(d) During 2010, OneBeacon repurchased $187 face value of the OBH Senior Notes. At December 31, 2008, White Mountains had $200 outstanding under its credit facility, which was repaid during 2009. During 2007, White Mountains Re issued the $400 WMRe Senior Notes, a portion of the proceeds of which were used to repay the borrowings under White Mountains’ credit facility. At December 31, 2006, White Mountains had $320 outstanding under its credit facility.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 and 2008
White Mountains’ total revenues decreased 19% to $3,571 million in 2010 compared to $4,427 million in 2009, primarily due to lower net investment gains and lower earned premiums due to the Commercial and Personal Lines Transactions. White Mountains reported net realized and unrealized investment gains of $96 million in 2010 compared to $385 million in 2009. Earned premiums decreased 12% in 2010 compared to 2009 as decreases at OneBeacon and White Mountains Re were partially offset by an increase at Esurance. Net investment income was down 16% to $229 million in 2010, due primarily to lower fixed maturity yields and a reduction in invested assets from the Personal Lines Transaction, including a shift to lower yielding short-term investments during the first six months of 2010 in preparation for the sale, the OBH Senior Notes repurchases at OneBeacon and share repurchases. Other revenues decreased to $84 million in 2010 from $169 million in 2009, primarily due to a $44 million decrease in foreign currency translation gains at White Mountains Re and a $39 million decrease related to the deconsolidation of Tuckerman Fund II effective January 1, 2010, partially offset by a $13 million gain from White Mountains Re’s acquisition of Central National. Other revenues included $23 million of foreign currency translation gains at White Mountains Re in 2010 compared to $67 million in 2009.
(1) Other is primarily businesses that are now in run-off or have been sold as a result of the Commercial Lines Transaction and the Personal Lines Transaction.
Policy acquisition expenses increased 8% to $390 million in 2009 mainly due to higher acquisition costs associated with OneBeacon’s newer specialty businesses and changes in mix of business. Other underwriting expenses increased 13% to $330 million in 2009, as 2008 included lower incentive compensation costs resulting from changes in assumptions in long-term incentive compensation plans. Interest expense on debt decreased by 12%, primarily due to the interest expense related to the Mortgage Note, which was repaid in the second quarter of 2008 and repurchases of the OBH Notes.
White Mountains Re’s other revenues consisted primarily of $67 million of foreign currency translation gains in 2009 compared to $59 million of foreign currency translation losses in the 2008. In addition, White Mountains Re recorded $39 million of other revenues in 2009 related to the consolidation of Tuckerman Fund II compared to $28 million in 2008, as a result of its transfer to White Mountains Re from the Other Operations segment, effective June 30, 2008.
Esurance’s net written premiums increased 7% to $836 million in 2010 from $779 million in 2009. Net earned premiums increased 6% to $827 million in 2010 from $782 million in 2009. These increases were primarily attributable to higher policyholder conversion and retention. Esurance’s marketing expenditures increased 23% to $96 million in 2010. Direct new policy sales increased 23% in 2010, primarily due an increase in Esurance’s online marketing programs and the launch of a new advertising campaign.
Esurance’s other revenue increased 27% to $55 million in 2009. The increase resulted primarily from the inclusion of a full year of commission revenue in 2009 from AFI, which Esurance acquired in the second quarter of 2008, along with an increase in the revenue from unaffiliated third parties participating in Esurance’s comparison quotes program. General and administrative expenses increased by $3 million to $35 million in 2009, due to the inclusion of a full year of AFI’s operating expenses in 2009. The amortization of AFI’s purchase accounting adjustments in 2009 was $16 million related to the intangible asset associated with the acquired business in force and $2 million related to their information technology infrastructure.
The following table illustrates White Mountains’ consolidated insurance float position as of the past five year-ends:
Excludes preferred stock subject to mandatory redemption having an aggregate accreted liquidation preference at December 31, 2007 and 2006 of $278 and $269, respectively (and $306 and $339 of investments held in irrevocable grantor trusts for the purpose of economically defeasing the preferred stock as of these dates).
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 arrangements requiring it to guarantee payment of third-party debt or lease payments or to fund losses of an unconsolidated special purpose entity.
In addition to the shares repurchased under the share repurchase program, on October 31, 2008, White Mountains completed a transaction with Berkshire, through which Berkshire exchanged substantially all of its 16.3% stake in White Mountains (1,634,921 of its 1,724,200 common shares) for 100% of a White Mountains subsidiary which held CCIC, the International American Group and $708 million in cash. See the “Berkshire Exchange” on page 25.
Detailed information concerning White Mountains’ cash flows during 2010, 2009 and 2008 follows:
During the first quarter of 2010, White Mountains Re acquired Central National for $5 million.
OneBeacon’s reserves include provisions made for claims that assert damages from A&E related exposures. Asbestos claims relate primarily to injuries asserted by those who allegedly came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up cost obligations, particularly as mandated by federal and state environmental protection agencies. In addition to the factors described above regarding the reserving process, OneBeacon estimates its A&E reserves based upon, among other factors, facts surrounding reported cases and exposures to claims, such as policy limits and deductibles, current law, past and projected claim activity and past settlement values for similar claims, as well as analysis of industry studies and events, such as recent settlements and asbestos-related bankruptcies. The cost of administering A&E claims, which is an important factor in estimating loss and LAE reserves, tends to be higher than in the case of non-A&E claims due to the higher legal costs typically associated with A&E claims.
White Mountains Re’s net loss and LAE reserves by class of business at December 31, 2010 and 2009 were as follows:
White Mountains Re relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, White Mountains Re underwriters, actuaries, and claims personnel perform audits of certain ceding companies where customary. Generally, ceding company audits are not customary outside the United States. In such cases, White Mountains Re reviews information from ceding companies for unusual or unexpected results. Any material findings are discussed with the ceding companies. White Mountains Re sometimes encounters situations where it is determined that a claim presentation from a ceding company is not in accordance with contract terms. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, White Mountains Re will vigorously defend its position in such disputes.
The actuarial methods described above are used to calculate a point estimate of loss and LAE reserves for each company within White Mountains Re. These point estimates are then aggregated to produce an actuarial point estimate for the entire segment. Once a point estimate is established, White Mountains Re’s actuaries estimate loss reserve ranges to measure the sensitivity of the actuarial assumptions used to set the point estimates. These ranges are calculated from historical variations in loss ratios, payment and reporting patterns by class and type of business.