Third Party Reinsurance

9 Months Ended

Sep. 30, 2011

Third Party Reinsurance

Third Party Reinsurance

Note 4. Third Party Reinsurance

In the normal course of business, White Mountains’ insurance and reinsurance subsidiaries may seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. White Mountains remains liable for risks reinsured in the event that the reinsurer does not honor its obligations under reinsurance contracts.

OneBeacon

At September 30, 2011, OneBeacon had $13.7 million of reinsurance recoverables on paid losses and $2,405.7 million (gross of $166.6 million in purchase accounting adjustments) that will become recoverable if claims are paid in accordance with current reserve estimates. The collectability of balances due from OneBeacon’s reinsurers is critical to OneBeacon’s financial strength because reinsurance contracts do not relieve OneBeacon of its primary obligation to its policyholders. OneBeacon is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. OneBeacon monitors the financial strength of its reinsurers on an ongoing basis. Uncollectible amounts historically have not been significant.

The following table provides a listing of OneBeacon’s top reinsurers, excluding industry pools and associations, based upon recoverable amounts, the percentage of total paid and unpaid reinsurance recoverables and the reinsurer’s A.M Best Company, Inc. (“A.M. Best”) rating.

Top Reinsurers (Millions)	Balance at September 30, 2011		% of Total		A.M. Best Rating(1)
National Indemnity Company and General Reinsurance Corporation (2)	$	1,565.2	65	%		A++
Hanover Insurance Company	110.1		5	%		A
Tokio Marine and Nichido Fire (3)	55.8		2	%		A++
Tower Insurance Company	53.7		2	%		A-
Munich Reinsurance America	31.5		1	%		A+

(1)	A.M. Best ratings as detailed above are: “A++” (Superior, which is the highest of fifteen ratings), “A+” (Superior, which is the second highest of fifteen ratings), “A” (Excellent, which is the third highest of fifteen ratings), and “A-” (Excellent, which is the fourth highest of fifteen ratings).
(2)	Includes $198.3 of Third Party Recoverables (as defined below), which NICO (as defined below) would pay under the terms of the NICO Cover (as defined below) if they are unable to collect from third party reinsurers.
(3)	Includes $29.3 of reinsurance recoverables from various third party reinsurers that are guaranteed by Tokio Marine and Nichido Fire under the terms of a 100% quota share reinsurance agreement between Houston General Insurance Company and Tokio Marine and Nichido Fire.

Immediately prior to White Mountains’ acquisition of OneBeacon, the seller caused OneBeacon to purchase two reinsurance contracts from subsidiaries of Berkshire Hathaway Inc. (“Berkshire”): a full risk-transfer cover from National Indemnity Company (“NICO”) for up to $2.5 billion in old asbestos and environmental (“A&E”) claims and certain other exposures (the “NICO Cover”) and an adverse loss reserve development cover (the “GRC Cover”) from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse loss reserve development on losses occurring in years 2000 and prior and $170.0 million of reserves ceded as of the date of the OneBeacon acquisition. The NICO Cover and GRC Cover, which were contingent on and occurred contemporaneously with the OneBeacon acquisition, were put in place in lieu of a seller guarantee of loss and LAE reserves and are therefore accounted for under GAAP as a seller guarantee.

Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables (“Third Party Recoverables”) from certain of OneBeacon’s third party reinsurers in existence at the time the NICO Cover was executed. As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. White Mountains estimates that on an incurred basis, net of Third Party Recoverables, as of September 30, 2011 it has used approximately $2.3 billion of the coverage provided by NICO.  Through September 30, 2011, $1.4 billion of these incurred losses have been paid by NICO. Since entering into the NICO Cover, approximately 8%  ($187.7 million), of the $2.3 billion of utilized coverage from NICO related to uncollectible Third Party Recoverables. To the extent that actual experience differs from White Mountains’ estimate of ultimate A&E losses and Third Party Recoverables, future losses could utilize some or all of the protection remaining under the NICO Cover.

Pursuant to the GRC Cover, OneBeacon is not entitled to recover losses to the full contract limit if such losses are reimbursed by GRC more quickly than anticipated at the time the contract was signed. OneBeacon intends to only seek reimbursement from GRC for claims which result in payment patterns similar to those supporting its recoverables recorded pursuant to the GRC Cover. The economic cost of not submitting certain other eligible claims to GRC is primarily the investment spread between the rate credited by GRC and the rate achieved by OneBeacon on its own investments. This cost, if any, is expected to be nominal.  During the three and nine months ended September 30, 2011, $13.6 million and $60.7 million was collected under the GRC Cover.

During the third quarter of 2011, OneBeacon completed a new ground-up study of its legacy asbestos and environmental exposures.  The previous study was based on experience through 2007.  Reasonable estimates of potential adverse scenarios continue to be within the $2.5 billion reinsurance cover issued by NICO.  The point estimate of incurred losses ceded to NICO increased from $2.2 billion to $2.3 billion.

Effective May 1, 2011, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2012. The program provides coverage for OneBeacon’s property business as well as certain acts of terrorism. Under the program, the first $50.0 million of losses resulting from any single catastrophe are retained by OneBeacon.  The next $175.0 million of losses resulting from the catastrophe are reinsured with OneBeacon co-participating in the losses.  OneBeacon retains 26% of the losses from $50.0 million up to $100.0 million and 10% of the losses from $100.0 million up to $175.0 million. Any loss above $225.0 million is retained by OneBeacon.  In the event of a catastrophe, OneBeacon’s property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

OneBeacon had entered into a 30% quota share agreement with a group of reinsurers that ran from January 1, 2009 through December 31, 2009, and had renewed the agreement effective January 1, 2010 through July 1, 2010, the closing date of the Personal Lines Transaction.  Through June 30, 2010, OneBeacon ceded $25.6 million of written premiums from its Northeast homeowners business written through OneBeacon Insurance Company (“OBIC”) and its subsidiary companies, along with Adirondack Insurance Exchange (“Adirondack Insurance”) and New Jersey Skylands Insurance Agency (“NJSIA”) in New York and New Jersey, respectively.

Sirius Group

At September 30, 2011, Sirius Group had $17.2 million of reinsurance recoverables on paid losses and $342.1 million of reinsurance that will become recoverable if claims are paid in accordance with current reserve estimates. Because reinsurance contracts do not relieve Sirius Group of its obligation to its ceding companies, the collectability of balances due from its reinsurers is critical to Sirius Group’s financial strength. Sirius Group monitors the financial strength of its reinsurers on an ongoing basis. The following table provides a listing of Sirius Group’s top reinsurers based upon recoverable amounts, the percentage of total paid and unpaid reinsurance recoverables and the reinsurers’ A.M. Best ratings.

Top Reinsurers (Millions)	Balance at September 30, 2011		% of Total		A.M. Best Rating (1)		% Collateralized
General Reinsurance Corporation	$	43.3	12	%		A++	2	%
Olympus (2)	40.8		11	%		NR-5	100	%
Swiss Re Group	40.0		11	%		A	4	%
Lloyds of London(3)	31.3		9	%		A	6	%
Michigan Catastrophic Claims Association	14.6		4	%		N/A(4)	—	%

(1)	A.M. Best ratings as detailed above are: “NR-5” (Not formally followed), “A++” (Superior, which is the highest of fifteen ratings), and “A” (Excellent, which is the third highest of fifteen ratings).
(2)	Non-U.S. insurance entity. Balances are fully collateralized through funds held, letters of credit or trust agreements.
(3)	Represents the total of reinsurance recoverables due to Sirius Group from all Lloyds Syndicates.
(4)	Michigan Catastrophic Claims Association (“MCCA”) is a non-profit unincorporated association of which every insurance company that sells automobile coverage in Michigan is required to be a member.  A.M. Best does not rate MCCA. Sirius Group acquired its recoverable from MCCA pursuant to its acquisition of Stockbridge.