LAE reserves from specialty, commercial and personal lines to run-off, which reduced specialty, commercial and personal lines' GAAP loss and LAE ratios and GAAP combined ratios, but had no impact on OneBeacon's total GAAP combined ratio. OneBeacon's specialty, commercial and personal lines' loss and LAE ratios and combined ratios prior to reserve reallocation are non-GAAP financial measures that are derived by excluding the impact of the reserve reallocation from specialty, commercial and personal lines' loss and LAE ratios and combined ratios. OneBeacon believes that a presentation excluding the effect of the reserve reallocation on specialty, commercial and personal lines' loss and LAE ratios and GAAP combined ratios is meaningful for investors to understand the performance of its underwriting units during 2005 and 2007. The reconciliation of these non-GAAP financial measures to the GAAP loss and LAE ratios and GAAP combined ratios is included on page 51.

LIQUIDITY AND CAPITAL RESOURCES


Operating cash and short-term investments


        Holding company level.    The primary sources of cash for the Company and certain of its intermediate holding companies are dividends and tax sharing payments received from its insurance and reinsurance operating subsidiaries, financingcapital raising activities, and net investment income and proceeds from sales and maturities of holding company investments. The primary uses of cash are interestrepurchases of the Company's common shares, payments on the Senior Notes,its debt obligations, dividend payments on the Company's common shares, minority interest holders of OneBeacon Ltd.'s common shares, the Berkshire and Zenith Preferred Stock as well as on Commonand to holders of the WMRe Preference Shares, purchases of investments, payments made to tax authorities and holding company operating expenses.

        Operating subsidiary level.    The primary sources of cash for White Mountains' insurance and reinsurance operating subsidiaries are premium collections, net investment income, capital raising activities and proceeds from sales and maturities of investments. The primary uses of cash are claim payments, policy acquisition costs, operating expenses, the purchasepurchases of investments, payments on its debt obligations 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 cashliquidity 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 itsthe WTM Bank Facility and the Fund American 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 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. Following is a description of the abilitydividend activities 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 during any 12 month12-month period without the prior approval of regulatory 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 20042007 statutory net income, OneBeacon's top tier regulated insurance operating subsidiaries have the ability to pay $325approximately $346 million of dividends during 20052008 without prior approval of regulatory authorities, subject to the availability of unassigned funds. As of December 31, 2004,2007, OneBeacon's top tier regulated insurance operating subsidiaries had $1.3$1.5 billion of unassigned funds available for dividend distribution.funds.




        In addition, as of December 31, 2004,2007, OneBeacon had $195approximately $380 million of net unrestricted cash, fixed maturity and equity investments outside of its regulated insurance operating subsidiaries available for distribution during 2005.subsidiaries. During 2004,2007, OneBeacon paid $305$394 million of cash dividends to Fund American.American and OneBeacon Ltd. paid $84 million of dividends to its common shareholders, $60 million of which was paid to an intermediate holding company of White Mountains.

        Fund American's ability to declare or pay dividends is limited by the terms of the Berkshire Preferred Stock. Fund American may not, under certain circumstances, declare or pay any dividend or distribution without the consent of the holders of the Berkshire Preferred Stock. In addition, White Mountains and Fund American entered into or amended certain agreements with respect to the Berkshire Preferred Stock to effect a corporate reorganization in 2004 (seeKeep-Well below).

        On January 31, 2008, OneBeacon Ltd. declared a $200 million special dividend, of which White Mountains will receive a portion based on its ownership percentage on March 17, 2008 (the dividend record date). As of December 31, 2007, White Mountains owned 72.9% of OneBeacon Ltd.'s outstanding shares.

White Mountains Re:

        Folksamerica's principal regulated reinsurance operating subsidiaryFolksamerica has the ability to pay dividends during any 12 month12-month period without the prior approval of regulatory authorities in an amount equal to the lesser of net 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, basedBased upon December 31, 20042007 statutory surplus of $917$927 million, Folksamerica's principal regulated reinsurance operating subsidiaryFolksamerica would have the ability to pay approximately $92$93 million of dividends during 20052008 without prior approval of regulatory authorities, subject to the availability of earned surplus. As of December 31, 2004, Folksamerica's principal regulated reinsurance operating subsidiary2007, Folksamerica had $17$69 million of earned surplus, therefore it cansurplus.

        Sirius International has the ability to pay dividends of $17 million plus additional earned surplus reported during 2005, subject to the $92 million limitation discussed above.

availability of unrestricted statutory surplus. Historically, Sirius International has allocated the majority of its earnings to the Safety Reserve (see "Safety Reserve" below). As of December 31, 2004, WMU2007, Sirius International had $3$52 million of cash and investmentsunrestricted statutory surplus, which is available for distribution in 2008. Based on its 2007 results, Sirius International would have the ability to declare and pay additional dividends (on top of the $52 million noted above) of up to $60 million in 2008 without regulatory approval, if it elects not to allocate its related pre-tax earnings to the Safety Reserve.

        In accordance with the provisions of Swedish law, Sirius International can voluntarily transfer its pre-tax income, or a portion thereof, subject to certain limitations, to its parent company to minimize taxes. In early 2008, Sirius International intends to transfer aproximately $33 million of its 2007 pre-tax income to its Swedish parent company as a group contribution.

        During 2007, White Mountains Re increased the capital of WMRe (Bermuda), as Sirius International first contributed $136 million to WMRe (Bermuda), and then White Mountains Re extracted WMRe (Bermuda) from Sirius International and contributed the net proceeds of its May 2007 Preference Share issuance, or approximately $246 million, to WMRe (Bermuda). Additionally, during 2005. In addition, WMUthe fourth quarter of 2007, Folksamerica redeemed $285 million of its common shares, after receiving approval from the Insurance Department of the State of New York. $250 million of these proceeds were used to further capitalize WMRe (Bermuda). As of December 31, 2007 WMRe (Bermuda)'s capital was $776 million.

        WMRe (Bermuda) has the ability to declare and pay dividends of up to $103 million in 2008 without regulatory approval, subject to meeting all appropriate liquidity and solvency requirements.

        WMRUS has the ability to distribute its 20052008 earnings without restriction. During 2004, WMU paid $60At December 31, 2007, WMRUS had $2 million of unrestricted cash. During 2007, WMRUS paid $8 million of dividends to its immediate parent.

        White Mountains Re paid $392 million of cash dividends from the net proceeds of the WMRe Senior Notes and distributed its $54 million investment in Symetra warrants to its immediate parent during the first quarter 2007. During the remainder of 2007, White Mountains Re paid an additional $20 million of dividends to its immediate parent.

        In addition, as of December 31, 2004,2007, White Mountains Re and its intermediate holding companies had approximately $97an additional $58 million of net unrestricted cash and fixed maturity investments outside of Folksamerica, Sirius International, WMRe (Bermuda) and WMRUS.




Esurance:

        Generally, Esurance's regulated insurance operating subsidiaries have 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 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 December 31, 2007 statutory net income, Esurance's top tier regulated insurance operating subsidiary has the ability to pay $3 million of dividends during 2008 without prior approval of regulatory authorities, subject to the availability of unassigned funds. As of December 31, 2007, Esurance's top tier regulated insurance operating subsidiary had $30 million of unassigned funds.

        In addition, as of December 31, 2007, Esurance had $.4 million of net unrestricted cash and fixed maturity investments outside of its regulated insurance operating subsidiaries. During 2007, Esurance did not pay any cash dividends to its immediate parent.

Other operations:

        As of December 31, 2007, White Mountains had $462 million of net unrestricted cash, fixed maturity and reinsurance operating subsidiaries available for distribution during 2005.equity investments at the Company and its intermediate holding companies included in its other operations segment.


Safety Reserve


        In accordance with provisions of Swedish law, Sirius International can voluntarilyis permitted to transfer up to the full amount of its pretax earnings, or a portion thereof,pre-tax income, 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, underwhich amounted to $1.4 billion at December 31, 2007. Under GAAP, an amount equal to Sirius International'sthe 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 shareholders' 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 and loss reserves 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. Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International's safety reserve ($398 million at December 31, 2007) is included in solvency capital. Access to the safety reserve is restricted to coverage of aggregate losses and requires the approval of Swedish regulatory authorities.


Keep-Well


        On November 30, 2004, White Mountains completed a significant corporate reorganization, through which ownership of Folksamerica 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 Berkshire 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 reorganization, 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 shareholdersshareholders. This distribution limit, which as of December 31, 2007 was $2.4 billion, will increase or decrease by an amount equal to approximately $1.3 billion plus White Mountains' aggregate consolidated net income after September 30, 2004.or loss over the remaining life of the agreement. The Keep-Well will expire upon the earlier of 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 dynamicaspect of White Mountains' operations that must be managed effectively. Floatinsurance operations. Insurance 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 time, the insurer invests the money.funds. When the premiums that an insurer collects do not cover the losses and expenses it eventually must pay, the result is an underwriting loss, which is considered to be the cost of insurance float. The amount and cost of insurance 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,																		December 31,
($ in millions)	($ in millions)																		($ in millions)
				2004			2003			2002			2001			2000						2007			2006			2005			2004			2003
Total investments	Total investments			$	10,529.5		$	8,547.5		$	8,899.4		$	9,005.7		$	2,102.2		Total investments			$	11,649.0		$	11,332.7		$	9,866.4		$	10,529.5		$	8,547.5
Consolidated limited partnership investments(1)																			Consolidated limited partnership investments(1)				(123.0	)		(123.4	)		(90.7	)		(64.3	)		—
Trust account assets																			Trust account assets				(305.6	)		(338.9	)		—			—			—
Cash	Cash				243.1			89.9			121.5			67.4			4.4		Cash				171.3			159.0			187.7			243.1			89.9
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	)		—			—			—			—
Investments in unconsolidated affiliates																			Investments in unconsolidated affiliates				406.3			335.5			479.7			466.6			515.9
Equity in net unrealized (gains) losses from Symetra's fixed maturity portfolio																			Equity in net unrealized (gains) losses from Symetra's fixed maturity portfolio				5.6			4.1			(24.2	)		(56.6	)		—
Accounts receivable on unsettled investment sales	Accounts receivable on unsettled investment sales				19.9			9.1			160.8			75.2			—		Accounts receivable on unsettled investment sales				201.1			8.5			21.7			19.9			9.1
Accounts payable on unsettled investment purchases	Accounts payable on unsettled investment purchases				(30.9	)		(371.6	)		(495.2	)		(311.2	)		(.2	)	Accounts payable on unsettled investment purchases				(46.4	)		(66.8	)		(43.4	)		(30.9	)		(371.6	)
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	)
Interest-bearing funds held by ceding companies(2)																			Interest-bearing funds held by ceding companies(2)				192.8			226.7			293.9			516.9			70.4
Interest-bearing funds held under reinsurance treaties(3)																			Interest-bearing funds held under reinsurance treaties(3)				(73.4	)		(94.5	)		(100.6	)		(105.1	)		(152.5	)
	Net investment assets			$	11,583.4		$	8,708.7		$	8,900.3		$	8,880.1		$	1,859.8		Net investment assets			$	12,077.7		$	11,442.9		$	10,590.5		$	11,519.1		$	8,708.7
Total common shareholders' equity	Total common shareholders' equity			$	3,883.9		$	2,979.2		$	2,407.9		$	1,444.6		$	1,046.5		Total common shareholders' equity			$	4,713.4		$	4,455.3		$	3,833.2		$	3,883.9		$	2,979.2
Minority interest—OneBeacon Ltd.																			Minority interest—OneBeacon Ltd.				517.2			490.7			—			—			—
Minority interest—WMRe Preference Shares																			Minority interest—WMRe Preference Shares				250.0			—			—			—			—
Debt	Debt				783.3			743.0			793.2			1,125.4			96.0		Debt				1,192.9			1,106.7			779.1			783.3			743.0
Preferred stock subject to mandatory redemption					211.9			194.5			180.9			170.3			—
Convertible preference shares					—			—			219.0			—			—
Less:
Preferred stock subject to mandatory redemption(4)																			Preferred stock subject to mandatory redemption(4)				—			—			234.0			211.9			194.5
																			Total capital			$	6,673.5		$	6,052.7		$	4,846.3		$	4,879.1		$	3,916.7
		Unamortized deferred credits and goodwill			(20.0	)		(20.3	)		—			660.2			66.8			Unamortized goodwill			(30.4	)		(32.5	)		(24.4	)		(20.0	)		(20.3	)
		Equity in net unrealized gains from Symetra's fixed maturity portfolio			(56.6	)		—			—			—			—			Equity in net unrealized (gains) losses from Symetra's fixed maturity portfolio			5.6			4.1			(24.2	)		(56.6	)		—
	Total tangible capital			$	4,802.5		$	3,896.4		$	3,601.0		$	3,400.5		$	1,209.3		Total tangible capital			$	6,648.7		$	6,024.3		$	4,797.7		$	4,802.5		$	3,896.4
	Insurance float			$	6,780.9		$	4,812.3		$	5,299.3		$	5,479.6		$	650.5		Insurance float			$	5,429.0		$	5,418.6		$	5,792.8		$	6,716.6		$	4,812.3
Insurance float as a multiple of total tangible capital	Insurance float as a multiple of total tangible capital				1.4	x		1.2	x		1.5	x		1.6	x		0.5	x	Insurance float as a multiple of total tangible capital				0.8x			0.9x			1.2x			1.4x			1.2x
Net investment assets as a multiple of total tangible capital	Net investment assets as a multiple of total tangible capital				2.4	x		2.2	x		2.5	x		2.6	x		1.5	x	Net investment assets as a multiple of total tangible capital				1.8x			1.9x			2.2x			2.4x			2.2x
Insurance float as a multiple of common shareholders' equity	Insurance float as a multiple of common shareholders' equity				1.7	x		1.6	x		2.2	x		3.8	x		0.6	x	Insurance float as a multiple of common shareholders' equity				1.2x			1.2x			1.5x			1.7x			1.6x
Net investment assets as a multiple of common shareholders' equity	Net investment assets as a multiple of common shareholders' equity				3.0	x		2.9	x		3.7	x		6.1	x		1.8	x	Net investment assets as a multiple of common shareholders' equity				2.6x			2.6x			2.8x			3.0x			2.9x

---

(1)

The minority interest portion of investments of consolidated limited partnerships have not been included in insurance float because White Mountains does not have the ability to utilize these assets.



(2)

Excludes funds held by ceding companies from which White Mountains does not receive interest credits and excludescredits.



(3)

Excludes funds held by White Mountains under reinsurance treaties for which White Mountains does not provide interest credits.



(4)

Excludes preferred stock subject to mandatory redemption, having an aggregate accreted liquidation preference at December 31, 2007 and 2006 of $278 million and $269 million, respectively (and $306 million and $339 million of investments held in irrevocable grantor trusts for the purpose of economically defeasing the preferred stock subject to mandatory redemption). The creation and funding of these trusts did not legally defease the preferred stock and therefore the preferred stock will continue to appear on White Mountains' balance sheet until it is redeemed.

        White Mountains has historically obtained its insurance 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 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 does 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 effects 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 organic growth in its existing insurance and reinsurance operations. However, White Mountains will seek to increase its insurance float organically only when market conditions allow for an expectation of generating underwriting profits.





Financing


        The following table summarizes White Mountains' capital structure as of December 31, 20042007 and 2003:2006:

			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	%

			December 31,
($ in millions)
			2007			2006
Fund American Senior Notes, carrying value			$	698.9		$	698.7
WMRe Senior Notes, carrying value				398.9			—
WTM Bank Facility(1)				—			320.0
Fund American Bank Facility				—			—
Other debt of operating subsidiaries(2)				95.1			88.0
	Total debt			1,192.9			1,106.7
Minority interest—OneBeacon Ltd.				517.2			490.7
Minority interest—WMRe Preference Shares				250.0			—
Total common shareholders' equity				4,713.4			4,455.3
	Total capital(3)(4)		$	6,673.5		$	6,052.7
Unamortized goodwill				(30.4	)		(32.5	)
Equity in net unrealized losses from Symetra's fixed maturity portfolio				5.6			4.1
	Total tangible capital		$	6,648.7		$	6,024.3
Total debt to total tangible capital				18	%		18	%
Total debt and Preference Shares to total tangible capital				22	%		18	%

---

(1)

The $320.0 million outstanding on December 31, 2006 was under White Mountains' previous credit facility, which was refinanced in June 2007 (See below).



(2)

SeeNote 6—Debt"Debt" of the accompanying Consolidated Financial Statements for a discussion of operating subsidiary debt.



(2)

The minority interest arising from White Mountains' investments in consolidated limited partnerships has not been included in total capital because White Mountains does not have the ability to utilize the assets supporting this minority interest.



(4)

The preferred stock subject to mandatory redemption, having an aggregate accreted liquidation preference of $278 million and $262 million at December 31, 2007 and 2006, was not included in total capital because it was economically defeased in connection with the OneBeacon Offering.

        Management believes that White Mountains' strong financial position 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 2003,2007, WMRe Group issued $250 million non-cumulative perpetual preference shares and received $246 million of proceeds, net of $4 million of issuance costs and commissions. Holders of the WMRe Preference Shares receive dividends on a non-cumulative basis only when, and if declared by WMRe Group at a fixed dividend rate of 7.506% for the period from issuance until June 30, 2017 and a variable dividend rate thereafter. The WMRe Preference Shares are redeemable only at the option of WMRe Group.

        In March 2007, WMRe Group issued $400 million face value of senior unsecured debt at an issue price of 99.715%, wihich resulted in net proceeds of $392 million. The WMRe Senior Notes bear an annual interest rate of 6.375%, payable semi-annually in arrears on March 20 and September 20, until maturity in March 2017. Taking into effect the amortization of the orginal issue discount and all underwriting and issuance expenses, including an interest rate lock agreement, the WMRe Senior Notes yield an effective rate of 6.49% per annum.

        During the first quarter of 2007, White Mountains reducedrepaid the $320 million outstanding under its costrevolving credit facility using a portion 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 WMRe Senior Notes, which were issued by Fund American through a public offering. The Senior Notes bear a fixed annual interest rateNotes. During the second quarter of 5.9% and mature in May 2013. In July 2003,2007, 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 and/or equity securities.







        In August 2004, Fund American restructured and re-syndicatedreplaced its existing $300credit facility with a new $475 million Bank Facility to increase the availability under the revolving credit facility to $400 millionthat matures in June 2012. This new facility removed WMRe Group as co-borrower and to extend the maturity from September 2006 to August 2009. Under the Bank Facility, for which both Fund Americanco-guarantor, added certain intermediate holding companies of White Mountains as co-guarantors and the Company are permitted borrowers, the Company guarantees all obligations of Fund American,amended and/or removed certain financial and Fund American guarantees all borrowings of the Company, subject to certain limitations imposed by the terms of the Berkshire Preferred Stock.other covenants. As of December 31, 2004,2007, the WTM Bank Facility was undrawn.

        In connection with its acquisitionNovember 2006, Fund American, a subsidiary of OneBeacon Ltd., established a $75 million revolving credit facility that matures in November 2011. All borrowings under this facility are guaranteed by OneBeacon Ltd. As of December 31, 2007, this facility was undrawn.

        SeeRATINGS in Item 1—Business for the current financial ratings of the Sierra 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'sAmerican Senior Notes, are currently rated "Baa2" (Adequate, the 9^th highest of 21 ratings) with a stable outlook by Moody'sWMRe Senior Notes and "BBB-" (Adequate, the 10^th 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.WMRe Preference Shares. 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 could incur higher borrowing costs and its ability to access the capital markets could be impacted. In addition, White Mountains' insurance and reinsurance operating subsidiaries could be adversely impacted by a




downgrade in their financial strength ratings, including a possible reduction in demand for their products in certain markets.

        The Fund American Senior Notes and the WMRe Senior Notes were issued under an indentureindentures which containscontain restrictive covenants that, among other things, limit the ability of the Company, Fund American, WMRe Group and their respective subsidiaries to create liens and enter into sale and leaseback transactions and substantially limits the ability of Fund American, WMRe Group and itstheir respective subsidiaries to consolidate, merge or transfer their properties and assets. The indenture doesindentures do not contain any financial ratios or specified levels of net worth or liquidity to which the Company, or Fund American or WMRe Group must adhere. At December 31, 2004,2007, White Mountains was in compliance with all of the covenants under the Fund American Senior Notes and the WMRe Senior Notes, and anticipates it will continue to remain in compliance with these covenants for the foreseeable future.

        The WTM Bank Facility containsand the Fund American Bank Facility contain various affirmative, negative and financial covenants which White Mountains considers to be customary for such borrowings and include maintaining certain minimum net worth and maximum debt to capitalization standards for White Mountains.standards. Failure to meet one or more of these covenants could result in an event of default, which ultimately could eliminate availability under the facilitythese facilities and result in acceleration of principal repayment on any amounts outstanding. At December 31, 2004,2007, White Mountains was in compliance with all of the covenants under the WTM Bank Facility and the Fund American Bank Facility, and anticipates it will continue to remain in compliance with these covenants for the foreseeable future.








Contractual Obligations and Commitments


        Below is a schedule of White Mountains' material contractual obligations and commitments as of December 31, 2004:2007:

Millions	Millions		Due in One Year or Less			Due in Two to Three Years			Due in Four to Five Years			Due After Five Years			Total		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	Debt		$	—		$	17.0		$	4.0		$	764.0		$	785.0	Debt		$	2.1		$	41.8		$	5.7		$	1,145.5		$	1,195.1
Mandatorily redeemable preferred stock(1)	Mandatorily redeemable preferred stock(1)			—			—			300.0			20.0			320.0	Mandatorily redeemable preferred stock(1)			300.0			—			—			—			300.0
Loss and LAE reserves(1)(2)	Loss and LAE reserves(1)(2)			2,967.9			3,026.4			1,485.0			2,588.2			10,067.5	Loss and LAE reserves(1)(2)			2,446.4			2,198.2			1,135.1			2,521.0			8,300.7
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
Interest on debt and dividends on preferred stock subject to mandatory redemption																	Interest on debt and dividends on preferred stock subject to mandatory redemption			93.5			181.5			176.3			248.8			700.1
Long-term incentive compensation	Long-term incentive compensation			248.1			250.3			6.2			61.3			565.9	Long-term incentive compensation			104.6			173.2			36.3			21.8			335.9
Pension and other benefit plan obligations																	Pension and other benefit plan obligations			26.4			9.1			9.3			22.0			66.8
Operating leases	Operating leases			41.8			71.8			26.3			28.6			168.5	Operating leases			31.8			45.1			30.9			18.5			126.3
	Total contractual obligations		$	3,425.3		$	3,684.4		$	2,009.6		$	3,746.6		$	12,865.9	Total contractual obligations		$	3,004.8		$	2,648.9		$	1,393.6		$	3,977.6		$	11,024.9

---

(1)

Economically defeased in connection with the OneBeacon Offering.



(2)

Represents expected future cash outflows resulting from loss and LAE payments. Accordingly, these balances excludeThe amounts presented are gross of reinsurance recoverables on unpaid losses of $3,468 million and include the discount on OneBeacon's workers compensation loss and LAE reserves of $259.4$157 million andas of December 31, 2007. These balances add back the remaining purchase accounting fair value adjustment of $409.6$239 million related to the OneBeacon and Sirius acquisitionsAcquisition as they areit is a non-cash items. Further, the amounts presented include reinsurance recoverables recorded of $3,797.4 million.item.




        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 WMRe Preference Shares are not included in the table above as these perpetual preferred shares have no stated maturity date and are redeemable only at the option of WMRe Group. SeeItem 1.—Business—WHITE MOUNTAINS RE—Recent Financing Activities for more details.

        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 for performance shares cannot be predicted for performance shares, with certainty, as the ultimate amounts of these liabilities are based on the future performance of the Company and the market price of Common Sharesthe Company's common shares at the time the payments are made. The estimated payments reflected in the table are based on current accrual factors (Common Share(common share price and pay-out percentage) and assume that all outstanding balances were 100% vested as of December 31, 2004.2007.




        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, except as noted in the following paragraph, 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, except as noted in the following paragraph.entity.

        Through Sirius International, White Mountains has a long termlong-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 LUC. At December 31, 2004,2007, White Mountains has recorded a liability of $10$8 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 fund certain limited partnership investments. These commitments, which total approximately $25.9$144 million, do not have fixed funding dates and are therefore excluded from the table above.

Share Repurchase Programs

White Mountains:

        On November 17, 2006, White Mountains' board of directors authorized the Company to repurchase up to 1 million of its common shares, from time to time, subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions.The repurchase authorization does not obligate White Mountains to acquire any specific number of shares. As of December 31, 2007, 290,841 common shares had been repurchased for $145 million and retired.

OneBeacon Ltd.:

        On August 22, 2007, OneBeacon Ltd.'s board of directors authorized OneBeacon Ltd. to repurchase up to $200.0 million of its Class A common shares from time to time, subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions. This program does not have a stated expiration date. As of December 31, 2007, 1.6 million Class A common shares had been repurchased for $33.0 million and retired.

Cash Flows

        Detailed information concerning White Mountains' liquiditycash flows during 2007, 2006 and capital resource activities during 2004, 2003 and 20022005 follows:

For the year ended December 31, 20042007

Financing and Other Capital Activities

        In May 2007, White Mountains Re received net proceeds of $246 million through the issuance of the WMRe Preference Shares. White Mountains Re declared and paid $11 million in cash dividends on these shares in 2007.

        In March 2007, White Mountains Re received net proceeds of $392 million through the issuance of the WMRe Senior Notes and subsequently paid a cash dividend of $392 million to its immediate parent. White Mountains used a portion of these proceeds to repay its $320 million outstanding balance on its existing bank facility.

        During 2007, the Company declared and paid cash dividends of $86 million to its common shareholders.

        During 2007, the Company repurchased and retired 290,841 of its common shares for $145 million as part of its previously announced share repurchase plan.

        During 2007, OneBeacon Ltd. declared and paid cash dividends of $84 million to its common shareholders, $60 million of which was received by an intermediate holding company of White Mountains. On June 29, 2004, Berkshire exercised of all30, 2007, OneBeacon repaid $20 million of its warrants to purchase 1,724,200 Common Shares of White Mountains for $294 million. Berkshire acquired the warrantsmandatorily redeemable preferred stock using funds that were held 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 considerationtrust for the early exercisepurpose of economically defeasing the warrants, Berkshirepreferred stock. OneBeacon also paid $29 million in dividends on its mandatorily redeemable preferred stock during 2007, also using funds that were held in trust.




        During 2007, OneBeacon Ltd. repurchased and the Company agreed to reduce the exercise price by approximately 2%.retired 1.6 million of its common shares for $33 million as part of its previously announced share repurchase plan.

        During 2004, White Mountains2007, OneBeacon declared and paid dividends of $9 million, $28 million and $2$394 million to holdersFund American. Also during 2007, White Mountains Re paid $20 million of Common Shares,dividends to its immediate parent in addition to the Berkshire Preferred Stock and$392 million from the Zenith Preferred Stock, respectively.WMRe Senior Notes proceeds.

        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 2004,2007, White Mountains paid a total of $41 million in interest under the Fund American Senior Notes and $20 million under the WMRe Senior Notes.

        During 2004, OneBeacon declared2007, White Mountains received cash dividends from Symetra of $31 million on its common share investment and paid a total$17 million on its warrant investment.

        During 2007, Sirius International contributed $136 million to WMRe (Bermuda). In addition, White Mountains Re contributed the $246 million net proceeds from the WMRe Preference Share issuance and $250 million of $305the $285 million redemption of Folksamerica common shares to further capitalize WMRe (Bermuda).

        During 2007, White Mountains contributed $125 million in cash dividends to Fund American. Also during 2004, WMU paidEsurance and contributed $18 million and $15 million in cash and investments to Galileo and WM Life Re, respectively.

        In April 2007, White Mountains invested $50 million in Pentelia, a totalfund that invests in insurance-related investment assets.

Acquisitions and Dispositions

        During 2007, OneBeacon sold one of $60its inactive licensed subsidiaries, American Employers' Insurance Company, to a third party for $48 million of cash dividends to its immediate parent. On March 31, 2004, OneBeacon distributed Folksamerica to Fund American.in cash.

        During 2004,2007, White Mountains Re sold its' wholly-owned subsidiary Stockbridge Insurance Company for $26 million in cash to an external party.

        During 2007, White Mountains sold 645,262 shares of OneBeacon Ltd. to OneBeacon's employee stock ownership plan for proceeds of $17 million.

        On May 1, 2007, White Mountains sold all of its remaining interest in Montpelier Re, which consisted of 939,039 common shares and warrants to purchase 7,172,376 common shares, for total proceeds of $65 million.

Other Liquidity and Capital Resource Activities

        During 2007, the Company issued a net total of 3,938 Common Shares11,550 common shares to its employees through the exercise of Options during the yearperiod and the Company received cash proceeds of $.5$2 million in connection with these Option exercises. In addition, duringThe Company also accepted 4,465 common shares from an employee in satisfaction of a $3 million employee withholding tax liability associated with the first quartervesting 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 CommonRestricted 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 2004,2007, White Mountains made payments amounting to $127totaling $56 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 167,78263,300 target performance shares at payout levels ranging from 93%145% to 200%186% of target.

For the year ended December 31, 20032006

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 2003,2006, White Mountains declared and paid cash dividends of $8$86 million, $28 million and $2 million to holders of Common Shares,White Mountains' 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 2003,2006, OneBeacon Ltd. declared and paid a total$12 million cash dividend to its immediate parent and OneBeacon paid $90 million of $235 million in cash dividends to Fund American. Also during 2003, WMU2006, White Mountains Re paid $46 million of dividends to its immediate parent.

        During 2006, the Company, through various intermediate holding companies, contributed $100 million in cash and investments to White Mountains Re and $125 million in cash to Esurance.

        During 2006, Fund American funded a trust account with $324 million of cash and investments to economically defease the Berkshire Preferred Stock and FAEH funded a trust account with $21 million of cash to economically defease the Zenith Preferred Stock.

        During 2006, White Mountains paid a total of $35$41 million in interest under the Fund American Senior Notes.




        During 2006, White Mountains borrowed and repaid $140 million under its previous credit facility and borrowed $320 million under its new WTM Bank Facility. In addition, OneBeacon drew an additional $22 million under its existing real estate construction loan.

        During 2006, OneBeacon and Folksamerica Holdings repaid $8 million and $7 million, respectively, of loans to Dowling and Partners Connecticut Fund III LP.

        During 2006, White Mountains received cash dividends tofrom Symetra of $16 million on its immediate parent,common share investment and $9 million on its warrant investment.

Acquisitions and Dispositions

        On December 22, 2006, White Mountains Re and WM Advisors paid a total of $10acquired Mutual Service for $34 million in cash dividendscash.

        On November 14, 2006, White Mountains closed on the OneBeacon Offering and received $650 million in net proceeds for the sale of 27.6% of its ownership interest in OneBeacon Ltd.

        On August 2, 2006, White Mountains Re sold one of its subsidiaries, Sirius America, to Fund American.an investor group for $139 million in cash. As part of the transaction, White Mountains acquired an equity interest of approximately 18% in the acquiring entity by investing $32 million into the investor group.

        On September 29, 2006, OneBeacon transferred certain assets and the right to renew existing policies of its Agri division to QBE Insurance Group for $32 million in cash.

        During 2003,the third quarter of 2006, White Mountains sold 5.4 million common shares of Montpelier Re for proceeds of $104 million in cash.

Other Liquidity and Capital Resource Activities

        During 2006, the Company issued a total of 11,116 Common Shares3,530 common shares to its employees through the exercise of Options and, as a result,during the Companyperiod and received cash proceeds of $1.5$.6 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 2003,2006, White Mountains paid a total of 45,000 performance shares (relating to the 2000-2002 performance period) at 200%, amounting to $29made payments totaling $57 million, to its participants in







cash Common Shares or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries. Insubsidiaries, to participants in its long-term incentive compensation plans. These payments were made with respect to 64,100 target performance shares at payout levels ranging from 142% to 181% of target.

For the secondyear ended December 31, 2005

Financing and Other Capital Activities

        During 2005, White Mountains declared and paid cash dividends of $86 million, $28 million and $2 million to holders of White Mountains' common shares, the Berkshire Preferred Stock and the Zenith Preferred Stock, respectively.

        During 2005, OneBeacon declared and paid dividends of $340 million to Fund American and White Mountains Re declared and paid $98 million of dividends to its immediate parent.

        During 2005, White Mountains contributed $250 million to White Mountains Re (which, in turn, contributed $250 million to Folksamerica) and $10 million to Esurance.

        During 2005, White Mountains paid a total of $41 million in interest under the Fund American Senior Notes.

        During 2005, OneBeacon drew down $18 million on an 18-year mortgage note that it entered into in connection with its purchase of land and a home office building.

Acquisitions and Dispositions

        During 2005, OneBeacon sold two of its insurance subsidiaries, NFU and Traders and Pacific Insurance Company, to third parties for a total of $162 million in cash.

        During 2005, White Mountains Re sold one of its subsidiaries, California Indemnity Insurance Company, to a third party for a total of $20 million, $19 million of which was paid in cash.

        On April 29, 2005, OneBeacon purchased a 284,000 square foot office facility located in Canton, MA for $23 million.




Other Liquidity and Capital Resource Activities

        During 2005, White Mountains received a total of $60 million in tax refunds and interest from the Internal Revenue Service related to the completion of an audit of White Mountains' 1997-2000 tax years, the period during which the Company redomesticated to Bermuda.

        During 2005, the Company issued a total of 7,750 common shares to its employees through the exercise of Options during the period and received cash proceeds of $1 million in connection with these Option exercises.

        During the first quarter of 2003,2005, White Mountains made performance share payments amounting to $13totaling $235 million, in cash or by deferral into certain non-qualified compensation plans of the Company. TheCompany or its subsidiaries, to participants in its long-term incentive compensation plans. These payments on these additionalwere made with respect to 212,611 performance shares in the second quarter represented accelerated paymentsat payout levels ranging from 113% to certain non-employee directors200% of the Company for performance periods originally scheduled to end on December 31, 2003, 2004 and 2005.

For the year ended December 31, 2002

Financing and Other Capital Activitiestarget.

        During 2002,the first quarter of 2005, White Mountains sold $225received a $74 million of its equity securities in a private transaction and used the proceeds, along with cash on hand, to repay in full the $260 million Seller Note to Aviva, along with approximately $23 million ofspecial dividend related accrued interest.

        During 2002, White Mountains made scheduled principal amortization payments of $78 million and interest payments of $55 million (including $18 million paid under related interest rate swap agreements) on its previous bank facility.

        During 2002, OneBeacon declared and paid a total of $173 million in cash dividends to Fund American.

        During 2002, White Mountains declared and paid a total of $31 million in dividends on the Berkshire Preferred Stock, the Zenith Preferred Stock and the Convertible Preference Shares. Also in 2002, the Company declared and paid an annual dividend of $8 million to its common 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 (the "Incentive Plan"). The Company received proceedswarrant investment in Montpelier Re. This dividend represented $5.50 per share and was in addition to Montpelier Re's normal quarterly dividend of $1.3 million as a result of exercises of Options to acquire 11,500 Common Shares during the period.

        In December 2002, OBPP borrowed $8 million from a related third party.$.36 per share.

Acquisitions and Dispositions

        On April 25, 2002, Folksamerica acquired Imperial for $4 million including related expenses.

Other Liquidity and Capital Resource Activities

        In July and August of 2002, White Mountains received federal tax refunds totaling $167 million representing accelerated recoveries of carryback losses from 2001 under the Job Creation and Worker Assistance Act of 2002.

        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 $21 million, to its participants in cash, Common Shares or by deferral into certain non-qualified compensation plans of the Company or its subsidiaries.


TRANSACTIONS WITH RELATED PARTY TRANSACTIONS
PERSONS

        SeeNote 17—20—"Transactions with Related Party Transactions"Persons" in the accompanying Consolidated Financial Statements.


CRITICAL ACCOUNTING 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.

        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, reinsurance estimates 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


OneBeacon

Non-AsbestosReserves other than Asbestos and Environmental Reserves and Construction Defect Claim 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.

        ReservesLoss and LAE 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 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 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.

        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, 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.

        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.

        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, (meaningmeaning that small changes in payments have a larger impact on estimates of ultimate losses)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.