Statutory Capital and Surplus

12 Months Ended

Dec. 31, 2011

Statutory Capital and Surplus

Statutory Capital and Surplus

NOTE 13. Statutory Capital and Surplus

White Mountains’ insurance and reinsurance operations are subject to regulation and supervision in each of the jurisdictions where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders.  In addition, the NAIC uses risk-based capital (“RBC”) standards for property and casualty insurers as a means of monitoring certain aspects affecting the overall financial condition of insurance companies. At December 31, 2011, White Mountains’ active insurance and reinsurance operating subsidiaries exceeded their respective RBC requirements.

OneBeacon’s consolidated combined policyholders’ surplus of its insurance operating subsidiaries as reported to various regulatory authorities as of December 31, 2011 and 2010 was $1.0 billion and $1.1 billion. OneBeacon’s consolidated combined statutory net income (loss) for the years ended December 31, 2011, 2010 and 2009 was $119.6 million, $257.2 million and $210.5 million. The principal differences between OneBeacon’s combined statutory amounts and the amounts reported in accordance with GAAP include deferred acquisition costs, deferred taxes, market value adjustments for debt securities and recognition of pension plans. OneBeacon’s insurance operating subsidiaries’ statutory policyholders’ surplus at December 31, 2011 was in excess of the minimum requirements of relevant state insurance regulations.

Sirius International’s total regulatory capital at December 31, 2011 was $2.1 billion.  In accordance with Swedish regulations, Sirius International holds restricted equity of $1.6 billion as a component of Swedish statutory regulatory capital. This restricted equity cannot be paid as dividends.

Sirius America’s policyholders’ surplus, as reported to various regulatory authorities as of December 31, 2011 and 2010, was $533.7 million and $742.6 million. Sirius America’s statutory net income (loss) for the years ended December 31, 2011, 2010 and 2009 was $101.4 million, $70.2 million and $46.9 million. The principal differences between Sirius America’s statutory amounts and the amounts reported in accordance with GAAP include deferred acquisition costs, deferred taxes, gains recognized under retroactive reinsurance contracts and market value adjustments for debt securities. Sirius America’s statutory policyholders’ surplus at December 31, 2011 was in excess of the minimum requirements of relevant state insurance regulations.

Central National’s policyholders’ surplus, as reported to various regulatory authorities as of December 31, 2011 and 2010, was $13.4 million and $15.0 million. Central National’s statutory net income (loss) for the years ended December 31, 2011 and 2010 was $0.1 million and $1.6 million.

Scandinavian Re and White Shoals Re are also subject to regulation and supervision by the Bermuda Monetary Authority (“BMA”). Generally, the BMA has broad supervisory and administrative powers over such matters as licenses, standards of solvency, investments, methods of accounting, form and content of financial statements, minimum capital and surplus requirements, and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. As of December 31, 2011, Scandinavian Re and White Shoals Re had statutory capital and surplus of $27.6 million and $15.4 million, which was in excess of the minimum requirements of the BMA.

WM Life Re is subject to regulation and supervision by the BMA. As of December 31, 2011, WM Life Re had statutory capital and surplus of $26.4 million, which was in excess of the minimum requirement of the BMA.

Dividend Capacity

Under the insurance laws of the states and jurisdictions under which White Mountains’ insurance and reinsurance operating subsidiaries are domiciled, an insurer is restricted with respect to the timing and the amount of dividends it may pay without prior approval by regulatory authorities. Accordingly, there can be no assurance regarding the amount of such dividends that may be paid by such subsidiaries in the future. Following is a description of the dividend capacity of White Mountains’ insurance and reinsurance operating subsidiaries:

OneBeacon:

Generally, OneBeacon’s regulated insurance operating subsidiaries have the ability to pay dividends during any 12-month period without the prior approval of regulatory authorities in an amount set by formula based on the greater of prior year statutory net income or 10% of prior year end statutory surplus, subject to the availability of unassigned funds. Based upon OneBeacon’s top tier regulated insurance operating subsidiaries have the ability to pay $103 million of dividends during 2012 without prior approval of regulatory authorities, subject to the availability of unassigned funds. At December 31, 2011, OneBeacon’s top tier regulated insurance operating subsidiaries had $0.7 billion of unassigned funds. During 2011, OneBeacon’s top tier regulated insurance operating subsidiaries distributed $150.0 million in extraordinary dividends to their immediate parent.

During 2011, OneBeacon Ltd. paid $79.7 million of regular quarterly dividends and a $95.1 million special dividend to its common shareholders. White Mountains received $132.0 million of these dividends. At December 31, 2011, OneBeacon Ltd. and its intermediate holding companies had $16.9 million of net unrestricted cash, short-term investments and fixed maturity investments outside of its regulated and unregulated insurance operating subsidiaries.

During 2011, OneBeacon’s unregulated insurance operating subsidiaries paid $4.3 million of dividends to their immediate parent. At December 31, 2011, OneBeacon’s unregulated insurance operating subsidiaries had approximately $183.0 million of net unrestricted cash, short-term investments and fixed maturity investments and approximately $30.0 million of common equity securities and convertible fixed maturities.

Sirius Group:

Subject to certain limitations under Swedish law, Sirius International is permitted to transfer all or a portion of its pre-tax income to its Swedish parent companies to minimize taxes (referred to as a group contribution). In 2011, Sirius International transferred $74.0 million of its 2010 pre-tax income to its Swedish parent companies as a group contribution. In 2012, Sirius International intends to transfer approximately $80.0 million (based on December 31, 2011 SEK to USD exchange rate) of its 2011 pre-tax income to its Swedish parent companies as a group contribution.

Sirius International has the ability to pay dividends subject to the availability of unrestricted statutory surplus. Historically, Sirius International has allocated the majority of its pre-tax income, after group contributions to its Swedish parent companies, to the Safety Reserve (see “Safety Reserve” below). At December 31, 2011, Sirius International had $514.9 million (based on December 31, 2011 SEK to USD exchange rate) of unrestricted statutory surplus, which is available for distribution in 2012. During 2011, Sirius International paid $177 million of dividends to its immediate parent. In connection with the Reorganization, Sirius International’s unrestricted statutory surplus increased by $436.3 million due to the contribution of the remaining shares of Sirius America.

Sirius America has the ability to pay dividends to its intermediate parent, which is an indirect subsidiary wholly-owned subsidiary of Sirius International, during any 12-month period without the prior approval of regulatory authorities in an amount set by formula based on the lesser of net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. Based upon December 31, 2011 statutory surplus of $533.7 million, Sirius America has the ability to pay $53.4 million of dividends during 2012 without prior approval of regulatory authorities, subject to the availability of earned surplus.  At December 31, 2011, Sirius America had $75.5 million of earned surplus.

During 2011, Sirius Group distributed a total of $169.0 million to its immediate parent in addition to the $425.0 million distribution that was made as part of the Reorganization for a total of $594.0 million

At December 31, 2011, Sirius Group and its intermediate holding companies had $75.1 million of net unrestricted cash, short-term investments and fixed maturity investments and $16.3 million of other long-term investments outside of its regulated and unregulated insurance and reinsurance operating subsidiaries.

Safety Reserve

Subject to certain limitations under Swedish law, Sirius International is permitted to transfer pre-tax amounts into an untaxed reserve referred to as a safety reserve. At December 31, 2011, Sirius International’s safety reserve amounted to SEK 9.6 billion or $1.4 billion at the December 31, 2011 exchange rate of 6.86 USD to SEK. Under GAAP, an amount equal to the safety reserve, net of a related deferred tax liability established at the Swedish tax rate of 26.3%, is classified as common shareholders’ equity. Generally, this deferred tax liability is only required to be paid by Sirius International if it fails to maintain predetermined levels of premium writings and loss reserves in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities do not apply any taxes to the safety reserve when calculating solvency capital under Swedish insurance regulations. Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International’s safety reserve ($369.6 million at December 31, 2011) is included in solvency capital. Access to the safety reserve is restricted to coverage of insurance losses. Access for any other purpose requires the approval of Swedish regulatory authorities. Similar to the approach taken by Swedish regulatory authorities, most major rating agencies generally include the $1.4 billion balance of the safety reserve, without any provision for deferred taxes, in Sirius International’s capital when assessing Sirius International’s financial strength.

Other Operations:

During 2011, WM Advisors paid a $5.0 million dividend to its immediate parent.  At December 31, 2011, WM Advisors had $25.8 million of net unrestricted cash, short-term investments and fixed maturity investments.

At December 31, 2011, the Company and its intermediate holding companies had $1,554.3 million of net unrestricted cash, short-term investments and fixed maturity investments, $316.6 million of common equity securities and $33.4 million of other long-term investments included in its Other Operations segment.