Table of Contents

 

 

 

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 March 31, 2010

 

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, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

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

 

Large accelerated filer o

 

Accelerated Filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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 April 27, 2010, 23,368,400 Class A common shares, par value of $0.01 per share, and 71,754,738 Class B common shares, par value of $0.01 per share, were outstanding.

 

 

 


 


Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

 

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets:
As of March 31, 2010 and December 31, 2009

 

2

 

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income:
Three months ended March 31, 2010 and 2009

 

3

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity:
Three months ended March 31, 2010 and 2009

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows:
Three months ended March 31, 2010 and 2009

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

 

 

 

 

Results of Operations — For the three months ended March 31, 2010 and 2009

 

30

 

 

 

 

 

 

 

Summary of Investment Results

 

35

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

41

 

 

 

 

 

 

 

Critical Accounting Estimates

 

44

 

 

 

 

 

 

 

Forward-Looking Statements

 

45

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

46

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

46

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

46

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

ITEM 6.

 

Exhibits

 

47

 

 

 

 

 

SIGNATURES

 

 

 

48

 



Table of Contents

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

 

 

(in millions, except
share and per share
amounts)

 

Assets

 

 

 

 

 

Investment Securities:

 

 

 

 

 

Fixed maturity investments, at fair value (amortized cost $2,249.1 and $2,900.6)

 

$

2,344.5

 

$

2,994.3

 

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

 

1,068.8

 

544.4

 

Common equity securities, at fair value (cost $227.1 and $176.3)

 

245.6

 

187.6

 

Convertible bonds, at fair value (amortized cost $152.3 and $153.7)

 

170.9

 

170.2

 

Other investments, at fair value (cost $130.8 and $122.8)

 

160.5

 

146.3

 

Total investments

 

3,990.3

 

4,042.8

 

Cash

 

45.4

 

44.8

 

Reinsurance recoverable on unpaid losses

 

680.1

 

664.1

 

Reinsurance recoverable on unpaid losses—Berkshire Hathaway, Inc.

 

1,520.7

 

1,528.8

 

Reinsurance recoverable on paid losses

 

19.8

 

15.9

 

Premiums receivable

 

459.2

 

469.1

 

Deferred acquisition costs

 

188.5

 

215.0

 

Net deferred tax asset

 

147.6

 

161.1

 

Investment income accrued

 

21.2

 

29.4

 

Ceded unearned premiums

 

112.5

 

49.9

 

Accounts receivable on unsettled investment sales

 

42.7

 

24.2

 

Other assets

 

313.5

 

286.9

 

Total assets

 

$

7,541.5

 

$

7,532.0

 

Liabilities

 

 

 

 

 

Loss and LAE reserves

 

$

3,991.3

 

$

3,934.8

 

Unearned premiums

 

999.4

 

1,018.3

 

Debt

 

594.0

 

620.5

 

Securities lending payable

 

1.7

 

1.7

 

Ceded reinsurance payable

 

89.3

 

24.7

 

Accounts payable on unsettled investment purchases

 

11.5

 

7.6

 

Other liabilities

 

425.7

 

476.3

 

Total liabilities

 

6,112.9

 

6,083.9

 

Shareholders’ equity and noncontrolling interests

 

 

 

 

 

OneBeacon’s shareholders’ equity:

 

 

 

 

 

Common shares and paid-in surplus (par value $0.01; authorized, 200,000,000 shares; issued and outstanding, 95,123,138 and 95,121,050 shares)

 

1,010.1

 

1,009.7

 

Retained earnings

 

405.5

 

425.5

 

Accumulated other comprehensive loss, after tax:

 

 

 

 

 

Net unrealized foreign currency translation losses

 

(0.7

)

(0.7

)

Other comprehensive income and loss items

 

(5.3

)

(5.5

)

Total OneBeacon’s shareholders’ equity

 

1,409.6

 

1,429.0

 

Total noncontrolling interests

 

19.0

 

19.1

 

Total OneBeacon’s shareholders’ equity and noncontrolling interests

 

1,428.6

 

1,448.1

 

Total liabilities, OneBeacon’s shareholders’ equity and noncontrolling interests

 

$

7,541.5

 

$

7,532.0

 

 

See Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions, except per
share amounts)

 

Revenues

 

 

 

 

 

Earned premiums

 

$

453.2

 

$

487.8

 

Net investment income

 

28.3

 

21.9

 

Net realized and unrealized investment gains (losses)

 

42.4

 

(5.9

)

Net other revenues

 

6.5

 

9.4

 

Total revenues

 

530.4

 

513.2

 

Expenses

 

 

 

 

 

Loss and LAE

 

333.7

 

288.0

 

Policy acquisition expenses

 

101.4

 

95.9

 

Other underwriting expenses

 

74.2

 

72.7

 

General and administrative expenses

 

7.7

 

5.5

 

Accretion of fair value adjustment to loss and LAE reserves

 

 

1.4

 

Interest expense on debt

 

9.1

 

10.9

 

Total expenses

 

526.1

 

474.4

 

Pre-tax income

 

4.3

 

38.8

 

Income tax expense

 

(4.0

)

(5.5

)

Net income including noncontrolling interests

 

0.3

 

33.3

 

Less: Net income attributable to noncontrolling interests

 

(0.3

)

(0.5

)

Net income attributable to OneBeacon’s shareholders

 

 

32.8

 

Change in other comprehensive income and loss items

 

0.2

 

1.1

 

Comprehensive net income attributable to OneBeacon’s shareholders

 

$

0.2

 

$

33.9

 

 

 

 

 

 

 

Earnings per share attributable to OneBeacon’s shareholders – basic and diluted

 

 

 

 

 

Net income attributable to OneBeacon’s shareholders

 

$

0.0

 

$

0.34

 

 

 

 

 

 

 

Dividends declared and paid per share

 

$

0.21

 

$

0.21

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

OneBeacon’s Shareholders’ Equity

 

 

 

 

 

Common
shareholders’
equity

 

Common
shares and
paid-in
surplus

 

Retained
earnings

 

Accum. other
comprehensive
(loss) income,
after tax

 

Noncontrolling
interests,
after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2010

 

$

1,429.0

 

$

1,009.7

 

$

425.5

 

$

(6.2

)

$

19.1

 

Net income

 

 

 

 

 

0.3

 

Accrued option expense

 

0.4

 

0.4

 

 

 

 

Repurchases and retirements of common shares

 

 

 

 

 

0.3

 

Dividends

 

(20.0

)

 

(20.0

)

 

(0.7

)

Other comprehensive income, after tax

 

0.2

 

 

 

0.2

 

 

Balances at March 31, 2010

 

$

1,409.6

 

$

1,010.1

 

$

405.5

 

$

(6.0

)

$

19.0

 

 

 

 

OneBeacon’s Shareholders’ Equity

 

 

 

 

 

Common
shareholders’
equity

 

Common
shares and
paid-in
surplus

 

Retained
earnings

 

Accum. other
comprehensive
(loss) income,
after tax

 

Noncontrolling
interests,
after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2009

 

$

1,155.1

 

$

1,016.7

 

$

163.4

 

$

(25.0

)

$

17.2

 

Net income

 

32.8

 

 

32.8

 

 

0.5

 

Accrued option expense

 

0.3

 

0.3

 

 

 

 

Repurchases and retirements of common shares

 

 

 

 

 

0.3

 

Dividends

 

(20.0

)

 

(20.0

)

 

(0.6

)

Contributions

 

 

 

 

 

2.0

 

Other comprehensive income, after tax

 

1.1

 

 

 

1.1

 

 

Balances at March 31, 2009

 

$

1,169.3

 

$

1,017.0

 

$

176.2

 

$

(23.9

)

$

19.4

 

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Cash flows from operations:

 

 

 

 

 

Net income including noncontrolling interests

 

$

0.3

 

$

33.3

 

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

 

 

 

 

 

Net realized and unrealized investment (gains) losses

 

(42.4

)

5.9

 

Net other realized losses

 

0.5

 

 

Deferred income tax expense

 

13.5

 

57.9

 

Other operating items:

 

 

 

 

 

Net change in loss and LAE reserves

 

56.5

 

(82.8

)

Net change in unearned premiums

 

(18.9

)

(16.2

)

Net change in ceded reinsurance payable

 

64.6

 

(7.0

)

Net change in ceded unearned premiums

 

(62.6

)

(2.2

)

Net change in premiums receivable

 

9.9

 

7.5

 

Net change in reinsurance recoverable on paid and unpaid losses

 

(11.8

)

64.3

 

Net change in other assets and liabilities

 

(38.8

)

(118.5

)

Net cash used for operations

 

(29.2

)

(57.8

)

Cash flows from investing activities:

 

 

 

 

 

Net maturities, purchases and sales of short-term investments

 

(524.4

)

162.2

 

Maturities of fixed maturity investments

 

683.0

 

76.5

 

Sales of fixed maturity investments

 

286.5

 

248.3

 

Sales of common equity securities

 

11.3

 

156.9

 

Sales of convertible bonds

 

29.5

 

83.5

 

Distributions and redemptions of other investments

 

2.1

 

7.2

 

Purchases of fixed maturity investments

 

(297.7

)

(611.7

)

Purchases of common equity securities

 

(61.8

)

(13.9

)

Purchases of convertible bonds

 

(23.7

)

(50.2

)

Contributions for other investments

 

(12.5

)

(3.5

)

Net change in unsettled investment purchases and sales

 

(14.6

)

31.7

 

Net acquisitions of property and equipment

 

(0.8

)

0.6

 

Net cash provided from investing activities

 

76.9

 

87.6

 

Cash flows from financing activities:

 

 

 

 

 

Repayment of debt

 

(14.0

)

(2.0

)

Repurchases of debt

 

(13.1

)

(8.1

)

Cash dividends paid to common shareholders

 

(20.0

)

(20.0

)

Net cash used for financing activities

 

(47.1

)

(30.1

)

Net increase (decrease) in cash during period

 

0.6

 

(0.3

)

Cash balance at beginning of period

 

44.8

 

53.0

 

Cash balance at end of period

 

$

45.4

 

$

52.7

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

0.4

 

$

0.8

 

Net tax payments to state and national governments

 

5.1

 

1.4

 

 

See Notes to Consolidated Financial Statements.

 

5


 


Table of Contents

 

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 Company is an exempted Bermuda limited liability company. The OneBeacon operating companies are U.S.-based property and casualty insurance writers, most of which operate in a multi-company pool. OneBeacon offers a wide range of insurance personal products and services sold through independent agencies, brokers and managing general agencies. OneBeacon has historically offered a range of specialty, commercial and personal products and services, however, OneBeacon has recently entered into two transactions that will transform it into a specialty lines company. On December 3, 2009, OneBeacon sold the renewal rights to approximately $490 million in premiums from its non-specialty commercial lines business to The Hanover Insurance Group (“The Hanover”). The transaction includes small commercial accounts and the non-specialty portion of the middle-market business, beginning with January 1, 2010 effective dates (the “Commercial Lines Transaction”). On February 2, 2010, OneBeacon entered into a definitive agreement to sell its personal lines business. See Note 2 for further discussion.

 

OneBeacon was acquired by White Mountains Insurance 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. As of March 31, 2010, White Mountains owned 75.4% of the Company’s common shares. 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 14 Wesley Street, 5th Floor, Hamilton HM 11, Bermuda. The Company’s principal executive office is located at 601 Carlson Parkway, Minnetonka, Minnesota 55305, its U.S. headquarters are located at 1 Beacon Lane, Canton, Massachusetts 02021 and its registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

 

OneBeacon’s reportable segments are Insurance Operations and Other Operations. OneBeacon’s Insurance Operations segment includes the results of its insurance operations. OneBeacon currently manages its Insurance Operations segment through a specialty lines underwriting unit and a personal lines underwriting unit, nearly all of which is subject to the personal lines transaction described in Note 2. The Insurance Operations segment also includes run-off business, which primarily consists of non-specialty commercial lines business which is being transferred to The Hanover, as described above, and other run-off business. OneBeacon’s Other Operations segment consists of the Company and its intermediate holding companies which include OneBeacon U.S. Enterprises Holdings, Inc. and OneBeacon U.S. Holdings, Inc. (“OBH”), both U.S.-domiciled companies, as well as various intermediate holding companies domiciled in the United States, Gibraltar, Luxembourg and Bermuda.

 

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 2009 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 2009 Annual Report on Form 10-K for a complete discussion regarding OneBeacon’s significant accounting policies. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.

 

Recently Adopted Changes in Accounting Principles

 

Transfers of Financial Assets and Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

 

On January 1, 2010, OneBeacon adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-16 and ASU 2009-17, codified within Accounting Standards Codification (“ASC”) 860 and ASC 810, respectively. Under ASC 860, the concept of a qualifying special-purpose entity (“QSPE”) has been eliminated and accordingly, any existing QSPE must be evaluated for consolidation upon adoption. The appropriateness of derecognition is evaluated based on whether or not the transferor has surrendered control of the transferred assets. The evaluation must consider any continuing involvement by the transferor. OneBeacon does not have any entities that were considered a QSPE under guidance prior to ASC 860. ASC 810 clarifies the application of consolidation accounting for entities for which the controlling financial interest might not be solely identified

 

6



Table of Contents

 

through voting rights. The guidance under ASC 810 still requires a reporting entity to perform an analysis to determine if its variable interests give it a controlling financial interest in a variable interest entity (“VIE”). The analysis required identifies the primary beneficiary of a VIE as the entity having both of the following:

 

·                  The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and

 

·                  The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

 

In addition, a reporting entity must assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining if it has the power to direct the activities of the VIE that most significantly affect the entity’s economic performance. The concept of a reconsideration event is retained and an ongoing reassessment of whether a reporting entity is the primary beneficiary of a VIE is required. Specifically, the list of reconsideration events includes a change in facts and circumstances where the holders of an equity investment at risk as a group lose the power from voting or similar rights to direct the activities of the entity that most significantly affect the entity’s economic performance. In addition, a troubled debt-restructuring is now defined as a reconsideration event. Both statements expand required disclosures and are effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The adoption of ASC 860 and ASC 810 had no material impact on OneBeacon’s financial position or results of operations.

 

Improving Disclosures about Fair Value Measurements

 

On January 1, 2010, OneBeacon adopted ASU 2010-06, codified within ASC 820. ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements for fair value measurements. ASU 2010-06 requires disclosure of the amounts and nature of the transfers in and out of Level 1 and Level 2 measurements. The ASU also requires a gross presentation of activity within the Level 3 rollforward, presenting separately information about purchases, sales, issuances and settlements. In addition, fair value measurements by Level will now be presented on a more disaggregated basis, by asset or liability class. The ASU also requires more detailed disclosures about inputs and valuation techniques for Level 2 and Level 3 measurements for interim and annual reporting periods. The ASU is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of ASU 2010-06 had no material impact on OneBeacon’s financial position or results of operations. See Note 5 for required disclosures.

 

NOTE 2. Acquisitions and Dispositions

 

On February 2, 2010, OneBeacon entered into a definitive agreement to sell its traditional personal lines business to Tower Group, Inc. (the “Personal Lines Transaction”). The Personal Lines Transaction includes two insurance companies containing the personal lines business, and two attorneys-in-fact managing the reciprocal insurance exchanges (“reciprocals”) that write the personal lines business in New York and New Jersey. Net written premiums for the affected books totaled approximately $420 million for the year ended December 31, 2009. As consideration, OneBeacon will receive an amount equal to the statutory surplus in the reciprocals, the GAAP equity in the insurance companies and attorneys-in-fact, plus $32.5 million. All specialty lines, including the collector cars and boats business, will remain with OneBeacon. The sale is subject to certain state regulatory approvals.

 

Except as described above with respect to entering into the Personal Lines Transaction, during the first quarter of 2010, there were no acquisitions or dispositions. During the first quarter of 2009, there were no acquisitions or dispositions.

 

7



Table of Contents

 

NOTE 3. Reserves for Unpaid Loss and LAE

 

The following table summarizes the loss and LAE reserve activities of OneBeacon’s insurance subsidiaries for the three months ended March 31, 2010 and 2009:

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Gross beginning balance

 

$

3,934.8

 

$

4,294.0

 

Less beginning reinsurance recoverable on unpaid losses

 

(2,192.9

)

(2,503.3

)

Net loss and LAE reserves

 

1,741.9

 

1,790.7

 

Loss and LAE incurred relating to:

 

 

 

 

 

Current year losses

 

339.7

 

302.8

 

Prior year losses

 

(6.0

)

(14.8

)

Total incurred loss and LAE

 

333.7

 

288.0

 

Accretion of fair value adjustment to net loss and LAE reserves

 

 

1.4

 

Loss and LAE paid relating to:

 

 

 

 

 

Current year losses

 

(73.0

)

(76.3

)

Prior year losses

 

(212.1

)

(233.5

)

Total loss and LAE payments

 

(285.1

)

(309.8

)

Net ending balance

 

1,790.5

 

1,770.3

 

Plus ending reinsurance recoverable on unpaid losses

 

2,200.8

 

2,440.9

 

Gross ending balance

 

$

3,991.3

 

$

4,211.2

 

 

During the three months ended March 31, 2010, OneBeacon experienced $6.0 million of favorable loss and LAE reserve development on prior accident year loss reserves. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines, commercial package business and other general liability lines. During the three months ended March 31, 2009, OneBeacon experienced $14.8 million of favorable loss and LAE reserve development on prior accident year loss reserves. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines and commercial package business lines, partially offset by adverse loss reserve development primarily related to New York personal injury protection litigation at AutoOne Insurance (“AutoOne”).

 

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 was accreted through an income statement charge ratably with and over the period the claims were settled. Accordingly, OneBeacon recognized $1.4 million of such charges for the three months ended March 31, 2009. As of March 31, 2010, the outstanding pre-tax unaccreted adjustment was $0.

 

NOTE 4. 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, 2009, OneBeacon renewed its property catastrophe reinsurance program through June 30, 2010. The program provides coverage for OneBeacon’s personal and commercial property business as well as certain acts of terrorism. Under the program, the first $100 million of losses resulting from any single catastrophe are retained and the next $750 million of losses resulting from the catastrophe are reinsured. Any loss above $850 million would be retained. 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 entered into a 30% quota share agreement with a group of reinsurers that ran from January 1, 2009 through December 31, 2009, and renewed the agreement effective January 1, 2010. During the three months ended March 31, 2010 and 2009, OneBeacon ceded $11.6 million and $13.6 million, respectively, of written premiums from its Northeast homeowners business written through OneBeacon Insurance Company (“OBIC”) and its subsidiary companies, along with Adirondack Insurance Exchange and New Jersey Skylands Insurance Association in New York and New Jersey, respectively.

 

8



Table of Contents

 

At March 31, 2010, OneBeacon had $19.8 million of reinsurance recoverables on paid losses and $2,387.8 million (gross of $187.0 million in purchase accounting adjustments, as described in Note 3) that will become recoverable if claims are paid in accordance with current reserve estimates. Reinsurance contracts do not relieve OneBeacon of its obligations. Therefore, collectibility of balances due from its reinsurers is critical to OneBeacon’s financial strength. OneBeacon is selective in regard to its reinsurers, principally placing reinsurance with those reinsurers with strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings 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 for its insurance operations, excluding industry pools and associations and affiliates of OneBeacon, based upon recoverable amounts, the percentage of total reinsurance recoverables and the reinsurers’ A.M. Best Company, Inc. (“A.M. Best”) ratings.

 

($ in millions)

 

Balance at
March 31, 2010

 

% of total

 

A.M. Best
Rating (1)

 

National Indemnity Company and General Reinsurance Corporation (2)

 

$

1,840.9

 

76

%

A

++

Tokio Marine and Nichido Fire (3)

 

45.5

 

2

%

A

++

Munich Reinsurance America

 

40.9

 

2

%

A

+

QBE Insurance Corporation

 

28.2

 

1

%

A

 

Swiss Re

 

18.6

 

1

%

A

 

 


(1)          A.M. Best ratings as detailed above are: “A++” (Superior, which is the highest of fifteen financial strength ratings), “A+” (Superior, which is the second highest of fifteen financial strength ratings) and “A” (Excellent, which is the third highest of fifteen financial strength ratings).

 

(2)          Includes $320.2 million 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. OneBeacon also has an additional $105.4 million of Third Party Recoverables from various reinsurers, the majority of which are rated “A” or better by A.M. Best.

 

(3)          Includes $38.8 million of reinsurance recoverables from various 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.

 

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 loss reserve development cover from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse loss reserve development 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 under GAAP as a seller guarantee. 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 it has used approximately $2.2 billion of the coverage provided by NICO at March 31, 2010. Since entering into the NICO Cover, approximately 4% of the $2.2 billion of utilized coverage relates to uncollectible Third Party Recoverables and settlements on Third Party Recoverables through March 31, 2010. Net losses paid totaled approximately $1.2 billion as of March 31, 2010. To the extent that actual experience differs from OneBeacon’s estimate of ultimate A&E losses and Third Party Recoverables, future losses could exceed the $320.2 million of protection remaining under the NICO Cover at March 31, 2010.

 

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 seek reimbursement from GRC only 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.

 

9



Table of Contents

 

NOTE 5. Investment Securities

 

OneBeacon’s invested assets are comprised of securities and other investments held for general investment purposes. Refer to the Company’s 2009 Annual Report on Form 10-K for a complete discussion.

 

In accordance with ASC 825, OneBeacon classifies its portfolio of fixed maturity investments and common equity securities, including convertible bonds, held for general investment purposes as trading securities. Trading securities are reported at fair value as of the balance sheet date as determined by quoted market prices when available. Realized and unrealized investment gains and losses on trading securities are reported pre-tax in revenues.

 

Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized cost, which approximated fair value as of March 31, 2010 and December 31, 2009.

 

Other investments include hedge funds and private equity funds. OneBeacon measures its investments in hedge funds and private equity funds at fair value with changes therein reported in revenues on a pre-tax basis.

 

OneBeacon participated in a securities lending program as a mechanism for generating additional investment income on its fixed maturity and common equity portfolios. Under the securities lending arrangements, certain of its fixed maturity and common equity investments were loaned to other institutions for short periods of time through a lending agent. OneBeacon maintained control over the securities it loaned, retained the earnings and cash flows associated with the loaned securities and received a fee from the borrower for the temporary use of the asset. Collateral, in the form of cash and United States government securities, was required at a rate of 102% of the fair value of the loaned securities. An indemnification agreement with the lending agent protected OneBeacon in the event a borrower became insolvent or failed to return any of the securities on loan. In the event of a shortfall in the collateral amount required to be returned to the securities lending counterparty (e.g., as a result of investment losses), OneBeacon was obligated to make up any deficiency.

 

Prior to February 2009, the collateral was controlled by the lending agent. The lending agent managed the investment of the cash collateral, however, other than in the event of default by the borrower, this collateral was not available to OneBeacon and was remitted to the borrower by the lending agent upon the return of the loaned securities. Because of these restrictions, OneBeacon considered its securities lending activities to be non-cash transactions. The fair value of the securities lending collateral was recorded as both an asset and liability on the balance sheet.

 

In February 2009, OneBeacon amended the terms of the securities lending program to give it more control over the investment of borrowers’ collateral and to separate the assets supporting that collateral into a segregated account. Pursuant to the amendment, (i) the guidelines for the investment of any new cash collateral as well as the reinvestment of cash were narrowed to permit investment in only cash equivalent securities, (ii) OneBeacon has the authority to direct the lending agent to both sell specific collateral securities in the segregated account and to not sell certain collateral securities which the lending agent proposes to sell, and (iii) OneBeacon and the lending agent agreed to manage the securities lending program toward an orderly wind-down. In May 2009, OneBeacon instructed the lending agent not to make any additional loans of securities and to recall all of the securities on loan and fund the return of collateral to the borrower. As a result of the actions described above, the securities lending assets are no longer segregated and are included within OneBeacon’s investment securities. As of March 31, 2010, $1.7 million in collateral had not been returned to the borrower.

 

10



Table of Contents

 

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 months ended March 31, 2010 and 2009 consisted of the following:

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Investment income:

 

 

 

 

 

Fixed maturity investments

 

$

27.7

 

$

21.0

 

Short-term investments

 

0.1

 

1.6

 

Common equity securities

 

0.8

 

0.4

 

Convertible bonds

 

1.6

 

1.5

 

Other investments

 

0.4

 

0.3

 

Gross investment income

 

30.6

 

24.8

 

Less investment expenses

 

(2.3

)

(2.9

)

Net investment income, pre-tax

 

$

28.3

 

$

21.9

 

 

The composition of net realized investment gains (losses), a component of net realized and unrealized investment gains (losses), consisted of the following:

 

 

 

Three months ended
March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

24.4

 

$

(18.2

)

Short-term investments

 

 

0.1

 

Common equity securities

 

0.3

 

(39.6

)

Convertible bonds

 

4.1

 

0.7

 

Other investments

 

(2.4

)

0.7

 

Net realized investment gains (losses), pre-tax

 

$

26.4

 

$

(56.3

)

 

The net changes in fair value for the three months ended March 31, 2010 and 2009 are as follows:

 

 

 

Three months ended March 31, 2010

 

 

 

Changes in
net unrealized
gains and losses (1)

 

Changes in net foreign
currency
translation gains and
losses (1)

 

Total net changes in fair
value reflected in
revenues (1)

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

(1.8

)

$

2.6

 

$

0.8

 

Short-term investments

 

 

(0.3

)

(0.3

)

Common equity securities

 

7.2

 

 

7.2

 

Convertible bonds

 

2.1

 

 

2.1

 

Other investments

 

6.2

 

 

6.2

 

Total

 

$

13.7

 

$

2.3

 

$

16.0

 

 

11



Table of Contents

 

 

 

Three months ended March 31, 2009

 

 

 

Changes in
net unrealized
gains and losses (1)(2)

 

Changes in net foreign
currency
translation gains and
losses (1)

 

Total net changes in fair
value reflected in
revenues (1)(2)

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

33.7

 

$

6.4

 

$

40.1

 

Short-term investments

 

(0.1

)

0.2

 

0.1

 

Common equity securities

 

9.1

 

0.1

 

9.2

 

Convertible bonds

 

(1.7

)

 

(1.7

)

Other investments

 

2.7

 

 

2.7

 

Total

 

$

43.7

 

$

6.7

 

$

50.4

 

 


(1)          Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(0.9) million and $0.3 million, pre-tax, for the three months ended March 31, 2010 and 2009, respectively.

 

(2)          Includes net unrealized gains related to OneBeacon’s securities lending program of $3.2 million, pre-tax, for the three months ended March 31, 2009.

 

The components of OneBeacon’s ending net unrealized investment gains and losses, excluding the impact of net unrealized foreign currency translation gains and losses, on its trading investment portfolio as of March 31, 2010 and December 31, 2009 were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Investment securities:

 

 

 

 

 

Gross unrealized investment gains

 

$

169.1

 

$

167.2

 

Gross unrealized investment losses

 

(10.8

)

(23.5

)

Net unrealized gains from investment securities

 

158.3

 

143.7

 

Income taxes

 

(55.4

)

(50.3

)

Total net unrealized investment gains, after tax

 

$

102.9

 

$

93.4

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of OneBeacon’s fixed maturity investments as of March 31, 2010 and December 31, 2009 were as follows:

 

 

 

March 31, 2010

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

409.5

 

$

11.7

 

$

 

$

 

$

421.2

 

Debt securities issued by industrial corporations

 

895.1

 

60.0

 

(0.8

)

3.9

 

958.2

 

Municipal obligations

 

1.9

 

 

 

 

1.9

 

Asset-backed securities

 

856.1

 

18.8

 

(0.6

)

 

874.3

 

Foreign government obligations

 

15.7

 

0.9

 

 

 

16.6

 

Preferred stocks

 

70.8

 

1.5

 

 

 

72.3

 

Total fixed maturity investments

 

$

2,249.1

 

$

92.9

 

$

(1.4

)

$

3.9

 

$

2,344.5

 

 

12



Table of Contents

 

 

 

December 31, 2009

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

519.4

 

$

12.4

 

$

(0.2

)

$

 

$

531.6

 

Debt securities issued by industrial corporations

 

1,278.6

 

73.5

 

(6.4

)

1.3

 

1,347.0

 

Municipal obligations

 

2.5

 

0.1

 

 

 

2.6

 

Asset-backed securities

 

1,003.7

 

18.4

 

(7.2

)

 

1,014.9

 

Foreign government obligations

 

25.6

 

1.1

 

 

 

26.7

 

Preferred stocks

 

70.8

 

0.7

 

 

 

 

71.5

 

Total fixed maturity investments

 

$

2,900.6

 

$

106.2

 

$

(13.8

)

$

1.3

 

$

2,994.3

 

 

The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of OneBeacon’s common equity securities, convertible bonds and other investments as of March 31, 2010 and December 31, 2009 were as follows:

 

 

 

March 31, 2010

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

227.1

 

$

21.4

 

$

(2.9

)

$

 

$

245.6

 

Convertible bonds

 

152.3

 

18.7

 

(0.1

)

 

170.9

 

Other investments

 

130.8

 

36.1

 

(6.4

)

 

160.5

 

 

 

 

December 31, 2009

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

176.3

 

$

12.3

 

$

(1.0

)

$

 

$

187.6

 

Convertible bonds

 

153.7

 

16.6

 

(0.1

)

 

170.2

 

Other investments

 

122.8

 

32.1

 

(8.6

)

 

146.3

 

 

Fair value measurements at March 31, 2010

 

OneBeacon records its investments in accordance with ASC 820 which provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). ASC 820 establishes a fair value hierarchy that distinguishes between inputs 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 ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

 

Level 1 — Valuations based on quoted prices in active markets for identical assets;

 

Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

 

Level 3 — Valuations based on unobservable inputs.

 

As of both March 31, 2010 and December 31, 2009, approximately 93% of the investment portfolio recorded at fair value was priced based upon observable inputs.

 

Fair values for securities for which quoted prices are unavailable are estimated based upon reference to observable inputs other than quoted prices, such as benchmark interest rates, market comparables, broker quotes and other relevant observable inputs. In circumstances where observable inputs are adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

 

13


 


Table of Contents

 

Other investments, which are comprised of hedge funds and private equity funds for which the fair value option has been elected, are carried at fair value based upon OneBeacon’s proportionate interest in the underlying fund’s net asset value, which is deemed to approximate fair value. The fair value of OneBeacon’s investments in hedge funds and private equity funds has been estimated using net asset value because it reflects the fair value of the funds’ underlying investments in accordance with ASC 820. OneBeacon employs a number of procedures to assess the reasonableness of the fair value measurements, including obtaining and reviewing each fund’s audited financial statements and discussing each fund’s pricing with the fund’s manager. However, since the fund managers do not provide sufficient information to independently evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of OneBeacon’s investment in hedge funds and private equity funds have been classified as Level 3 under the fair value hierarchy.

 

In circumstances where the underlying investments are publicly traded, such as the investments made by hedge funds, the fair value of the underlying investments is determined using current market prices. In circumstances where the underlying investments are not publicly traded, such as the investments made by private equity funds, the private equity fund managers have considered the need for a liquidity discount on each of the underlying investments when determining the fund’s net asset value in accordance with ASC 820. In circumstances where OneBeacon’s portion of a fund’s net asset value is deemed to differ from fair value due to illiquidity or other factors associated with OneBeacon’s investment in the fund, including counterparty credit risk, the net asset value is adjusted accordingly. At March 31, 2010 and December 31, 2009, OneBeacon did not record an adjustment to the net asset value related to its investments in hedge funds or private equity funds.

 

As of March 31, 2010 and December 31, 2009, other investments represented approximately 4% of the investment portfolio recorded at fair value. Other investments accounted for at fair value as of March 31, 2010 and December 31, 2009 were comprised of $79.7 million and $74.2 million, respectively, in hedge funds, $63.3 million and $58.0 million, respectively, in private equity funds, $14.1 million for both periods of an investment in a community reinvestment vehicle, and $3.4 million of an investment in a tax credit stimulus fund as of March 31, 2010. At March 31, 2010 and December 31, 2009, we held investments in 15 hedge funds and 16 and 15 private equity funds, respectively. The largest investment in a single fund was $11.3 million and $10.8 million, respectively, at March 31, 2010 and December 31, 2009.

 

14



Table of Contents

 

The fair value measurements at March 31, 2010 and December 31, 2009 and their related inputs are as follows:

 

 

 

Fair value at
March 31, 2010

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

421.2

 

$

418.6

 

$

2.6

 

$

 

Debt securities issued by industrial corporations

 

 

 

 

 

 

 

 

 

AA

 

23.8

 

 

23.8

 

 

A

 

261.2

 

 

261.2

 

 

BBB

 

659.6

 

 

659.6

 

 

BB

 

13.6

 

 

13.6

 

 

Debt securities issued by industrial corporations

 

958.2

 

 

958.2

 

 

 

 

 

 

 

 

 

 

 

 

Municipal obligations

 

1.9

 

 

1.9

 

 

Asset-backed securities

 

874.3

 

 

859.6

 

14.7

 

Foreign government obligations

 

16.6

 

11.3

 

5.3

 

 

Preferred stocks

 

72.3

 

 

1.6

 

70.7

 

Fixed maturity investments

 

2,344.5

 

429.9

 

1,829.2

 

85.4

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

1,068.8

 

1,068.8

 

 

 

Common equity securities

 

 

 

 

 

 

 

 

 

Financials

 

88.5

 

54.5

 

 

34.0

 

Basic Materials

 

46.6

 

46.6

 

 

 

Consumer

 

39.0

 

39.0

 

 

 

Energy

 

27.2

 

25.4

 

 

1.8

 

Utilities

 

23.9

 

23.9

 

 

 

Other

 

20.4

 

20.3

 

0.1

 

 

Common equity securities

 

245.6

 

209.7

 

0.1

 

35.8

 

 

 

 

 

 

 

 

 

 

 

Convertible bonds

 

170.9

 

 

170.9

 

 

Other investments

 

160.5

 

 

 

160.5

 

Total

 

$

3,990.3

 

$

1,708.4

 

$

2,000.2

 

$

281.7

 

 

15



Table of Contents

 

 

 

Fair value at
December 31, 2009

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

531.6

 

$

529.0

 

$

2.6

 

$

 

Debt securities issued by industrial corporations

 

 

 

 

 

 

 

 

 

AA

 

101.0

 

 

100.8

 

0.2

 

A

 

398.3

 

 

398.3

 

 

BBB

 

794.0

 

 

794.0

 

 

BBB

 

31.6

 

 

31.6

 

 

Other

 

22.1

 

 

22.1

 

 

Debt securities issued by industrial corporations

 

1,347.0

 

 

1,346.8

 

0.2

 

 

 

 

 

 

 

 

 

 

 

Municipal obligations

 

2.6

 

 

2.6

 

 

Asset-backed securities

 

1,014.9

 

 

999.2

 

15.7

 

Foreign government obligations

 

26.7

 

21.4

 

5.3

 

 

Preferred stocks

 

71.5

 

 

1.5

 

70.0

 

Fixed maturity investments

 

2,994.3

 

550.4

 

2,358.0

 

85.9

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

544.4

 

544.4

 

 

 

Common equity securities

 

 

 

 

 

 

 

 

 

Financials

 

82.3

 

50.1

 

 

32.2

 

Basic Materials

 

32.3

 

32.3

 

 

 

Consumer

 

19.2

 

19.2

 

 

 

Energy

 

29.4

 

27.8

 

 

1.6

 

Utilities

 

7.2

 

7.2

 

 

 

Other

 

17.2

 

17.2

 

 

 

Common equity securities

 

187.6

 

153.8

 

 

33.8

 

 

 

 

 

 

 

 

 

 

 

Convertible bonds

 

170.2

 

 

170.2

 

 

Other investments

 

146.3

 

 

 

146.3

 

Total

 

$

4,042.8

 

$

1,248.6

 

$

2,528.2

 

$

266.0

 

 

At March 31, 2010 and December 31, 2009, OneBeacon held one private preferred stock that represented approximately 98% of its preferred stock portfolio. OneBeacon used quoted market prices for similar securities that were adjusted to reflect management’s best estimate of fair value; this security is classified as a Level 3 measurement.

 

In addition to the investment portfolio described above, OneBeacon had $40.7 million and $27.2 million, respectively, of liabilities recorded at fair value and included in other liabilities as of March 31, 2010 and December 31, 2009. These liabilities relate to securities that have been sold short by a limited partnership that OneBeacon invests in and is required to consolidate in accordance with GAAP. All of the liabilities included in the $40.7 million and $27.2 million, respectively, have been deemed to have a Level 1 designation as of March 31, 2010 and December 31, 2009.

 

Asset-backed Securities 

 

OneBeacon purchases commercial and residential mortgage backed securities to maximize its fixed income portfolio’s risk adjusted returns in the context of a diversified portfolio. OneBeacon’s non-agency commercial mortgage-backed portfolio (“CMBS”) is generally short tenor, fixed rate and structurally senior, with more than 30 points of subordination on average for fixed rate CMBS and more than 60 points of subordination on average for floating rate CMBS as of March 31, 2010. In general, subordination represents the percentage of principal loss on the underlying collateral that would have to occur before the security incurs a loss.  These collateral losses, instead, are first absorbed by other securities lower in the capital structure.  OneBeacon believes these levels of protection will mitigate the risk of loss tied to refinancing challenges facing the commercial real estate market.  As of March 31, 2010, on average approximately 6% of the underlying loans were reported as non-performing for all CMBS held by OneBeacon. OneBeacon is not an originator of residential mortgage loans and held $0.1 million of residential mortgage-backed securities (“RMBS”) categorized as sub-prime as of March 31, 2010. In addition, OneBeacon’s investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage backed securities as of March 31, 2010. OneBeacon considers sub-prime mortgage backed securities to be those that are issued from dedicated sub-prime shelves, have underlying loan pools that exhibit weak credit characteristics and dedicated second-lien shelf registrations (i.e., OneBeacon considers investments backed primarily by second-liens to be a sub-prime risk regardless of credit scores or other metrics).

 

16



Table of Contents

 

There are also mortgage backed securities that OneBeacon categorizes as “non-prime” (also called “Alt A” or “A-”) that are backed by collateral that has overall credit quality between prime and sub-prime, as determined based on OneBeacon’s review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. As of March 31, 2010, OneBeacon did not hold any mortgage backed securities that were classified as non-prime.  OneBeacon’s non-agency residential mortgage-backed portfolio is generally of moderate average life, fixed rate and structurally senior. OneBeacon does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.

 

The following table summarizes the carrying value of OneBeacon’s asset-backed securities as of March 31, 2010 and December 31, 2009:

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

Fair Value

 

Level 2

 

Level 3

 

Fair Value

 

Level 2

 

Level 3

 

 

 

($ in millions)

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

GNMA

 

$

452.6

 

$

452.6

 

$

 

$

483.0

 

$

483.0

 

$

 

FNMA

 

120.8

 

120.8

 

 

149.1

 

149.1

 

 

FHLMC

 

55.3

 

55.3

 

 

76.3

 

76.3

 

 

Total Agency(1)

 

 

628.7

 

 

628.7

 

 

 

 

708.4

 

 

708.4

 

 

 

Non-agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

25.1

 

25.1

 

 

30.7

 

30.7

 

 

Commercial

 

96.8

 

82.1

 

14.7

 

136.1

 

120.4

 

15.7

 

Total Non-agency

 

121.9

 

107.2

 

14.7

 

166.8

 

151.1

 

15.7

 

Total mortgage-backed securities

 

750.6

 

735.9

 

14.7

 

875.2

 

859.5

 

15.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card receivables

 

11.1

 

11.1

 

 

27.7

 

27.7

 

 

Auto loans

 

112.1

 

112.1

 

 

111.1

 

111.1

 

 

Other

 

0.5

 

0.5

 

 

0.9

 

0.9

 

 

Total other asset-backed securities

 

123.7

 

123.7

 

 

139.7

 

139.7

 

 

Total asset-backed securities

 

$

874.3

 

$

859.6

 

$

14.7

 

$

1,014.9

 

$

999.2

 

$

15.7

 

 


(1)          Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).

 

The security issuance years of OneBeacon’s investments in non-agency RMBS and non-agency CMBS securities as of March 31, 2010 are as follows:

 

 

 

 

 

Security Issuance Year

 

 

 

Fair Value

 

2001

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 

($ in millions)

 

Non-agency RMBS

 

$

25.1

 

$

 

$

 

$

4.5

 

$

16.7

 

$

3.8

 

$

0.1

 

Non-agency CMBS

 

96.8

 

11.3

 

3.3

 

 

18.5

 

4.4

 

59.3

 

Total

 

$

121.9

 

$

11.3

 

$

3.3

 

$

4.5

 

$

35.2

 

$

8.2

 

$

59.4

 

 

Non-agency Residential Mortgage Securities

 

The classification of the underlying collateral quality and the tranche levels of OneBeacon’s non-agency RMBS securities are as follows as of March 31, 2010:

 

 

 

Fair Value

 

Super Senior (1)

 

Senior (2)

 

Subordinate (3)

 

 

 

($ in millions)

 

Prime

 

$

25.0

 

$

 

$

25.0

 

$

 

Sub-prime

 

0.1

 

 

0.1

 

 

Total

 

$

25.1

 

$

 

$

25.1

 

$

 

 


(1)          At issuance, Super Senior were rated AAA and were senior to other AAA bonds.

 

(2)          At issuance, Senior were rated AAA and were senior to non-AAA bonds.

 

(3)          At issuance, Subordinate were not rated AAA and were junior to other bonds.

 

17


 


Table of Contents

 

Non-agency Commercial Mortgage Securities

 

On average, these CMBS have over 30% of subordination and less than 6% of the underlying loans are non-performing.  The amount of fixed and float rate securities and their tranche levels are as follows as of March 31, 2010:

 

 

 

Fair Value

 

Super Senior (1)

 

Senior(2)

 

Subordinate(3)

 

 

 

($ in millions)

 

Fixed rate CMBS

 

$

 76.9

 

$

 62.4

 

$

 3.3

 

$

11.2

 

Float rate CMBS

 

19.9

 

18.0

 

 

1.9

 

Total

 

$

 96.8

 

$

 80.4

 

$

 3.3

 

$

13.1

 

 


(1)           At issuance, Super Senior were rated AAA and were senior to other AAA bonds.

(2)           At issuance, Senior were rated AAA and were senior to non-AAA bonds.

(3)           At issuance, Subordinate were not rated AAA and were senior to other bonds.

 

The changes in Level 1 fair value measurements for the three months ended March 31, 2010 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments

 

Total (1)

 

 

 

($ in millions)

 

Balance at January 1, 2010

 

$

 550.4

 

$

153.8

 

$

 

$

 

$

704.2

 

Amortization/accretion

 

0.1

 

 

 

 

0.1

 

Total net realized and unrealized gains (losses)

 

2.1

 

5.1

 

 

 

7.2

 

Purchases

 

185.8

 

61.7

 

 

 

247.5

 

Sales

 

(308.5

)

(10.9

)

 

 

(319.4

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at March 31, 2010

 

$

 429.9

 

$

209.7

 

$

 

$

 

$

639.6

 

 


(1)           Excludes short-term investments which are deemed to have a Level 1 designation as of March 31, 2010 and December 31, 2009. The net maturities, purchases and sales of short-term investments resulted in an increase of $524.4 million during the three months ended March 31, 2010.

 

The changes in Level 2 fair value measurements for the three months ended March 31, 2010 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments

 

Total

 

 

 

($ in millions)

 

Balance at January 1, 2010

 

$

2,358.0

 

$

 

$

170.2

 

$

 

$

2,528.2

 

Amortization/accretion

 

(1.9

)

 

0.3

 

 

(1.6

)

Total net realized and unrealized gains (losses)

 

20.3

 

 

6.2

 

 

26.5

 

Purchases

 

111.9

 

0.1

 

23.7

 

 

135.7

 

Sales

 

(659.3

)

 

(29.5

)

 

(688.8

)

Transfers in

 

0.2

 

 

 

 

0.2

 

Transfers out

 

 

 

 

 

 

Balance at March 31, 2010

 

$

1,829.2

 

$

0.1

 

$

170.9

 

$

 

$

2,000.2

 

 

18



Table of Contents

 

The changes in Level 3 fair value measurements for the three months ended March 31, 2010 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments

 

Total

 

 

 

($ in millions)

 

Balance at January 1, 2010

 

$

85.9

 

$

33.8

 

$

 

$

146.3

 

$

266.0

 

Amortization/accretion

 

(1.4

)

 

 

 

(1.4

)

Total net realized and unrealized gains (losses)

 

2.8

 

2.4

 

 

3.8

 

9.0

 

Purchases

 

 

 

 

12.5

 

12.5

 

Sales

 

(1.7

)

(0.4

)

 

(2.1

)

(4.2

)

Transfers in

 

 

 

 

 

 

Transfers out

 

(0.2

)

 

 

 

(0.2

)

Balance at March 31, 2010

 

$

85.4

 

$

35.8

 

$

 

$

160.5

 

$

281.7

 

 

“Transfers out” of Level 3 and included in “transfers in” of Level 2 fixed maturity investments of $0.2 million for the three months ended March 31, 2010 comprise one security which had been previously classified as a Level 3 measurement and was recategorized as a Level 2 measurement when quoted market prices for similar securities that were considered reliable and could be validated against an alternative source became available during the three months ended March 31, 2010.

 

The following table summarizes the change in net unrealized gains or losses for assets designated as Level 3 for the three months ended March 31, 2010 and 2009:

 

 

 

Three months ended March 31,

 

 

 

2010

 

2009

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

 2.3

 

$

 (1.0

)

Short-term investments

 

 

 

Common equity securities

 

2.3

 

0.2

 

Convertible bonds

 

 

 

Other investments

 

 

(4.3

)

Total

 

$

 4.6

 

$

 (5.1

)

 

19



Table of Contents

 

Other Investments

 

OneBeacon holds investments in hedge funds and private equity funds which are included in other investments. The fair value of these investments has been estimated using the net asset value of the funds. The following table summarizes investments in hedge funds and private equity funds at March 31, 2010:

 

 

 

Fair Value

 

Unfunded
Commitments

 

 

 

($ in millions)

 

Hedge funds

 

 

 

 

 

Long/short credit and distressed

 

$

23.6

 

None

 

Long bank loan

 

3.6

 

None

 

Long/short equity

 

44.9

 

None

 

Long/short equity real estate investment trust

 

1.0

 

None

 

Long/short equity activist

 

6.6

 

None

 

Total hedge funds

 

$

79.7

 

 

 

 

 

 

 

 

 

Private equity funds

 

 

 

 

 

Insurance

 

$

6.4

 

$

0.1

 

Banking

 

4.2

 

0.1

 

Distressed residential real estate

 

5.0

 

20.5

 

Energy infrastructure and services

 

18.2

 

8.3

 

Healthcare

 

0.8

 

4.0

 

Multi-sector