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

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

FORM 10-K

Commission file number 1-8993

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

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

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

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

None

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

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

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

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

        As of March 1, 2005, 10,774,589 common shares, par value of $1.00 per share ("Common Shares"), were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to the Registrant's Annual General Meeting of Members scheduled to be held May 19, 2005 are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K.

TABLE OF CONTENTS

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PART I

Item 1. Business

GENERAL

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

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

        The White Mountains Re segment consists of White Mountains Re Group, Ltd. and its subsidiaries. White Mountains Re offers lead capacity for reinsurance on most liability, property and accident & health exposures through its reinsurance subsidiaries, Folksamerica Reinsurance Company (together with its parent, Folksamerica Holding Company, "Folksamerica", which has been a wholly-owned subsidiary of White Mountains since 1998) and Sirius International Insurance Corporation ("Sirius International"). On April 16, 2004, White Mountains acquired Sirius Insurance Holdings Sweden AB and its subsidiaries ("Sirius") from ABB Ltd. (the "Sirius Acquisition"). The principal companies acquired were Sirius International, Sirius America Insurance Company ("Sirius America"), which provides primary insurance programs in the United States, and Scandinavian Reinsurance Company Ltd. ("Scandinavian Re"), a reinsurance company that has been in run-off since 2002. White Mountains Re also provides reinsurance advisory services, specializing in international property and marine excess reinsurance, through White Mountains Underwriting Limited (domiciled in Ireland and formed in 2001) and White Mountains Underwriting (Bermuda) Limited, formed in 2003 (collectively, "WMU").

        The Esurance segment consists of Esurance Holdings, Inc. and its subsidiaries (collectively, "Esurance"). Esurance, which has been a unit of White Mountains since October 2000, markets personal auto insurance directly to customers and through select online agents.

        White Mountains' Other Operations segment consists of the Company and its intermediate holding companies, as well as the International American Group, Inc. (the "International American Group"). The International American Group, which was acquired by White Mountains in 1999, consists of American Centennial Insurance Company ("American Centennial") and British Insurance Company of Cayman ("British Insurance Company"), both of which are in run-off.

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

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global reinsurance organization. The reorganization also allows White Mountains to independently manage the financial structures of its main operating segments.

White Mountains' Operating Principles

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

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

        Maintain a Disciplined Balance Sheet.    The first concern here is that insurance liabilities must always be fully recognized. Loss reserves and expense reserves must be solid before any other aspect of the business can be solid. Pricing, marketing and underwriting all depend on informed judgment of ultimate loss costs and that can be managed effectively only with a disciplined balance sheet.

        Invest for Total Return.    Historical insurance accounting has tended to hide unrealized gains and losses in the investment portfolio and over reward reported investment income (interest and dividends). Regardless of the accounting, White Mountains must invest for the best growth in after-tax value over time. In addition to investing our bond portfolios for total after-tax return, that will also mean prudent investment in a balanced portfolio consistent with leverage and insurance risk considerations.

        Think Like Owners.    Thinking like owners has a value all its own. There are stakeholders in a business enterprise and doing good work requires more than this quarter's profit. But thinking like an owner embraces all that without losing the touchstone of a capitalist enterprise.

ONEBEACON

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

        At December 31, 2004 and 2003, OneBeacon had $10.0 billion and $11.3 billion of total assets, respectively, and shareholder's equity of $2.3 billion and $2.2 billion, respectively. OneBeacon's principal operating insurance subsidiaries are rated "A" (Excellent, the third highest of fifteen ratings) by A.M. Best, a rating agency which specializes in the insurance and reinsurance industry.

Property and Casualty Insurance Overview

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

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

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

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

Lines of Business

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

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

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Ocean marine: covers losses to an insured's vessel and/or its cargo as a result of collision, fire, piracy and other perils. Ocean marine coverages include cargo, hull, protection and indemnity, primary and excess liability, marina package, comprehensive marina liability package and yacht products.



•

Agricultural and rural marketplace products: policies providing property, liability, automobile and/or umbrella coverages for dairy farms, equine farms, farm equipment dealers, orchard and garden farms, as well as farm owners and rural telephone companies and personal auto and homeowners coverage in rural markets, excluding crop damage claims.



•

Limited Assigned Distribution ("LAD") services: OneBeacon offers LAD services and takeout credits to insurance companies required to accept future assignments from the New York Automobile Insurance Plan ("NYAIP") and the New Jersey Personal Automobile Insurance Plan ("NJ PAIP").



•

Medical errors and omissions: provides coverage for claims arising from direct patient treatment, such as making diagnoses, rendering opinions or providing advice or referral to another physician. Medical errors and omissions also provide coverage for professional committee activities as a member of an accredited hospital staff or any professional medical association or

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committee. These coverages are generally offered to mid-sized hospitals and/or managed care organizations and to individual physicians, but only through selected programs.

•

Tuition reimbursement: covers tuition payments due to schools and colleges when a student is unable to complete a semester as a result of an illness, accident or certain other causes.



•

Excess and surplus property: excess property covers the insured against certain damages over and above those covered by primary policies. Surplus property provides specialized insurance coverage in instances where such coverage is unavailable from insurers licensed within a particular state. OneBeacon entered the excess and surplus lines property business in 2004.

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

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Automobile: consists of physical damage and liability coverage. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft or other causes. Automobile liability insurance covers bodily injury of others, damage to their property and costs of legal defense resulting from a collision caused by the insured.



•

Homeowners: covers losses to an insured's home, including its contents, as a result of weather, fire, theft and other causes, and losses resulting from liability for acts of negligence by the insured or the insured's immediate family.



•

Commercial property: covers losses to a business' premises, inventory and equipment as a result of weather, fire, theft and other causes.



•

General liability: covers businesses for any liability resulting from bodily injury and property damage arising from its general business operations, accidents on its premises and the products it manufactures or sells.



•

Umbrella: supplements existing insurance policies by covering losses from a broad range of insurance risks in excess of coverage provided by the primary insurance policy up to a specified limit.



•

Workers compensation: covers an employer's liability for injuries, disability or death of employees, without regard to fault, as prescribed by state workers compensation law and other statutes.



•

Multi-peril: a package policy sold to small to mid-sized insureds or to members of trade associations or other groups that includes general liability insurance and commercial property insurance.



•

Inland marine: covers property that may be in transit or held by a bailee at a fixed location, movable goods that are often stored at different locations or property with an unusual antique or collector's value.

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        For the twelve months ended December 31, 2004, 2003 and 2002, OneBeacon's net written premiums by line of business were as follows:

(1)

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

Specialty Lines

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

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

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

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

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

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

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

Personal Lines

        OneBeacon's personal lines principally include automobile, homeowners and Custom-Pac products (Custom-Pac products are combination policies offering home and automobile coverage with optional umbrella, boatowners and other coverages). OneBeacon's mix of personal lines products between automobile and homeowners, including Custom-Pac products, was 67% and 25%, respectively, of personal lines net written premium during 2004, compared to 63% and 30%, respectively, during 2003 and 69% and 24%, respectively, during 2002. OneBeacon writes the majority of its personal business in New York, Massachusetts and Maine.

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

Commercial Lines

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

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

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        During the third quarter of 2004, OneBeacon entered into an agreement to sell the renewal rights to most of its pre-Atlantic Mutual New York commercial business to Tower Insurance Group. The transaction, effective with December 1, 2004 renewals, will impact approximately $110 million of premiums. OneBeacon will retain the commercial business acquired from Atlantic Mutual.

Other Lines

        OneBeacon's other lines include the results of reciprocal insurance exchanges that are included in OneBeacon's GAAP results and also business assumed from Liberty Mutual.

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

        On November 1, 2001, OneBeacon transferred its regional agency business, agents and operations in 42 states and the District of Columbia to Liberty Mutual pursuant to a renewal rights agreement (the "Liberty Agreement"). This transfer amounted to approximately 45% of OneBeacon's total business at the time of transfer. The Liberty Agreement expired on October 31, 2003. As a result, OneBeacon earned premium in 2004 on policies written prior to the expiration, but did not write any new premiums in 2004 under the Liberty Agreement. Net written premiums assumed under the Liberty Agreement were $130.4 million in 2003 and $496.7 million in 2002.

Geographic Concentration

        OneBeacon's net written premiums are derived solely from business produced in the United States. Business from specialty, personal and commercial lines was produced in the following states:

(1)

No individual state is greater than 3% of specialty, personal and commercial net written premiums for the years ended December 31, 2004, 2003 and 2002.

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Marketing

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

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

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

Underwriting and Pricing

        OneBeacon believes that there must be a realistic expectation of attaining an underwriting profit on all the business it writes as well as a demonstrated fulfillment of that expectation over time. Adequate pricing is a critical component to the achievement of an underwriting profit and requires a disciplined approach towards pricing insurance products. Inadequate pricing can be caused by pressures from: (1) insurance companies selling their products at rates less than those acceptable to OneBeacon because they either underestimate ultimate claim costs or overestimate the amount of investment income and investment gains they will earn on premiums collected before claims are paid, (2) insurance companies willing to accept a lower return on investment for their stakeholders than OneBeacon, (3) insurance companies seeking to increase revenues and market share by reducing the price of their products beneath levels acceptable to OneBeacon, (4) the emergence and continued growth of insurance company competitors that have lower cost structures, and (5) state regulation, legislation and judicial mandates.

        Beginning in 2003 and continuing through 2004, OneBeacon introduced tiered rating plans in both its personal and commercial lines which permit OneBeacon to offer more price points to its customers based on underwriting criteria applicable to each tier. As a result, OneBeacon now has the flexibility to renew expiring policies into the appropriate tier rather than being forced to choose to either renew the policy at the same base rate or cancel the policy. Management believes that this significant improvement in the accuracy and precision of OneBeacon's rate plans moves it toward the pricing sophistication of the best insurance underwriters in the market.

        These tiers are just one example of OneBeacon's segmented underwriting and pricing strategy. Segmentation is a key driver of OneBeacon's success in specialty lines and is being carried over into personal and commercial lines. OneBeacon develops proprietary knowledge about a given industry/class/risk type which provides it with a competitive edge when offering terms and conditions on individual accounts. OneBeacon believes this will deliver superior returns versus a more "generalist" underwriting approach.

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        OneBeacon also monitors pricing activity on a weekly basis and regularly measures usage of tiers, credits, debits and limits; this includes monthly review calls with all field offices. In addition, it regularly updates base rates to achieve targeted returns on surplus and attempts to shift writings away from price inadequate lines/classes. Lastly, OneBeacon expends considerable effort to measure and verify exposure bases and values.

Competition

        Property and casualty insurance is highly competitive and extensively regulated by state insurance departments. In specialty lines, OneBeacon competes with numerous regional and national insurance companies, most notably The Robert Plan Corporation, The Chubb Corporation, American International Group, The St. Paul Travelers Companies and the regional Farm Bureaus. In personal and commercial lines, OneBeacon competes with numerous regional and national insurance companies, most notably The St. Paul Travelers Companies, Zurich Insurance Group, CNA Financial, the Hartford Financial Services Group, Allmerica Financial Corporation, W.R. Berkley Corporation, The Chubb Corporation, Progressive Insurance, Allstate Insurance and Liberty Mutual. The more significant competitive factors for most insurance products offered by OneBeacon are price, product terms and claims service, which OneBeacon believes is the most important product differentiation that it brings to its agents and insureds. OneBeacon's underwriting principles and dedication to agency distribution are unlikely to make them the low-cost provider in most markets. However, while it is often difficult for insurance companies to differentiate their products to consumers, OneBeacon believes that its dedication to providing superior product offerings, claims service, and localized underwriting experience gives it a competitive advantage over typical low-cost providers.

Claims Management

        Effective claims management is a critical factor in achieving satisfactory underwriting results. OneBeacon maintains an experienced staff of appraisers, medical specialists, managers, attorneys and field adjusters strategically located throughout its operating territories. OneBeacon also maintains a special investigative unit designed to detect insurance fraud and abuse, and support efforts by regulatory bodies and trade associations to curtail the cost of fraud.

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

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

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

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

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

Terrorism

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

        On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act (the "Terrorism Act") establishing a federal "backstop" for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. The Terrorism Act requires primary commercial insurers to make terrorism coverage available immediately and provides Federal protection above individual company retention and aggregate industry retention levels. OneBeacon estimates its individual retention level for commercial policies subject to the Terrorism Act to be approximately $160.0 million in 2005. Aggregate industry retention levels are $15.0 billion for 2005. The Federal government will pay 90% of covered terrorism losses that exceed either OneBeacon's or the industry's retention levels up to $100.0 billion. The fate of the Terrorism Act beyond 2005 remains uncertain. It is anticipated that Congress will likely rule on a possible extension during the summer of 2005; however, there is a chance that the Terrorism Act could expire on December 31, 2005. To prepare for that possibility, OneBeacon is notifying customers (in states where permitted) with policies that expire in 2006 of the potential implications to their coverage. OneBeacon's current property and casualty catastrophe reinsurance programs provide coverage for "non-certified" events as defined under the Terrorism Act, provided such losses are not the result of a nuclear, biological or chemical attack. See the discussion in the "Reinsurance Protection" section below for a further description of OneBeacon's catastrophe program.

        OneBeacon closely monitors and manages its concentration of risk by geographic area. Beginning in 2002 and continuing through 2004, OneBeacon aggressively reduced its terrorism exposure in the largest metropolitan areas in which OneBeacon writes insurance by implementing a strategy that limits total probable maximum loss ("PML") from a terrorism event in any half mile radius. (PML is a statistical modeling technique that measures a company's catastrophic exposure as the maximum probable loss in a given time period.) The addition of the Atlantic Mutual book in 2004 resulted in some areas exceeding corporate PML thresholds. In these areas, specific account exposure reduction plans have been established to bring exposures within tolerance levels by the end of 2005. The financial exposure of potential new business is evaluated when it is located in an area of existing concentration or individually presents significant terrorism exposure. Additionally, formal reports are generated quarterly to validate that action adheres to corporate standards. As a result, OneBeacon believes that it has taken appropriate actions to mitigate its exposure to losses from future terrorist attacks and will

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

Reinsurance Protection

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

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

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

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

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

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

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

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"A++" (Superior) by A.M. Best: a full risk-transfer cover from NICO for up to $2.5 billion in old asbestos and environmental claims (the "NICO Cover") and an adverse development cover from General Reinsurance Corporation ("GRC") for up to $400.0 million on additional losses occurring in accident years 2000 and prior (the "GRC Cover").

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

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

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

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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 as a result of a pooling of interests between Commercial Union and General Accident. All historical balances have been restated as though the companies had been merged throughout the periods presented.

(2)

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

(3)

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

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

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

WHITE MOUNTAINS RE

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

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

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

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

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

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

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

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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, Folksamerica acquired 100% of Imperial Casualty and Indemnity Insurance Company ("Imperial"), a company in run-off.



•

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



•

In 2000, Folksamerica 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").

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Reinsurance Overview

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

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

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

Classes of Business

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

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

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

Geographic Concentration

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

Marketing

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

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

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

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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

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

Competition

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

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

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

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

Reinsurance Protection

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

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

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

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

Loss and Loss Adjustment Expense Reserves

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

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

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

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

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