UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the period ended September 30, 2007

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from          to        

 

 

 

Commission file number 1-33128

 

ONEBEACON INSURANCE GROUP, LTD.

(Exact name of Registrant as specified in its charter)

 

Bermuda

 

98-0503315

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

601 Carlson Parkway

 

 

Minnetonka, Minnesota

 

55305

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (952) 852-2431

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x    No   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated Filer  o

Non-accelerated filer  x

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o    No   x

 

As of November 1, 2007, 27,812,189 Class A common shares, par value of $0.01 per share, and 71,754,738 Class B common shares, par value $0.01 per share, were outstanding.

 

 



 

ONEBEACON INSURANCE GROUP, LTD.

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets:

 

 

September 30, 2007 and December 31, 2006

2

 

 

 

 

Consolidated Statements of Income and Comprehensive Income:

 

 

Three and nine months ended September 30, 2007 and 2006

3

 

 

 

 

Consolidated Statements of Common Shareholders’ Equity:

 

 

Nine months ended September 30, 2007 and 2006

4

 

 

 

 

Consolidated Statements of Cash Flows:

 

 

Nine months ended September 30, 2007 and 2006

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

ITEM 2.

Managements’ Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

Results of Operations — For the three and nine months ended September 30, 2007 and 2006

25

 

 

 

 

Summary of Investment Results

33

 

 

 

 

Non-GAAP Financial Measures

37

 

 

 

 

Liquidity and Capital Resources

38

 

 

 

 

Critical Accounting Estimates

42

 

 

 

 

Forward Looking Statements

43

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

ITEM 4.

Controls and Procedures

44

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

44

 

 

 

ITEM 1A.

Risk Factors

45

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

ITEM 6.

Exhibits

45

 

 

 

SIGNATURES

 

 

 



 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

($ in millions, except
share and per share
amounts)

 

Assets

 

 

 

 

 

Available-for-sale investments:

 

 

 

 

 

Fixed maturity investments, at fair value (amortized cost $3,393.5 and $3,501.5)

 

$3,433.3

 

$3,539.7

 

Common equity securities, at fair value (cost $638.8 and $568.9)

 

796.2

 

737.1

 

Short-term investments, at amortized cost (which approximates fair value)

 

424.5

 

319.0

 

Held-to-maturity investments (assets held in trust):

 

 

 

 

 

Fixed maturity investments, at amortized cost (estimated market value $309.5 and $304.0)

 

308.6

 

305.0

 

Short-term investments, at amortized cost (which approximates fair value)

 

0.1

 

33.8

 

Other investments (cost $265.1 and $229.5)

 

322.7

 

278.1

 

Total investments

 

5,285.4

 

5,212.7

 

Cash

 

59.1

 

41.5

 

Reinsurance recoverable on unpaid losses

 

995.5

 

1,032.6

 

Reinsurance recoverable on unpaid losses—Berkshire Hathaway, Inc.

 

1,704.1

 

1,810.0

 

Reinsurance recoverable on paid losses

 

20.6

 

32.4

 

Premiums receivable

 

574.3

 

517.1

 

Securities lending collateral

 

534.7

 

528.8

 

Deferred acquisition costs

 

207.8

 

183.8

 

Deferred tax asset

 

21.8

 

61.2

 

Investment income accrued

 

33.4

 

34.8

 

Ceded unearned premiums

 

69.1

 

38.2

 

Accounts receivable on unsettled investment sales

 

15.7

 

6.7

 

Other assets

 

282.3

 

369.6

 

Total assets

 

$9,803.8

 

$9,869.4

 

Liabilities

 

 

 

 

 

Loss and LAE reserves

 

$4,594.8

 

$4,837.7

 

Unearned premiums

 

1,046.0

 

985.2

 

Debt

 

757.7

 

759.5

 

Securities lending payable

 

534.7

 

528.8

 

Preferred stock subject to mandatory redemption:

 

 

 

 

 

Held by Berkshire Hathaway, Inc. (redemption value $300.0)

 

268.5

 

242.3

 

Held by others (redemption value $— and $20.0)

 

 

20.0

 

Ceded reinsurance payable

 

97.3

 

71.9

 

Accounts payable on unsettled investment purchases

 

29.0

 

11.5

 

Other liabilities

 

564.9

 

635.3

 

Total liabilities

 

7,892.9

 

8,092.2

 

Common shareholders’ equity

 

 

 

 

 

Common shares and paid-in surplus (par value $0.01; authorized, 200,000,000 shares; issued and outstanding, 99,747,931 and 100,013,292 shares)

 

1,111.4

 

1,115.9

 

Retained earnings

 

616.2

 

474.4

 

Accumulated other comprehensive income, after-tax:

 

 

 

 

 

Net unrealized gains on investments

 

168.3

 

173.1

 

Net unrealized foreign currency translation gains

 

14.3

 

11.8

 

Other comprehensive income items

 

0.7

 

2.0

 

Total common shareholders’ equity

 

1,910.9

 

1,777.2

 

Total liabilities and common shareholders’ equity

 

$9,803.8

 

$9,869.4

 

 

See Notes to Consolidated Financial Statements including Note 12 – “Commitments and Contingencies”

 

2



 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended 
September 30,

 

Nine months ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

($ in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

473.6

 

$

551.3

 

$

1,407.5

 

$

1,590.0

 

Net investment income

 

51.5

 

49.2

 

156.7

 

148.4

 

Net realized investment gains

 

30.7

 

35.4

 

142.7

 

105.0

 

Net other revenues

 

10.8

 

36.6

 

16.3

 

48.4

 

Total revenues

 

566.6

 

672.5

 

1,723.2

 

1,891.8

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and LAE

 

255.8

 

318.5

 

827.1

 

994.6

 

Policy acquisition expenses

 

74.9

 

124.5

 

231.5

 

297.4

 

Other underwriting expenses

 

66.4

 

84.0

 

246.9

 

253.9

 

General and administrative expenses

 

2.4

 

5.1

 

7.5

 

11.6

 

Accretion of fair value adjustment to loss and LAE reserves

 

4.0

 

5.8

 

12.0

 

17.3

 

Interest expense on debt

 

11.4

 

12.0

 

34.1

 

34.8

 

Interest expense—dividends on preferred stock subject to mandatory redemption

 

7.1

 

7.6

 

22.2

 

22.7

 

Interest expense—accretion on preferred stock subject to mandatory redemption

 

9.2

 

7.2

 

26.2

 

20.5

 

Total expenses

 

431.2

 

564.7

 

1,407.5

 

1,652.8

 

Pre-tax income

 

135.4

 

107.8

 

315.7

 

239.0

 

Income tax provision

 

(53.1

)

(34.1

)

(110.6

)

(54.5

)

Income from continuing operations before equity in earnings of unconsolidated affiliate

 

82.3

 

73.7

 

205.1

 

184.5

 

Equity in earnings of unconsolidated affiliate

 

 

(1.6

)

 

8.6

 

Net income from continuing operations

 

82.3

 

72.1

 

205.1

 

193.1

 

Income from discontinued operations

 

 

0.8

 

 

1.2

 

Net income

 

82.3

 

72.9

 

205.1

 

194.3

 

Change in net unrealized gains and losses for investments held

 

19.5

 

38.4

 

85.2

 

43.5

 

Recognition of net unrealized gains and losses for investments sold

 

(19.1

)

(19.5

)

(90.0

)

(56.7

)

Change in foreign currency translation

 

(4.1

)

3.8

 

2.5

 

6.4

 

Change in other comprehensive income items

 

(2.6

)

(1.3

)

(1.3

)

0.6

 

Comprehensive net income

 

$

76.0

 

$

94.3

 

$

201.5

 

$

188.1

 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.82

 

$

0.72

 

$

2.05

 

$

1.93

 

Income from discontinued operations

 

 

0.01

 

 

0.01

 

Net income available to common shareholders

 

$

0.82

 

$

0.73

 

$

2.05

 

$

1.94

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.82

 

$

0.72

 

$

2.05

 

$

1.93

 

Income from discontinued operations

 

 

0.01

 

 

0.01

 

Net income available to common shareholders

 

$

0.82

 

$

0.73

 

$

2.05

 

$

1.94

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.21

 

$

 

$

0.63

 

$

 

 

See Notes to Consolidated Financial Statements

 

3



 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common
shareholders’
equity

 

Common
shares and
paid-in
surplus

 

Retained
earnings

 

Accum. other
comprehensive
income,
after-tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2007

 

$

1,777.2

 

$

1,115.9

 

$

474.4

 

$

186.9

 

Adjustment to adopt FIN 48

 

(0.3

)

 

(0.3

)

 

Net income

 

205.1

 

 

205.1

 

 

Accrued option expense

 

1.0

 

1.0

 

 

 

Issuance of common shares

 

0.3

 

0.3

 

 

 

Repurchases and retirements of Class A common shares

 

(5.8

)

(5.8

)

 

 

Dividends

 

(63.0

)

 

(63.0

)

 

Other comprehensive loss, after-tax

 

(3.6

)

 

 

(3.6

)

Balances at September 30, 2007

 

$

1,910.9

 

$

1,111.4

 

$

616.2

 

$

183.3

 

 

 

 

Common
shareholders’
equity

 

Common
shares and
paid-in
surplus

 

Retained
earnings

 

Accum. other
comprehensive
income,
after-tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2006

 

$

1,560.0

 

$

1,169.8

 

$

232.6

 

$

157.6

 

Adjustment to adopt SFAS No. 155, after-tax

 

 

 

7.1

 

(7.1

)

Net income

 

194.3

 

 

194.3

 

 

Capital contributions received from White Mountains Insurance Group, Ltd.

 

6.0

 

6.0

 

 

 

Distribution to White Mountains Insurance Group, Ltd.

 

(58.8

)

(58.8

)

 

 

Other comprehensive loss, after-tax

 

(6.2

)

 

 

(6.2

)

Balances at September 30, 2006

 

$

1,695.3

 

$

1,117.0

 

$

434.0

 

$

144.3

 

 

See Notes to Consolidated Financial Statements

 

4



 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

 

 

($ in millions)

 

Cash flows from operations:

 

 

 

 

 

Net income

 

$

205.1

 

$

194.3

 

Charges (credits) to reconcile net income to cash flows used for operations:

 

 

 

 

 

Income from discontinued operations

 

 

(1.2

)

Net realized investment gain

 

(142.7

)

(105.0

)

Net realized gains from sale of common stock of subsidiary

 

(11.3

)

 

Dividends paid on mandatorily redeemable preferred stock of subsidiaries

 

22.2

 

22.7

 

Other operating items:

 

 

 

 

 

Net change in loss and LAE reserves

 

(242.9

)

(412.4

)

Net change in unearned premiums

 

60.8

 

117.2

 

Net change in ceded reinsurance payable

 

25.4

 

10.1

 

Net change in premiums receivable

 

(57.2

)

(72.9

)

Net change in reinsurance recoverable on paid and unpaid losses

 

154.8

 

212.1

 

Net change in other assets and liabilities

 

26.3

 

(18.9

)

Net cash provided from (used for) operating activities of continuing operations

 

40.5

 

(54.0

)

Net cash used for operating activities of discontinued operations

 

 

(22.0

)

Net cash provided from (used for) operations

 

40.5

 

(76.0

)

Cash flows from investing activities:

 

 

 

 

 

Net maturities, purchases and sales of short-term investments available-for-sale

 

(120.3

)

(290.2

)

Maturities of held-to-maturity investments

 

33.8

 

 

Sales of fixed maturity investments

 

1,139.6

 

1,096.0

 

Maturities of fixed maturity investments

 

543.3

 

398.6

 

Sales of common equity securities

 

221.6

 

316.7

 

Sales of other investments

 

36.4

 

9.4

 

Purchases of fixed maturity investments available-for-sale

 

(1,562.1

)

(1,026.5

)

Purchases of common equity securities

 

(205.3

)

(335.3

)

Purchases of other investments

 

(40.9

)

(58.2

)

Sale of common stock of subsidiary, net of sales costs

 

47.2

 

 

Sales of consolidated affiliates

 

 

11.1

 

Sale of renewal rights

 

 

32.0

 

Net change in unsettled investment purchases and sales

 

8.4

 

8.0

 

Net acquisitions of property and equipment

 

(11.6

)

(7.8

)

Net cash provided from investing activities of continuing operations

 

90.1

 

153.8

 

Net cash provided from investing activities of discontinued operations

 

 

19.8

 

Net cash provided from investing activities

 

90.1

 

173.6

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of debt

 

 

15.0

 

Repayment of debt

 

(2.0

)

 

Repayment of loan by affiliate

 

 

106.6

 

Loans to affiliates

 

 

(102.6

)

Repurchases and retirements of Class A common shares

 

(5.8

)

 

Distribution to White Mountains Insurance Group, Ltd.

 

 

(58.8

)

Cash dividends paid to common shareholders

 

(63.0

)

 

Redemption of mandatorily redeemable preferred stock of subsidiary

 

(20.0

)

 

Dividends paid on mandatorily redeemable preferred stock of subsidiaries

 

(22.2

)

(22.7

)

Net cash used for financing activities of continuing operations

 

(113.0

)

(62.5

)

Net increase in cash during period

 

17.6

 

35.1

 

Cash balance at beginning of period

 

41.5

 

44.1

 

Cash balance at end of period

 

$

59.1

 

$

79.2

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

22.9

 

$

23.2

 

Net Federal income taxes paid (received)

 

76.6

 

(18.1

)

 

See Notes to Consolidated Financial Statements

 

5



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. Nature of Operations and Summary of Significant Accounting Policies

 

Basis of presentation

 

These interim consolidated financial statements include the accounts of OneBeacon Insurance Group, Ltd. (the “Company” or the “Registrant”) and its subsidiaries (collectively, “OneBeacon”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The OneBeacon operating companies are U.S.-based property and casualty insurance writers, substantially all of which operate in a multi-company pool. OneBeacon offers a wide range of specialty, commercial and personal products and services sold primarily through select independent agencies and brokers.

 

OneBeacon was acquired by White Mountains Group, Ltd. (“White Mountains”) from Aviva plc (“Aviva”, formerly CGNU) in 2001 (the “OneBeacon Acquisition”). White Mountains is a holding company whose businesses provide property and casualty insurance, reinsurance and certain other products. During the fourth quarter of 2006, White Mountains sold 27.6 million or 27.6% of the Company’s common shares in an initial public offering. Prior to the initial public offering, OneBeacon was a wholly-owned subsidiary of White Mountains. Within this report, the term “OneBeacon” is used to refer to one or more entities within the consolidated organization, as the context requires. The Company is a Bermuda exempted limited company with its headquarters located at the Bank of Butterfield Building, 42 Reid Street, 6th Floor, Hamilton HM 12, Bermuda. The Company’s U.S. headquarters are located at 1 Beacon Lane, Canton, Massachusetts 02021, its principal executive office is located at 601 Carlson Parkway, Minnetonka, Minnesota 55305 and its registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. OneBeacon’s reportable segments are Primary Insurance Operations, Affiliate Quota Shares, and Other Operations, as defined below.

 

OneBeacon’s Primary Insurance Operations segment includes the results of substantially all of its insurance operations, with the exception of certain quota share arrangements with affiliates of White Mountains as described below.

 

During 2004 and 2005, OneBeacon entered into two quota share reinsurance arrangements with other subsidiaries of White Mountains. Under the Sirius Quota Share, OneBeacon ceded between 6% and 12% of business written, effective April 1, 2004, to Sirius International Insurance Corporation. Under the Esurance Quota Share, which was effective on January 1, 2005, OneBeacon assumed approximately 85% of business written by Esurance Insurance Company, which includes business written by its wholly-owned subsidiary, Esurance Property and Casualty Insurance Company. These quota share agreements were commuted during the fourth quarter of 2006 in connection with the Company’s initial public offering.

 

OneBeacon’s Other Operations segment consists of the Company and its intermediate holding companies.

 

All significant intercompany transactions have been eliminated in consolidation. These interim financial statements include all adjustments, consisting of a normal recurring nature, considered necessary by management to fairly present the financial position, results of operations and cash flows of OneBeacon.  These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s 2006 Annual Report on Form 10-K. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Refer to the Company’s 2006 Annual Report on Form 10-K for a complete discussion regarding OneBeacon’s significant accounting policies.

 

As part of a reorganization immediately preceding the initial public offering, OneBeacon sold certain consolidated subsidiaries to White Mountains on August 3, 2006 at GAAP book value. These subsidiaries have been classified as discontinued operations. Accordingly, the results of operations for these subsidiaries are presented net of tax, as income from discontinued operations in the consolidated statements of income and comprehensive income. Cash flows associated with the operating and investing activities of discontinued operations are aggregated and presented under separate captions in the consolidated statements of cash flows. There were no cash flows associated with financing activities for the discontinued operations.

 

6



 

Recently Adopted Changes in Accounting Principles

 

Federal, State and Foreign Income Taxes

 

While OneBeacon is subject to taxation in several jurisdictions, the majority of OneBeacon’s subsidiaries file a consolidated tax return in the United States.  Income earned or losses generated by companies outside the United States are generally subject to an overall effective tax rate lower than that imposed by the United States.

 

On January 1, 2007 (“Date of Adoption”) OneBeacon adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainy in Income Taxes (“FIN 48”). FIN 48 prescribes when the benefit of a given tax position should be recognized and how it should be measured.  Under the new guidance, recognition is based upon whether or not a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, OneBeacon must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.

 

FIN 48 also addresses how interest and penalties should be accrued for uncertain tax positions, requiring that interest expense should be recognized in the first period interest would be accrued under the tax law. OneBeacon classifies all interest and penalties on unrecognized tax benefits as part of income tax expense.  At the Date of Adoption, OneBeacon had accrued interest and penalties of $3.3 million, net of federal benefit.  In connection with the adoption of FIN 48, OneBeacon has recognized a $0.3 million increase in the liability for unrecognized tax benefits, primarily as a result of increases in its estimates of accrued interest. The effect of adoption has been recorded as an adjustment to opening retained earnings.

 

At the Date of Adoption, OneBeacon had $56.0 million of unrecognized tax benefits.  If recognized, $51.8 million would be recorded as a reduction to income tax expense.  The remaining $4.2 million of unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but the timing of deductibility is uncertain.  Recognition of these tax benefits, other than any applicable interest and penalties, would not affect the effective tax rate.  There have been no material changes to the above balances since the Date of Adoption.

 

With few exceptions, OneBeacon is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2003.  The Internal Revenue Service (IRS) commenced an examination of OneBeacon’s U.S. income tax returns for 2003 through 2004 in the second quarter of 2006 that is anticipated to be completed by the end of 2008.  As of September 30, 2007 the IRS has not proposed any significant adjustments to taxable income.  OneBeacon does not expect to receive any adjustments that would result in a material change to its financial position.

 

OneBeacon does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months.

 

Recent Accounting Pronouncements

 

Fair Value Measurements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). The Statement provides a revised definition of fair value and guidance on the methods used to measure fair value. The Statement also expands financial statement disclosure requirements for fair value information. The Statement establishes a fair value hierarchy that distinguishes between assumptions based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in SFAS 157 prioritizes inputs within three levels. Quoted prices in active markets have the highest priority (Level 1) followed by observable inputs other than quoted prices (Level 2) and unobservable inputs having the lowest priority (Level 3). The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. OneBeacon has not yet determined the effect of adoption on its financial condition, results of operations or cash flows.

 

7



 

Fair Value Option

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The Statement allows companies to make an election, on an individual instrument basis, to report financial assets and liabilities at fair value. The election must be made at the inception of a transaction and may not be reversed. The election may also be made for existing financial assets and liabilities at the time of adoption. Unrealized gains and losses on assets or liabilities for which the fair value option has been elected are to be reported in earnings. The Statement requires additional disclosures for instruments for which the election has been made, including a description of management’s reasons for making the election. The Statement is effective as of fiscal years beginning after November 15, 2007 and is to be adopted prospectively and concurrent with the adoption of SFAS 157. OneBeacon has not yet determined the effect of adoption on its financial condition, results of operations or cash flows.

 

NOTE 2. Discontinued Operations

 

In 2006 OneBeacon sold certain consolidated subsidiaries at GAAP book value to White Mountains. These subsidiaries are included in discontinued operations and comprise the following entities:

 

       White Mountains Advisors LLC—an investment management subsidiary;

 

       White Mountains Management Company, Inc. and White Mountains Capital, Inc.—both service companies;

 

       White Mountains Services Holdings and White Mountains Services, LLC—these companies contain the remainder of mortgage banking run-off assets from the sale of substantially all the mortgage banking assets of White Mountains Services Corporation (formerly Source One Mortgage Services Corporation) to Citibank Mortgage, Inc. in 1999;

 

       Tuckerman Capital, L.P. and Tuckerman Capital II, L.P.—both private equity fund investments;

 

       International American Group—primarily consists of American Centennial Insurance Company and British Insurance Company of Cayman, two run-off insurance companies.

 

OneBeacon’s income from continuing operations excludes the results of operations for the above entities for all periods presented. Income from discontinued operations has been presented separately and is shown net of related income taxes.

 

NOTE 3. Acquisitions and Dispositions

 

During the third quarter of 2007, we sold one of our inactive licensed subsidiaries, American Employers’ Insurance Company (“AEIC”) to Sparta Insurance Company (“Sparta”) for $47.7 million in cash and recorded a pre-tax gain of $11.3 million through net other revenues, which included a deposit of $0.5 million received in the first quarter of 2007.

 

During the third quarter of 2006, we sold one of our inactive licensed subsidiaries, Homeland Central Insurance Company (“HCIC”), to a subsidiary of White Mountains. In connection with the sale of HCIC, OneBeacon recorded a $6.0 million gain as additional paid in capital.

 

On September 29, 2006, OneBeacon sold certain assets and the right to renew existing policies of Agri, a division of OneBeacon that provided commercial farm and ranch and commercial agricultural insurance products, for $32.0 million in cash to QBE Insurance Group, Ltd. (“QBE”) and recorded a pre-tax gain of $30.4 million through net other revenues. In connection with this sale, OneBeacon entered into agreements under which, at the option of QBE, it will write the policies of Agri on a direct basis and cede 100% of this business to QBE.

 

On October 31, 2006, OneBeacon restructured its investment in Main Street America Holdings, Inc. (“MSA”). OneBeacon received a $70 million cash dividend from MSA following which OneBeacon sold its 50% common stock investment in MSA to Main Street America Group, Inc. (“the MSA Group”) for (i) $70.0 million in 9.0% non-voting cumulative perpetual preferred stock of the MSA Group and (ii) 4.9% of the common stock of the MSA Group. Effective October 31, 2006, OneBeacon accounts for its remaining investment in the MSA Group in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Refer to the Company’s 2006 Annual Report on Form 10-K. Prior to the sale, OneBeacon owned 50% of the total common shares outstanding of MSA and accounted for this investment using the equity method of accounting. These transactions resulted in a net after-tax realized gain of $8.5 million.

 

8



 

NOTE 4. Reserves for Unpaid Loss and LAE

 

The following table summarizes the loss and LAE reserve activities of OneBeacon’s insurance subsidiaries for the three and nine months ended September 30, 2007 and 2006:

 

 

 

Three months ended 
September30,

 

Nine Months Ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Gross beginning balance

 

$

4,696.6

 

$

5,041.8

 

$

4,837.7

 

$

5,354.3

 

Less beginning reinsurance recoverable on unpaid losses

 

(2,765.5

)

(2,967.5

)

(2,842.6

)

(3,120.9

)

Net loss and LAE reserves

 

1,931.1

 

2,074.3

 

1,995.1

 

2,233.4

 

Loss and LAE incurred relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

272.3

 

316.7

 

868.3

 

980.7

 

Prior year losses

 

(16.5

)

1.8

 

(41.2

)

13.9

 

Total incurred loss and LAE

 

255.8

 

318.5

 

827.1

 

994.6

 

Accretion of fair value adjustment to net loss and LAE reserves

 

4.0

 

5.8

 

12.0

 

17.3

 

Loss and LAE paid relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

(172.6

)

(181.3

)

(373.2

)

(470.2

)

Prior year losses

 

(123.1

)

(202.2

)

(565.8

)

(760.0

)

Total loss and LAE payments

 

(295.7

)

(383.5

)

(939.0

)

(1,230.2

)

Net ending balance

 

1,895.2

 

2,015.1

 

1,895.2

 

2,015.1

 

Plus ending reinsurance recoverable on unpaid losses

 

2,699.6

 

2,926.8

 

2,699.6

 

2,926.8

 

Gross ending balance

 

$

4,594.8

 

$

4,941.9

 

$

4,594.8

 

$

4,941.9

 

 

During the three months ended September 30, 2007, OneBeacon experienced $16.5 million of favorable development on prior accident year loss reserves due to lower than expected severity on non-catastrophe losses.  The favorable development was primarily related to automobile liability in traditional personal lines and at AutoOne, general liability in commercial lines and professional liability and tuition reimbursement in specialty lines.  During the three months ended September 30, 2006, OneBeacon experienced $1.8 million of adverse development on prior accident year loss reserves primarily related to 2004 catastrophe losses in commercial lines, partially offset by favorable development in other lines.

 

 During the nine months ended September 30, 2007, OneBeacon experienced $41.2 million of favorable development on prior accident year loss reserves due to lower than expected severity on non-catastrophe losses.  The favorable development was primarily related to professional liability and tuition reimbursement in specialty lines, property and general liability in commercial lines and automobile liability in traditional personal lines and at AutoOne. During the nine months ended September 30, 2006, OneBeacon experienced $13.9 million of adverse development on prior accident year loss reserves primarily related to hurricane Katrina in commercial lines, partially offset by favorable development in specialty lines.

 

In connection with purchase accounting for the OneBeacon Acquisition, loss and LAE reserves and the related reinsurance recoverables were adjusted to fair value on the balance sheets. The net reduction to loss and LAE reserves is being recognized through an income statement charge ratably with and over the period the claims are settled. Accordingly, OneBeacon recognized $4.0 million and $12.0 million of such charges for the three and nine months ended September 30, 2007, respectively, $5.8 million and $17.3 million of such charges for the three and nine months ended September 30, 2006, respectively.

 

NOTE 5. Reinsurance

 

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

 

Effective, July 1, 2007, OneBeacon renewed its property catastrophe reinsurance program through June 30, 2008.  The program provides coverage for OneBeacon property business including automobile physical damage, as well as terrorism coverage for non-TRIA events (excluding nuclear, biological, chemical and radiological).  Under the program, the first $150 million of losses resulting from a single catastrophe are retained by OneBeacon and $650 million of the next $700 million of losses resulting from the catastrophe are reinsured.  Any loss above $850 million would be retained by OneBeacon. In the event of a catastrophe, OneBeacon’s property catastrophe reinsurance program is reinstated for the remainder of the original

 

9



 

contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

 

At September 30, 2007, OneBeacon had $20.6 million of reinsurance recoverables on paid losses and $2,924.7 million (gross of $225.1 million in purchase accounting adjustments, as described in Note 4) that will become recoverable if claims are paid in accordance with current reserve estimates. The collectibility 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. As a result, uncollectible amounts have historically not been significant. The following table provides a listing of OneBeacon’s top reinsurers based upon recoverable amounts, the percentage of total reinsurance recoverables and the reinsurers’ A.M. Best ratings.

 

($ in millions)

 

Balance at
September 30, 2007

 

% of total

 

A.M. Best 
Rating(1)

 

National Indemnity Company and General Reinsurance Corporation (2)

 

$

2,107.3

 

78

%

A

++

Tokio Marine and Nichido Fire

 

59.0

 

2

%

A

++

Munich Reinsurance America (formerly America Reinsurance Company)

 

49.8

 

2

%

A

 

Liberty Mutual and subsidiaries (3)

 

32.0

 

1

%

A

 

Swiss Re

 

21.2

 

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) and “A” (Excellent, which is the third highest of fifteen ratings).

 

(2)    Includes $404.0 million of Third Party Recoverables, which NICO would pay under the terms of the NICO Cover if they are unable to collect from third party reinsurers. OneBeacon also has an additional $339.7 million of Third Party Recoverables from various reinsurers, the majority of which are rated “A” or better by A.M. Best.

 

(3)    At September 30, 2007, OneBeacon had assumed balances payable and expenses payable of approximately $24.0 million under its renewal rights agreement with Liberty Mutual, which expired on October 31, 2003.

 

In connection with the OneBeacon Acquisition, Aviva caused OneBeacon to purchase two reinsurance contracts: a reinsurance contract with 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 development cover from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse development on losses occurring in years 2000 and prior (the “GRC Cover”) in addition to $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 as a seller guarantee under GAAP in accordance with Emerging Issues Task Force Technical Matter Document No. D-54 (“EITF Topic D-54”).  NICO and GRC are wholly-owned subsidiaries of Berkshire Hathaway, Inc.

 

Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OneBeacon’s third party reinsurers (“Third Party Reinsurers”) in existence at the time the NICO Cover was executed (“Third Party Recoverables”). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OneBeacon. OneBeacon estimates that on an incurred basis, net of Third Party Recoverables, as of September 30, 2007 it has used approximately $2.1 billion of the coverage provided by NICO. Approximately $953 million of these incurred losses have been paid by NICO through September 30, 2007. Since entering into the NICO Cover, $39.8 million of the $2.1 billion of utilized coverage from NICO related to uncollectible Third Party Recoverables. To the extent that actual experience differs from OneBeacon’s 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 small.

 

10



 

NOTE 6. Investment Securities

 

OneBeacon’s invested assets are comprised of securities and other investments held for general investment purposes and assets held in two irrevocable grantor trust accounts. Refer to the Company’s 2006 Annual Report on Form 10-K for a complete discussion regarding the trust accounts. OneBeacon’s fixed maturity investments and common equity securities, excluding convertible bonds, held for general investment purposes, are classified as available for sale and are reported at fair value as of the balance sheet date as determined by quoted market prices. Net unrealized investment gains and losses on available for sale securities are reported net, after-tax, as a separate component of shareholders’ equity. Changes in net unrealized investment gains and losses, after-tax, are reported as a component of other comprehensive income.

 

OneBeacon has elected the fair value option for its investment in convertible bonds. Convertible bonds are carried at fair value as fixed maturity investments with changes therein recorded in income as realized investment gains. 

 

Asset-backed securities are included in fixed maturity investments and consist primarily of pooled collateralized mortgage obligations. Fair values for asset-backed securities are based on quoted market prices from a third party pricing service. Income on asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.

 

The fixed maturity investments held in the trust accounts are classified as held to maturity as OneBeacon has the ability and intent to hold the investments until maturity. Securities classified as held to maturity are recorded at amortized cost.

 

Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, the financial health of and specific prospects for the issuer and the ability and intent to hold the investment to recovery. Investment losses that are other than temporary are recognized in earnings. Realized gains and losses resulting from sales of investment securities are accounted for using the weighted average method. Premiums and discounts on all fixed maturity investments are accreted to income over the anticipated life of the investment.

 

Short-term investments consist of money market funds, certificates of deposit and other securities which mature or become available for use within one year. Certain of the investments purchased to fund the trusts mature within one year and are therefore reflected as short-term investments. Short-term investments are carried at amortized cost, which approximated fair value as of September 30, 2007 and December 31, 2006.

 

Other investments include limited partnerships, hedge funds and private equity interests. Changes in OneBeacon’s interest in other investments accounted for using the equity method are included in realized investment gains or losses.  Changes in OneBeacon’s interest in other investments not accounted for under the equity method are reported, net of tax, as a component of common shareholders’ equity with changes therein reported, after-tax, as a component of other comprehensive income.

 

OneBeacon’s net investment income is comprised primarily of interest income associated with OneBeacon’s fixed maturity investments, dividend income from its equity investments and interest income from its short-term investments. Net investment income for the three and nine months ended September 30, 2007 and 2006 consisted of the following:

 

 

 

Three months ended
September 30,

 

Nine months ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

($ in millions)

 

Investment income:

 

 

 

 

 

 

 

 

 

Fixed maturity investments

 

$

46.6

 

$

43.0

 

$

144.2

 

$

128.4

 

Short-term investments

 

4.8

 

3.0

 

12.9

 

8.0

 

Common equity securities

 

3.5

 

5.0

 

10.3

 

17.5

 

Other investments

 

0.8

 

3.4

 

2.0

 

6.8

 

Total investment income

 

55.7

 

54.4

 

169.4

 

160.7

 

Less investment expenses

 

(4.2

)

(5.2

)

(12.7

)

(12.3

)

Net investment income, pre-tax

 

$

51.5

 

$

49.2

 

$

156.7

 

$

148.4

 

 

11



 

The composition of net realized investment gains consisted of the following:

 

 

 

Three months ended 
September 30,

 

Nine months ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

12.0

 

$

23.1

 

$

25.2

 

$

39.9

 

Common equity securities

 

7.5

 

19.7

 

86.4

 

58.4

 

Other investments

 

11.2

 

(7.4

)

31.1

 

6.7

 

Net realized investment gains, pre-tax

 

$

30.7

 

$

35.4

 

$

142.7

 

$

105.0

 

 

The components of OneBeacon’s ending net unrealized investment gains and losses on its investment portfolio were as follows:

 

 

 

Nine months ended
September 30,

 

Year ended
December 31,

 

 

 

2007

 

2006

 

 

 

($ in millions)

 

Investment securities:(1)

 

 

 

 

 

Gross unrealized investment gains

 

$

256.2

 

$

255.3

 

Gross unrealized investment losses

 

(23.6

)

(18.8

)

Net unrealized gains from investment securities

 

232.6

 

236.5

 

Income taxes attributable to such gains

 

(81.0

)

(82.1

)

Total net unrealized investment gains, after-tax

 

$

151.6

 

$

154.4

 

 


(1)    Does not include deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $16.7 million and $18.7 million, after-tax, as of September 30, 2007 and December 31, 2006, respectively.

 

In connection with the initial public offering, two irrevocable grantor trusts were established to economically defease the Company’s mandatorily redeemable preferred stock.  The assets of each trust are solely dedicated to payments of dividends and redemption amounts on the mandatorily redeemable preferred stock.  The assets held in the trusts include fixed maturity and short-term investments which are classified and accounted for as held-to-maturity.  During the second quarter of 2007, trust assets were utilized to redeem the $20.0 million Zenith Insurance Company (“Zenith”) Preferred Stock (“Zenith Preferred Stock”). Refer to the Company’s 2006 Annual Report on Form 10-K for a complete discussion of the economic defeasance of the Company’s mandatorily redeemable preferred stock. The carrying value, gross unrealized investment gains and losses, and estimated market values of OneBeacon’s fixed maturity held-to-maturity investments, carried at amortized cost, as of September 30, 2007 and December 31, 2006 were as follows:

 

 

 

September 30, 2007

 

 

 

Carrying
value

 

Gross 
unrealized
gains

 

Gross 
unrealized
losses

 

Net foreign
currency
gains

 

Estimated
market
value

 

 

 

($ in millions)

 

U.S. Government obligations

 

$

308.6

 

$

0.9

 

$

 

$

 

$

309.5

 

Total fixed maturity investments

 

$

308.6

 

$

0.9

 

$

 

$

 

$

309.5

 

 

 

 

December 31, 2006

 

 

 

Carrying
value

 

Gross 
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Estimated
market
value

 

 

 

($ in millions)

 

U.S. Government obligations

 

$

305.0

 

$

 

$

(1.0

)

$

 

$

304.0

 

Total fixed maturity investments

 

$

305.0

 

$

 

$

(1.0

)

$

 

$

304.0

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of OneBeacon’s fixed maturity available-for-sale investments as of September 30, 2007 and December 31, 2006, were as follows:

 

12



 

 

 

September 30, 2007

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

U.S. Government obligations

 

$

462.9

 

$

5.7

 

$

(0.8

)

$

 

$

467.8

 

Debt securities issued by industrial corporations

 

1,480.4

 

5.1

 

(8.7

)

11.0

 

1,487.8

 

Municipal obligations

 

8.1

 

0.4

 

 

 

8.5

 

Asset-backed securities

 

1,199.8

 

12.1

 

(2.3

)

 

1,209.6

 

Foreign government obligations

 

143.2

 

0.6

 

(0.2

)

 

143.6

 

Preferred stocks

 

99.1

 

8.7

 

(0.5

)

8.7

 

116.0

 

Total fixed maturity investments

 

$

3,393.5

 

$

32.6

 

$

(12.5

)

$

19.7

 

$

3,433.3

 

 

 

 

December 31, 2006

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

U.S. Government obligations

 

$

806.7

 

$

1.8

 

$

(4.2

)

$

 

$

804.3

 

Debt securities issued by industrial corporations

 

1,429.6

 

8.2

 

(8.4

)

10.7

 

1,440.1

 

Municipal obligations

 

8.2

 

0.4

 

 

 

8.6

 

Asset-backed securities

 

1,091.4

 

9.4

 

(3.7

)

 

1,097.1

 

Foreign government obligations

 

54.7

 

 

(0.6

)

 

54.1

 

Preferred stocks

 

110.9

 

17.1

 

(0.4

)

7.9

 

135.5

 

Total fixed maturity investments

 

$

3,501.5

 

$

36.9

 

$

(17.3

)

$

18.6

 

$

3,539.7

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of OneBeacon’s common equity securities and other investments as of September 30, 2007 and December 31, 2006, were as follows:

 

 

 

September 30, 2007

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

638.8

 

$

165.1

 

$

(10.2

)

$

2.5

 

$

796.2

 

Other investments

 

$

265.1

 

$

58.5

 

$

(0.9

)

$

 

$

322.7

 

 

 

 

December 31, 2006

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
losses

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

568.9

 

$

169.2

 

$

(0.9

)

$

(0.1

)

$

737.1

 

Other investments

 

$

229.5

 

$

49.2

 

$

(0.6

)

$

 

$

278.1

 

 

Impairment

 

Temporary losses on investment securities are recorded as unrealized losses. Temporary losses do not impact net income and earnings per share but serve to reduce comprehensive net income and common shareholders’ equity. Unrealized losses subsequently identified as other-than-temporary impairments are recorded as realized losses. Other-than-temporary impairments previously recorded as unrealized losses do not impact comprehensive net income and common shareholders’ equity and book value but serve to reduce net income and earnings per share.

 

OneBeacon’s methodology of assessing other-than-temporary impairments is based on security-specific facts and circumstances as of the balance sheet date. As a result, subsequent adverse changes in an issuers’ credit quality or subsequent weakening of market conditions that differ from expectations could result in additional other-than-temporary impairments. In addition, the sale of a fixed maturity security with a previously recorded unrealized loss would result in a realized loss. Either of these situations would adversely impact net income and earnings per share but would not impact comprehensive net income and common shareholders’ equity or book value.

 

The following table presents an analysis of the continuous periods during which OneBeacon has held investment positions which were carried at an unrealized loss as of September 30, 2007 (excluding short-term investments):

 

13



 

 

 

0-6
Months

 

6-12
Months

 

> 12
Months

 

Total

 

 

 

(in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

Number of positions

 

55

 

11

 

89

 

155

 

Market value

 

$

491.8

 

$

104.8

 

$

443.1

 

$

1,039.7

 

Amortized cost

 

$

497.5

 

$

106.2

 

$

448.5

 

$

1,052.2

 

Unrealized loss

 

$

(5.7

)

$

(1.4

)

$

(5.4

)

$

(12.5

)

Common equity securities:

 

 

 

 

 

 

 

 

 

Number of positions

 

17

 

3

 

 

20

 

Market value

 

$

113.1

 

$

9.3

 

$

 

$

122.4

 

Amortized cost

 

$

122.7

 

$

9.9

 

$

 

$

132.6

 

Unrealized loss

 

$

(9.6

)

$

(0.6

)

$

 

$

(10.2

)

Other investments:

 

 

 

 

 

 

 

 

 

Number of positions

 

2

 

1

 

2

 

5

 

Market value

 

$

8.6

 

$

2.0

 

$

14.5

 

$

25.1

 

Amortized cost

 

$

9.3

 

$

2.1

 

$

14.6

 

$

26.0

 

Unrealized loss

 

$

(0.7

)

$

(0.1

)

$

(0.1

)

$

(0.9

)

Total:

 

 

 

 

 

 

 

 

 

Number of positions

 

74

 

15

 

91

 

180

 

Market value

 

$

613.5

 

$

116.1

 

$

457.6

 

$

1,187.2

 

Amortized cost

 

$

629.5

 

$

118.2

 

$

463.1

 

$

1,210.8

 

Unrealized loss

 

$

(16.0

)

$

(2.1

)

$

(5.5

)

$

(23.6

)

% of total gross unrealized losses

 

68

%

9

%

23

%

100

%

 

During the three and nine months ended September 30, 2007, OneBeacon recognized $3.4 million and $5.5 million, respectively, of pre-tax other-than-temporary impairment charges. OneBeacon believes that the gross unrealized losses relating to its fixed maturity investments at September 30, 2007 resulted primarily from increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental changes in the credit quality of the issuers of such securities. OneBeacon views these decreases in value as being temporary because it has the intent and ability to retain such investments until recovery. However, should OneBeacon determine that it no longer has the intent and ability to hold a fixed maturity investment that has an existing unrealized loss resulting from an increase in market interest rates until it recovers, this loss would be realized through the income statement at the time such determination is made. OneBeacon also believes that the gross unrealized losses recorded on its common equity securities and its other investments at September 30, 2007 resulted primarily from decreases in quoted market values from the dates that certain investments securities within that portfolio were acquired as opposed to fundamental changes in the issuer’s financial performance and near term financial prospects. Therefore, these decreases are also viewed as being temporary. However, due to the inherent risk involved in investing in the equity markets, it is possible that the decrease in market value of these investments may ultimately prove to be other than temporary. At September 30, 2007, OneBeacon’s investment portfolio did not include any individual investment securities with an after-tax unrealized loss of more than $3.0 million for more than a six-month period.

 

NOTE 7. Segment Information

 

OneBeacon’s segments consist of the following: (1) Primary Insurance Operations, (2) Affiliate Quota Shares and (3) Other Operations. OneBeacon has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each of the Company’s subsidiaries and affiliates; (ii) the manner in which the Company’s subsidiaries and affiliates are organized and (iii) the existence of primary managers responsible for specific subsidiaries and affiliates. Significant intercompany transactions among OneBeacon’s segments have been eliminated herein. Financial information for OneBeacon’s segments follows:

 

14



 

 

 

Primary
Insurance
Operations

 

Affiliate
Quota
Shares
(1)

 

Other
Operations

 

Total

 

 

 

($ in millions)

 

Three months ended September 30, 2007

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

473.6

 

$

 

$

 

$

473.6

 

Net investment income

 

45.2

 

 

6.3

 

51.5

 

Net realized investment gains (losses)

 

31.2

 

 

(0.5

)

30.7

 

Net other revenues

 

11.2

 

 

(0.4

)

10.8

 

Total revenues

 

561.2

 

 

5.4

 

566.6

 

Loss and LAE

 

255.8

 

 

 

255.8

 

Policy acquisition expenses

 

74.9

 

 

 

74.9

 

Other underwriting expenses

 

66.4

 

 

 

66.4

 

General and administrative expenses

 

1.1

 

 

1.3

 

2.4

 

Accretion of fair value adjustment to loss and LAE reserves

 

 

 

4.0

 

4.0

 

Interest expense on debt

 

0.8

 

 

10.6

 

11.4

 

Interest expense-on preferred stock subject to mandatory redemption

 

 

 

16.3

 

16.3

 

Total expenses

 

399.0

 

 

32.2

 

431.2

 

Pre-tax income (loss)

 

$

162.2

 

$

 

$

(26.8

)

$

135.4

 

Three months ended September 30, 2006

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

492.7

 

$

58.6

 

$

 

$

551.3

 

Net investment income

 

48.3

 

 

0.9

 

49.2

 

Net realized investment gains (losses)

 

35.6

 

 

(0.2

)

35.4

 

Net other revenues

 

30.6

 

 

6.0

 

36.6

 

Total revenues

 

607.2

 

58.6

 

6.7

 

672.5

 

Loss and LAE

 

291.9

 

26.6

 

 

318.5

 

Policy acquisition expenses

 

89.0

 

35.5

 

 

124.5

 

Other underwriting expenses

 

84.0

 

 

 

84.0

 

General and administrative expenses

 

0.6

 

 

4.5

 

5.1

 

Accretion of fair value adjustment to loss and LAE reserves

 

 

 

5.8

 

5.8

 

Interest expense on debt

 

1.4

 

 

10.6

 

12.0

 

Interest expense-on preferred stock subject to mandatory redemption

 

 

 

14.8

 

14.8

 

Total expenses

 

466.9

 

62.1

 

35.7

 

564.7

 

Pre-tax income (loss)

 

$

140.3

 

$

(3.5

)

$

(29.0

)

$

107.8

 

 


(1)             The affiliate quota share agreements were commuted during the fourth quarter of 2006.

 

15



 

 

 

Primary
Insurance
Operations

 

Affiliate
Quota
Shares
(1)

 

Other
Operations

 

Total

 

 

 

($ in millions)

 

Nine months ended September 30, 2007

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

1,407.5

 

$

 

$

 

$

1,407.5

 

Net investment income

 

139.6

 

 

17.1

 

156.7

 

Net realized investment gains (losses)

 

143.0

 

 

(0.3

142.7

 

Net other revenues

 

17.8

 

 

(1.5

)

16.3

 

Total revenues

 

1,707.9

 

 

15.3

 

1,723.2

 

Loss and LAE

 

827.1

 

 

 

827.1

 

Policy acquisition expenses

 

231.5

 

 

 

231.5

 

Other underwriting expenses

 

246.9

 

 

 

246.9

 

General and administrative expenses

 

2.3

 

 

5.2

 

7.5

 

Accretion of fair value adjustment to loss and LAE reserves

 

 

 

12.0

 

12.0

 

Interest expense on debt

 

2.5

 

 

31.6

 

34.1

 

Interest expense-on preferred stock subject to mandatory redemption

 

 

 

48.4

 

48.4

 

Total expenses

 

1,310.3

 

 

97.2

 

1,407.5

 

Pre-tax income (loss)

 

$

397.6

 

 

$

(81.9

)

$

315.7

 

Nine months ended September 30, 2006

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

1,458.1

 

$

131.9

 

$

 

$

1,590.0

 

Net investment income

 

142.2

 

 

6.2

 

148.4

 

Net realized investment gains (losses)

 

105.5

 

 

(0.5

)

105.0

 

Net other revenues

 

35.2

 

 

13.2

 

48.4

 

Total revenues

 

1,741.0

 

131.9

 

18.9

 

1,891.8

 

Loss and LAE

 

891.3

 

103.3

 

 

994.6

 

Policy acquisition expenses

 

249.8

 

47.6

 

 

297.4

 

Other underwriting expenses

 

253.9

 

 

 

253.9

 

General and administrative expenses

 

2.2

 

 

9.4

 

11.6

 

Accretion of fair value adjustment to loss and LAE reserves

 

 

 

17.3

 

17.3

 

Interest expense on debt

 

2.8

 

 

32.0

 

34.8

 

Interest expense-on preferred stock subject to mandatory redemption

 

 

 

43.2

 

43.2

 

Total expenses

 

1,400.0

 

150.9

 

101.9

 

1,652.8

 

Pre-tax income (loss)

 

$

341.0

 

$

(19.0

)

$

(83.0

)

$

239.0

 

September 30, 2007

 

 

 

 

 

 

 

 

 

Total investments

 

$

4,805.6

 

$

 

$

479.8

 

$

5,285.4

 

Reinsurance recoverable on paid and unpaid losses

 

2,945.3

 

 

(225.1

)

2,720.2

 

Total assets

 

9,575.2

 

 

228.6

 

9,803.8

 

Loss and LAE reserves

 

4,841.3

 

 

(246.5

)

4,594.8

 

Total liabilities

 

7,115.2

 

 

777.7

 

7,892.9

 

Total equity

 

2,460.0

 

 

(549.1

)

1,910.9

 

December 31, 2006

 

 

 

 

 

 

 

 

 

Total investments

 

$

4,806.9

 

$

 

$

405.8

 

$

5,212.7

 

Reinsurance recoverable on paid and unpaid losses

 

3,112.1

 

 

(237.1

)

2,875.0

 

Total assets

 

9,729.2

 

 

140.2

 

9,869.4

 

Loss and LAE reserves

 

5,108.2

 

 

(270.5

)

4,837.7

 

Total liabilities

 

7,382.3

 

 

709.9

 

8,092.2

 

Total equity

 

2,346.9

 

 

(569.7

)

1,777.2

 

 


(1)             The affiliate quota share agreements were commuted during the fourth quarter of 2006.

 

16



 

The following tables provide net written premiums and earned insurance premiums for OneBeacon’s Primary Insurance Operations by major underwriting unit and in total for the three and nine months ended September 30, 2007 and 2006:

 

 

 

Specialty

 

Commercial

 

Personal

 

Total(1)

 

 

 

($ in millions)

 

Three months ended September 30, 2007

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

136.6

 

$

192.8

 

$

182.5

 

$

511.9

 

Earned premiums

 

109.1

 

182.6

 

181.8

 

473.6

 

Three months ended September 30, 2006

 

 

 

 

 

 

 

 

 

Net written premiums