White Mountains’ overall fixed maturity investment strategy is to purchase securities that are attractively priced in relation to their investment risks. White Mountains also actively manages the average duration of the portfolio. The weighted average duration of White Mountains’ fixed income portfolio at December 31, 2013 was approximately 2.1 years, including short-term investments, and approximately 2.4 years excluding short-term investments.
During 2013, insurance float decreased by $124 million, primarily due to the continued runoff of reserves at OneBeacon, the runoff of Sirius Group’s casualty business and payments of losses incurred in 2010, 2011 and 2012 related to major catastrophes, primarily from hurricane Sandy and earthquakes in Chile, Japan and New Zealand. These catastrophe losses increased White Mountains’ insurance float when they were first recorded, which is now reversing and decreasing insurance float as the catastrophe losses are paid. Based on December 31, 2013 balances, the closing of the Runoff Transaction is expected to decrease insurance float by approximately $236 million.
During 2013, Sirius Group paid $250 million of dividends to its immediate parent, $75 million of which had been declared and accrued in December 2012.
During 2013, White Mountains Solutions acquired Ashmere for a purchase price of $10 million and Empire for a purchase price of $3 million.
During 2011, OBH repurchased and retired a portion of the outstanding 2003 OBH Senior Notes for $162 million.
As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases. This lag can be due to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant’s physical condition many years after an accident occurs, etc. In its loss reserving process, Sirius Group assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in its actuarial projection methods. This means that, as a reinsurer, Sirius Group must rely on such actuarial estimates for a longer period of time after reserves are first estimated than does a primary insurance company.
Sirius Group recorded $12 million and $46 million of asbestos-related incurred losses and LAE on its already existing asbestos reserves in 2013 and 2012. The 2013 incurred losses were primarily the result of management’s monitoring of a variety of metrics including actual paid and reported claims activity as compared to the most recent in-depth analysis performed in 2012, net paid and reported survival ratios, peer comparisons, and industry benchmarks. In 2012, the increase in net asbestos losses included $14 million in response to Sirius Group’s quarterly monitoring of newly reported claims and $33 million as a result of an in-depth analysis of all treaty and facultative contracts likely to have asbestos exposure which examined total expected asbestos losses and LAE from a variety of information sources, including previous asbestos studies, reported client data and external benchmarking scenarios.
WM Life Re applies shocks to the Japanese interest rates and foreign bond fund yields in opposite directions. In the down market scenario, Japanese interest rates are decreased 70 bps, Japanese interest rate swap spreads are tightened by 25 bps, and foreign bond fund yields are increased 70 bps. The “up market” scenario assumes opposite movements in the same variables. For other variables, the “down market” scenario assumes equity indices decrease 20%, foreign currencies depreciate by 15% against the Japanese yen and implied market volatility increases as described in footnote 3 to the table above. The “up market” scenario assumes opposite movements in the same variables. The size of the estimated impact on the liability of simultaneous market events, in both the “up market” and “down market” scenarios, is impacted by several factors, including the applicable account value to guaranty value ratios, term to maturity and surrender assumptions of policies reinsured. Through December 31, 2013, both the up and down scenarios produce an expected net loss due to the convexity of the liability value, coupled with the assumption that the shock scenarios happen instantaneously without adjustment of the hedging portfolio. The proforma 2012 sensitivity analysis up market scenario resulted in a positive $10 million due to the reduction in the liability from higher discount rates that is no longer offset by losses from the Japanese interest rate swaps that have been unwound subsequent to December 2012. However, this also caused the proforma 2012 down market scenario to be $13 million worse than the down market scenario as of December 31, 2012. The December 2013 up market scenario resulted in a negative $4 million, which was worse that the positive $10 million in the proforma December 2012 up market scenario, primarily because the net benefit in the “up market” shock scenario from unwinding the Japanese interest rate swaps decreases over time as the policies reinsured are closer to maturity and the discounting term shortens. The decrease in magnitude of both the “up market” and “down market” shocks as at December 2013 versus the prior year was driven by the substantial decrease in WM Life Re’s liability, owing primarily to higher account values, shorter terms to maturity and lower implied volatilities.