OneBeacon’s net combined ratio for 2011 was lower than its gross combined ratio by 39 points, primarily due to losses ceded to NICO and other third-party reinsurers as a result of an A&E study performed by OneBeacon during 2011 (See “A&E Reserves” on page 74). OneBeacon’s net combined ratio for 2010 was higher than its gross combined ratio by 6 points, primarily due to the cost of catastrophe reinsurance and the business fronted under the Commercial Lines Transaction.
Reinsurance protection. Sirius Group’s reinsurance protection primarily consists of pro-rata and excess of loss protections to cover aviation, trade credit, and certain property exposures. Sirius Group’s proportional reinsurance programs provide protection for part of the non-proportional treaty accounts written in Europe, the Americas, Asia, the Middle East, and Australia. This reinsurance is designed to increase underwriting capacity where appropriate, and to reduce exposure both to large catastrophe losses and to a frequency of smaller loss events. Attachment points and coverage limits vary by region around the world.
Sirius Group’s net combined ratio for 2011 was higher than its gross combined ratio by 7 points and the net combined ratio was lower than the gross combined ratio by 6 points for 2010. The 2011 net combined ratio was higher primarily due to the cost of the ILWs, aviation reinsurance, and other excess of loss protections with limited incurred loss cessions. The lower net combined ratio for 2010 was primarily due to significant retrocessional recoveries, including recovery of the full $65 million limit under Sirius Group’s non-U.S./non-Japan earthquake cover triggered by losses from the Chile earthquake.
The following table presents the composition of White Mountains’ investment portfolio as of December 31, 2011 and 2010:
Esurance’s adjusted combined ratios for 2011, 2010 and 2009 were as follows:
On April 21, 2011, OBH repurchased and retired $150 million aggregate principal amount of the OBH Senior Notes for an aggregate purchase price of $162 million through a cash tender offer.
The SIG 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 SIG. See “Sirius Group’s Preference Shares and Senior Notes” on page 19 for more details.
Cash flows from operations for the years ended 2011, 2010, and 2009
In addition to the development described for the lines of business above, management also recorded a $6 million net increase in IBNR in other lines of business as a result of its review of loss reserves at December 31, 2010. The change in IBNR for each other line of business was not individually significant.
During 2010, emerged loss experience for workers compensation had been lower than had been projected by several of the actuarial methods. As this favorable emerged loss experience coincided with some significant changes in claims staffing, management had selected reserves consistent with previous projections which resulted in our selected reserves being higher in the range at year end 2010. During 2011, the emerged experience was higher than the 2010 emergence, which drove the actuarial range up and management also reduced its estimate of reserves with the net effect being a reserve lower in the range of actuarial estimates. The impact of this primarily affected OneBeacon’s other insurance operations.
OneBeacon also incurred A&E losses via its participation in industry pools and associations. The most significant of these pools was Excess Casualty Reinsurance Association (“ECRA”), which provided excess liability reinsurance to U.S. insurers from 1950 until the early 1980s. ECRA incurred significant liabilities for A&E, of which OneBeacon bears approximately a 4.7% share, or $71 million and $32 million at December 31, 2011 and 2010, respectively, which is fully reflected in OneBeacon’s loss and LAE reserves.
In 2011 and 2010, Sirius Group recorded $10 million and $7 million of asbestos-related incurred losses and LAE. The 2011 incurred losses included $5 million related to a negotiated commutation of one of Sirius Group’s top five asbestos exposures. Sirius Group entered into the commutation to eliminate the possibility of future adverse development on the account. A payment of $11 million was made in first quarter 2012. The remaining incurred losses in 2011 and 2010 were primarily the result of management’s monitoring of a variety of metrics including: actual paid and reported claims activity; net survival ratios; peer comparisons; and industry benchmarks. In 2011 and 2010, Sirius Group recorded $2 million and $(1) million of environmental losses.
In addition, during 2011, 10 securities which had been classified as Level 3 measurements in prior periods were recategorized as Level 2 measurements because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at December 31, 2011. These measurements consist of “Transfers out” of $269.2 million in fixed maturities for the period ended December 31, 2011. Two securities that were classified as a Level 2 investment in prior periods were priced with unobservable inputs during the current period and represent the transfers in of $18.2 million in Level 3 investments. The fair value of these securities was estimated using industry standard pricing models, in which management selected inputs using its best judgment. These inputs principally included benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. The pricing models used by White Mountains use the same valuation methodology for all Level 3 measurements for fixed maturities. The securities are considered to be Level 3 because the measurements are not directly observable. At December 31, 2011, the estimated fair value for these securities determined using the industry standard pricing models was $1.6 million less than the estimated fair value based upon quoted prices provided by a third party.
During 2009, WM Life Re entered into long term Japanese interest rate swaps, largely replacing its use of short term Japanese Government Bond (“JGB”) futures to hedge its discount rate exposure. By doing so, WM Life Re has better matched the term structure of its discount rate exposure, substantially reduced its exposure to changes in swap spreads and significantly reduced the potential costs associated with rolling JGB futures contracts during times of relative market illiquidity. As of December 31, 2011, the notional amount of interest rate swaps was ¥183 billion ($2.4 billion).