Third-Party Reinsurance

In the normal course of business, White Mountains’ insurance and reinsurance subsidiaries 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. The effects of reinsurance on White Mountains’ insurance and reinsurance subsidiaries’ written and earned premiums and on losses and LAE were as follows (see Note 9 for balances related to White Mountains financial guarantee business):



	Year Ended December 31, 2013
Millions	OneBeacon			Sirius Group			Total
Written premiums:
Direct	$	1,103.1		$	177.3		$	1,280.4
Assumed	59.8			943.1			1,002.9
Gross written premiums	1,162.9			1,120.4			2,283.3
Ceded	(74.3		)	(243.8		)	(318.1		)
Net written premiums	$	1,088.6		$	876.6		$	1,965.2
Earned premiums:
Direct	$	1,043.3		$	174.0		$	1,217.3
Assumed	148.5			938.6			1,087.1
Gross earned premiums	1,191.8			1,112.6			2,304.4
Ceded	(71.4		)	(246.2		)	(317.6		)
Net earned premiums	$	1,120.4		$	866.4		$	1,986.8
Losses and LAE:
Direct	$	584.9		$	98.1		$	683.0
Assumed	76.3			455.5			531.8
Gross losses and LAE	661.2			553.6			1,214.8
Ceded	(39.1		)	(135.2		)	(174.3		)
Net losses and LAE	$	622.1		$	418.4		$	1,040.5



	Year Ended December 31, 2012
Millions	OneBeacon			Sirius Group			Total
Written premiums:
Direct	$	1,204.0		$	186.1		$	1,390.1
Assumed	55.2			992.7			1,047.9
Gross written premiums	1,259.2			1,178.8			2,438.0
Ceded	(80.0		)	(231.1		)	(311.1		)
Net written premiums	$	1,179.2		$	947.7		$	2,126.9
Earned premiums:
Direct	$	1,158.3		$	169.9		$	1,328.2
Assumed	52.8			988.3			1,041.1
Gross earned premiums	1,211.1			1,158.2			2,369.3
Ceded	(79.1		)	(226.6		)	(305.7		)
Net earned premiums	$	1,132.0		$	931.6		$	2,063.6
Losses and LAE:
Direct	$	687.5		$	96.9		$	784.4
Assumed	29.6			523.9			553.5
Gross losses and LAE	717.1			620.8			1,337.9
Ceded	(67.1		)	(76.9		)	(144.0		)
Net losses and LAE	$	650.0		$	543.9		$	1,193.9



	Year Ended December 31, 2011
Millions	OneBeacon			Sirius Group			Total
Written premiums:
Direct	$	1,079.2		$	139.5		$	1,218.7
Assumed	49.1			988.6			1,037.7
Gross written premiums	1,128.3			1,128.1			2,256.4
Ceded	(65.6		)	(212.4		)	(278.0		)
Net written premiums	$	1,062.7		$	915.7		$	1,978.4
Earned premiums:
Direct	$	1,035.9		$	128.5		$	1,164.4
Assumed	42.3			989.8			1,032.1
Gross earned premiums	1,078.2			1,118.3			2,196.5
Ceded	(66.0		)	(206.0		)	(272.0		)
Net earned premiums	$	1,012.2		$	912.3		$	1,924.5
Losses and LAE:
Direct	$	551.8		$	80.0		$	631.8
Assumed	9.2			627.8			637.0
Gross losses and LAE	561.0			707.8			1,268.8
Ceded	(12.7		)	(81.8		)	(94.5		)
Net losses and LAE	$	548.3		$	626.0		$	1,174.3

OneBeacon

In the normal course of business, OneBeacon purchases reinsurance from high-quality, highly rated, third-party reinsurers in order to minimize loss from large losses or catastrophic events.

The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OneBeacon’s operating results and financial position. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and terrorist acts. The extent of losses caused by catastrophes is a function of the amount and type of insured exposure in the area affected by the event as well as the severity of the event. OneBeacon uses models (primarily AIR Worldwide (“AIR”) Classic/2 version 15.0) to estimate the potential losses from catastrophes. OneBeacon uses this model output in conjunction with other data to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas such as coastal regions. In addition, OneBeacon imposes wind deductibles on existing coastal windstorm exposures.

Since the terrorist attacks of September 11, 2001, OneBeacon has sought to mitigate the risk associated with any future terrorist attacks by limiting the aggregate insured value of policies in geographic areas with exposure to losses from terrorist attacks. This is accomplished by either limiting the total insured values exposed, or, where applicable, through the use of terrorism exclusions.

In December 2007, the U.S. government extended the Terrorism Risk Insurance Program Reauthorization Act (the “Terrorism Act” or “TRIPRA”) until December 31, 2014. The Terrorism Act established a federal “backstop” for commercial property and casualty losses, including workers compensation, resulting from acts of terrorism by or on behalf of any foreign person or foreign interest. As extended, the law now also covers domestic acts of terrorism. The law limits the industry’s aggregate liability by requiring the federal government to share 85% of certified losses once a company meets a specific retention or deductible as determined by its prior year’s direct written premiums and limits the aggregate liability to be paid by the government and industry without further action by Congress at $100.0 billion. In exchange for this “backstop,” primary insurers are required to make coverage available to commercial insureds for losses from acts of terrorism as specified in the Terrorism Act. The following types of coverage are excluded from the program: commercial automobile, burglary and theft, surety, farmowners multi-peril and all professional liability coverage except directors and officers coverage.

OneBeacon estimates its individual retention level for commercial policies subject to the Terrorism Act to be approximately $100.0 million in 2014. The federal government will pay 85% of covered terrorism losses that exceed OneBeacon’s or the industry’s retention levels in 2014, up to a total of $100.0 billion.

OneBeacon seeks to further reduce its potential loss from catastrophe exposures through the purchase of catastrophe reinsurance. Effective May 1, 2013, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2014. The program provides coverage for OneBeacon’s property business as well as certain acts of terrorism. Under the program, the first $20.0 million of losses resulting from any single catastrophe are retained and $117.0 million of the next $130.0 million of losses resulting from the catastrophe are reinsured in three layers. OneBeacon retains 50% of losses from $20.0 million to $30.0 million, 10% of losses from $30.0 million to $70.0 million, and 5% of losses from $70.0 million to $150.0 million. Thus, for a $150.0 million loss, OneBeacon would retain $33.0 million. Losses above $150.0 million are not covered by the property catastrophe program. 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. This $150.0 million limit was reduced from the $180.0 million limit that OneBeacon’s previous catastrophe reinsurance program provided, as a result of lower catastrophe exposure as a specialty-focused company.

OneBeacon’s property catastrophe reinsurance program does not cover property losses resulting from any nuclear events or biological, chemical or radiological terrorist attacks or losses resulting from acts of terrorism as defined under the Terrorism Act, committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as well as domestic acts of terrorism. Such losses are subject to coverage provided to insurance companies by TRIPRA.

OneBeacon purchases property-per-risk reinsurance coverage to reduce large loss volatility. The property-per-risk reinsurance program reinsures losses in excess of $10.0 million up to $100.0 million on certain risks. Individual risk facultative reinsurance is purchased above $100.0 million. OneBeacon retains 5% for losses in excess of $20.0 million up to $40.0 million and 10% of losses in excess of $40.0 million. The property-per-risk treaty also provides one limit of reinsurance protection for losses in excess of $10.0 million up to $100.0 million for acts of foreign terrorism. However, any nuclear events, or biological, chemical or radiological terrorist attacks are not covered.

OneBeacon also maintains a casualty reinsurance program that provides protection for individual policies involving general liability, automobile liability, professional liability or umbrella liability. OneBeacon's healthcare professional liability treaty covers losses in excess of $5.0 million up to $20.0 million in two layers. The first layer, $5.0 million excess of $5.0 million, has a 10% co-participation. All other casualty business is covered in a separate treaty covering losses in excess of $5.0 million up to $21.0 million. This treaty has a 10.0% co-participation in the first layer ($6.0 million in excess of $5.0 million) as well as a $3.0 million aggregate deductible, and a 5% co-participation in the second layer ($10.0 million in excess of $11.0 million). OneBeacon also purchases a treaty to protect against large workers compensation losses that covers 100% of the loss in excess of $1.0 million up to $10.0 million per occurrence. Additionally, for casualty and/or workers compensation catastrophe losses, OneBeacon maintains a dedicated clash treaty that covers up to $60.0 million in excess of a $10.0 million retention.

OneBeacon purchases a per-occurrence treaty for inland and ocean marine business that protects against large occurrences, whether a single large claim or a catastrophe. The marine treaty attaches at $2.0 million per occurrence. The first layer of the marine treaty is $5.0 million in excess of $2.0 million, with annual aggregate deductibles of $1.5 million for individual ocean marine large claims, $1.5 million for individual inland marine large claims and $5.0 million for catastrophe losses. OneBeacon retains 60% of the loss from $2.0 million up to $7.0 million. Catastrophe coverage is provided up to $60.0 million. Retained catastrophe losses are subject to the corporate catastrophe treaty. Individual risk losses from inland marine exceeding $20.0 million are subject to the corporate property per risk treaty. Reinstatement premiums are paid in full or in part depending on the layer and the occurrence if the coverage is attached. OneBeacon also purchases reinsurance for its surety underwriting operating segment which covers 100% of losses in excess of $5.0 million up to $30.0 million per bond and up to $60.0 million in aggregate.

At December 31, 2013, OneBeacon had $9.7 million and $80.2 million of reinsurance recoverables on paid and unpaid losses. Reinsurance contracts do not relieve OneBeacon of its 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 summarizes Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) ratings for OneBeacon’s reinsurers. The reinsurance balances associated with the Runoff Business are included in discontinued operations (see Note 21).



Standard & Poor’s Rating⁽¹⁾	Balance at December 31, 2013		% of Total
AA	$	26.4	30	%
A	56.1		62	%
BBB+, Not rated and other	7.4		8	%
Total	$	89.9	100	%

⁽¹⁾Standard & Poor’s ratings as detailed above are: “AA” (Very strong), “A” (Strong) and “BBB+” (Adequate).

Sirius Group

Sirius Group's reinsurance protection primarily consists of pro-rata and excess of loss protections to cover A&H, aviation, trade credit, and certain property exposures. Sirius Group's core proportional property reinsurance programs provide protection for parts of the non-proportional treaty accounts written in Europe, the Americas, Asia, the Middle East, and Australia. These reinsurance protections are 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. In addition to its proportional reinsurance, Sirius Group also purchases excess of loss reinsurance protection for $15.0 million in excess of a retention of $5.0 million for the facultative and direct property portfolios written by the Stockholm, Hamburg and London branches (excluding business written in the United States). Syndicate 1945 has a reinsurance cover of $10.0 million in excess of $5.0 million for the facultative and direct property portfolio. An additional $15.0 million of reinsurance protection in excess of the $20.0 million coverage is in place for the facultative and direct property portfolios written by the Hamburg and Stockholm branches. At January 1, 2014, an additional $2.5 million of second loss coverage was purchased for the facultative and direct property portfolios written by the Hamburg, Stockholm and London branches in excess of a retention of $2.5 million. Sirius Group also has $5.0 million of protection in excess of a retention of $5.0 million for the London branch and Syndicate 1945 for facultative and direct U.S.-catastrophe exposed business, which was renewed through June 30, 2014.

Sirius Group has in place excess of loss retrocessional coverage for its non-U.S. and non-Japan earthquake-related exposures. This cover was renewed for one year at April 1, 2013, providing $40.0 million of reinsurance protection in excess of Sirius Group's retention of $35.0 million and a further $15.8 million of partially placed coverage in excess of $75.0 million.

In addition, Sirius Group periodically purchases industry loss warranty (“ILW”) contracts to augment its overall retrocessional program. A European windstorm and flood ILW totaling $7.5 million in coverage and attaching at a market event level of €5.0 billion or greater ($6.9 billion based on the December 31, 2013 EUR to USD exchange rate) was purchased in October 2013 and remains in force throughout 2014. Two additional ILWs were purchased at January 1, 2014, in force through March 31, 2014, totaling $10.0 million in coverage for European windstorm and flood attaching at a market event level of $7.5 billion.

Sirius Group's aviation reinsurance program is intended to reduce exposure to a frequency of small losses, a single large loss, or a combination of both. For the proportional and facultative aviation portfolios, reinsurance protection purchases are generally for coverage on losses from events that cause a market loss in excess of $150.0 million up to a full policy limit of $2.25 billion. This program is in effect through November 2014. For the non-proportional aviation portfolio, reinsurance protection includes a 15% quota share treaty. In addition, the non-proportional portfolio is protected by ILWs with a limit of $30.5 million. The ILWs attach at industry loss levels between $350.0 million and $1.0 billion.

For the marine yacht portfolio written by the London branch and Syndicate 1945, reinsurance coverage is in place for $9.8 million in excess of a retention of $0.3 million.

For accident and health, Sirius Group has excess of loss protection covering personal accident and life of €10.0 million ($13.8 million based on the December 31, 2013 EUR to USD exchange rate) of protection in excess of a €5.0 million ($6.9 million based on the December 31, 2013 EUR to USD exchange rate) retention for the Stockholm, Hamburg, Liege and Singapore branches. In addition, the Sirius America’s direct insurance portfolio includes quota share reinsurance of various percentages.

For 2013, Sirius Group ceded 20% and 50% of its trade credit and bond business, respectively, under a quota share retrocession, which supported growth in this line. The treaty was renewed for 2014 at the same cession percentages.

For 2013, Sirius Group also ceded 30% of the direct contingency business written in the London branch and Syndicate 1945 on a proportional basis. The treaty was renewed at January 1, 2014.

Almost all of Sirius Group's excess of loss reinsurance protections, excluding ILWs which tend to cover only one loss event, include provisions that reinstate coverage at a cost of 100% or more of the original reinsurance premium.

At December 31, 2013, Sirius Group had $15.7 million of reinsurance recoverables on paid losses and $347.9 million of reinsurance recoverables on unpaid losses that will become recoverable if claims are paid in accordance with current reserve estimates. Because retrocessional reinsurance contracts do not relieve Sirius Group of its obligation to its insureds, the collectability of balances due from Sirius Group's reinsurers is critical to its financial strength. Sirius Group monitors the financial strength and ratings of retrocessionaires on an ongoing basis.

The following table provides a listing of Sirius Group’s gross and net recoverable amounts by the reinsurer’s Standard & Poor’s rating and the percentage of total recoverables.



Rating⁽¹⁾	Gross		Collateral		Net		% of Net Total
AAA	$	62.9	$	—	$	62.9	19	%
AA	60.6		4.5		56.1		17	%
A	127.5		1.6		125.9		39	%
BBB+	21.0		—		21.0		7	%
BBB or lower	16.6		—		16.6		5	%
Not rated	75.0		31.5		43.5		13	%
Total	$	363.6	$	37.6	$	326.0	100	%

⁽¹⁾Standard & Poor’s ratings as detailed above are: “AAA” (Extremely strong), “AA” (Very strong), “A” (Strong), and “BBB+” and “BBB” (Adequate).