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, 2011

 

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, 2011, 22,661,739 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, 2011 and December 31, 2010

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income:
Three months ended March 31, 2011 and 2010

3

 

 

 

 

Consolidated Statements of Common Shareholders’ Equity:
Three months ended March 31, 2011 and 2010

4

 

 

 

 

Consolidated Statements of Cash Flows:
Three months ended March 31, 2011 and 2010

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

ITEM 2.

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

30

 

 

 

 

Results of Operations — For the three months ended March 31, 2011 and 2010

32

 

 

 

 

Summary of Investment Results

38

 

 

 

 

Liquidity and Capital Resources

42

 

 

 

 

Critical Accounting Estimates

46

 

 

 

 

Forward-Looking Statements

47

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

ITEM 4.

Controls and Procedures

48

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

48

 

 

 

ITEM 1A.

Risk Factors

48

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

ITEM 6.

Exhibits

49

 

 

 

SIGNATURES

 

50

 



Table of Contents

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

 

 

(in millions, except
share and per share
amounts)

 

Assets

 

 

 

 

 

Investment Securities:

 

 

 

 

 

Fixed maturity investments, at fair value (amortized cost $2,368.9 and $2,359.7)

 

$

2,422.0

 

$

2,415.5

 

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

 

244.8

 

300.0

 

Common equity securities, at fair value (cost $253.3 and $237.2)

 

309.9

 

285.3

 

Convertible bonds, at fair value (amortized cost $82.6 and $82.2)

 

92.3

 

93.8

 

Other investments

 

163.0

 

171.4

 

Total investments

 

3,232.0

 

3,266.0

 

Cash

 

32.6

 

33.6

 

Reinsurance recoverable on unpaid losses

 

1,864.0

 

1,893.2

 

Reinsurance recoverable on paid losses

 

18.3

 

44.5

 

Premiums receivable

 

260.5

 

275.0

 

Deferred acquisition costs

 

112.0

 

114.5

 

Ceded unearned premiums

 

58.4

 

113.9

 

Net deferred tax asset

 

90.5

 

101.2

 

Investment income accrued

 

18.1

 

19.4

 

Accounts receivable on unsettled investment sales

 

15.3

 

5.4

 

Other assets

 

293.9

 

300.0

 

Total assets

 

$

5,995.6

 

$

6,166.7

 

Liabilities

 

 

 

 

 

Loss and LAE reserves

 

$

3,224.7

 

$

3,295.5

 

Unearned premiums

 

586.5

 

627.5

 

Debt

 

419.6

 

419.6

 

Ceded reinsurance payable

 

90.4

 

149.3

 

Accounts payable on unsettled investment purchases

 

52.9

 

14.1

 

Other liabilities

 

350.5

 

411.8

 

Total liabilities

 

4,724.6

 

4,917.8

 

OneBeacon’s common shareholders’ equity and noncontrolling interests

 

 

 

 

 

OneBeacon’s common shareholders’ equity:

 

 

 

 

 

Common shares and paid-in surplus (par value $0.01; authorized, 200,000,000 shares; issued and outstanding, 94,416,477 shares)

 

1,000.6

 

1,000.5

 

Retained earnings

 

250.3

 

228.2

 

Accumulated other comprehensive income, after tax:

 

 

 

 

 

Other comprehensive income and loss items

 

0.4

 

0.3

 

Total OneBeacon’s common shareholders’ equity

 

1,251.3

 

1,229.0

 

Total noncontrolling interests

 

19.7

 

19.9

 

Total OneBeacon’s common shareholders’ equity and noncontrolling interests

 

1,271.0

 

1,248.9

 

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

 

$

5,995.6

 

$

6,166.7

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

 

 

($ in millions, except per
share amounts)

 

Revenues

 

 

 

 

 

Earned premiums

 

$

263.5

 

$

453.2

 

Net investment income

 

21.0

 

28.3

 

Net realized and unrealized investment gains

 

23.1

 

42.4

 

Net other revenues (expenses)

 

0.8

 

(0.8

)

Total revenues

 

308.4

 

523.1

 

Expenses

 

 

 

 

 

Loss and LAE

 

144.6

 

333.7

 

Policy acquisition expenses

 

51.0

 

97.5

 

Other underwriting expenses

 

52.4

 

74.2

 

General and administrative expenses

 

2.3

 

4.3

 

Interest expense on debt

 

6.3

 

9.1

 

Total expenses

 

256.6

 

518.8

 

Pre-tax income

 

51.8

 

4.3

 

Income tax expense

 

(9.5

)

(4.0

)

Net income including noncontrolling interests

 

42.3

 

0.3

 

Less: Net income attributable to noncontrolling interests

 

(0.4

)

(0.3

)

Net income attributable to OneBeacon’s common shareholders

 

41.9

 

 

Change in other comprehensive income and loss items

 

0.1

 

0.2

 

Comprehensive income attributable to OneBeacon’s common shareholders

 

$

42.0

 

$

0.2

 

 

 

 

 

 

 

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

 

 

 

 

 

Net income attributable to OneBeacon’s common shareholders

 

$

0.44

 

$

0.00

 

 

 

 

 

 

 

Dividends declared and paid per OneBeacon’s common share

 

$

0.21

 

$

0.21

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

OneBeacon’s Common Shareholders’ Equity

 

 

 

 

 

Common
shareholders’
equity

 

Common
shares and
paid-in
surplus

 

Retained
earnings

 

Accum. other
comprehensive
income,
after tax

 

Noncontrolling
interests,
after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011

 

$

1,229.0

 

$

1,000.5

 

$

228.2

 

$

0.3

 

$

19.9

 

Net income

 

41.9

 

 

41.9

 

 

0.4

 

Accrued option expense

 

0.1

 

0.1

 

 

 

 

Repurchases and retirements of common shares

 

 

 

 

 

0.3

 

Dividends

 

(19.8

)

 

(19.8

)

 

(0.9

)

Other comprehensive income, after tax

 

0.1

 

 

 

0.1

 

 

Balances at March 31, 2011

 

$

1,251.3

 

$

1,000.6

 

$

250.3

 

$

0.4

 

$

19.7

 

 

 

 

OneBeacon’s Common 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

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Cash flows from operations:

 

 

 

 

 

Net income including noncontrolling interests

 

$

42.3

 

$

0.3

 

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

 

 

 

 

 

Net realized and unrealized investment gains

 

(23.1

)

(42.4

)

Net other realized losses

 

 

0.5

 

Deferred income tax expense

 

10.6

 

13.5

 

Other operating items:

 

 

 

 

 

Net change in loss and LAE reserves

 

(70.8

)

56.5

 

Net change in unearned premiums

 

(41.0

)

(18.9

)

Net change in ceded reinsurance payable

 

(58.9

)

64.6

 

Net change in ceded unearned premiums

 

55.5

 

(62.6

)

Net change in premiums receivable

 

14.5

 

9.9

 

Net change in reinsurance recoverable on paid and unpaid losses

 

55.4

 

(11.8

)

Net change in other assets and liabilities

 

(46.2

)

(38.8

)

Net cash used for operations

 

(61.7

)

(29.2

)

Cash flows from investing activities:

 

 

 

 

 

Net maturities, purchases and sales of short-term investments

 

55.3

 

(524.4

)

Maturities of fixed maturity investments

 

126.3

 

683.0

 

Sales of fixed maturity investments

 

395.9

 

286.5

 

Sales of common equity securities

 

15.6

 

11.3

 

Sales of convertible bonds

 

17.2

 

29.5

 

Distributions and redemptions of other investments

 

18.2

 

2.1

 

Purchases of fixed maturity investments

 

(528.6

)

(297.7

)

Purchases of common equity securities

 

(29.1

)

(61.8

)

Purchases of convertible bonds

 

(13.6

)

(23.7

)

Contributions for other investments

 

(3.5

)

(12.5

)

Net change in unsettled investment purchases and sales

 

28.9

 

(14.6

)

Net acquisitions of property and equipment

 

(2.1

)

(0.8

)

Net cash provided from investing activities

 

80.5

 

76.9

 

Cash flows from financing activities:

 

 

 

 

 

Repayment of debt

 

 

(14.0

)

Repurchases of debt

 

 

(13.1

)

Cash dividends paid to common shareholders

 

(19.8

)

(20.0

)

Net cash used for financing activities

 

(19.8

)

(47.1

)

Net (decrease) increase in cash during period

 

(1.0

)

0.6

 

Cash balance at beginning of period

 

33.6

 

44.8

 

Cash balance at end of period

 

$

32.6

 

$

45.4

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

 

$

0.4

 

Net tax payments to state and national governments

 

0.3

 

5.1

 

 

See Notes to Consolidated Financial Statements.

 

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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 specialty insurance products and services through independent agencies, regional and national brokers, wholesalers and managing general agencies.

 

OneBeacon was acquired by White Mountains Insurance Group, Ltd. (“White Mountains”) from Aviva plc (“Aviva”) in 2001 (the “OneBeacon Acquisition”). White Mountains is a holding company whose businesses provide property and casualty insurance, reinsurance and certain other products. As of March 31, 2011, White Mountains owned 76.0% 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’s headquarters are located at 14 Wesley Street, 5th Floor, Hamilton HM 11, Bermuda. The Company’s U.S. corporate headquarters are 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 Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations. The Specialty Insurance Operations segment is comprised of twelve underwriting units that are aggregated into three major underwriting units for financial reporting: Managing General Agency (“MGA”) Business, Specialty Industries and Specialty Products. OneBeacon’s Other Insurance Operations segment includes AutoOne Insurance (“AutoOne”), a division that offers products and services to assigned risk markets. Other Insurance Operations also includes the results of the non-specialty commercial lines business and the traditional personal lines business, other run-off business and certain purchase accounting adjustments relating to the OneBeacon Acquisition. Investing, Financing and Corporate Operations includes the investing and financing activities for OneBeacon on a consolidated basis, and certain other activities conducted through the top holding company, OneBeacon Insurance Group, Ltd., and the intermediate subsidiaries 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.

 

Historically, OneBeacon has offered a range of specialty, commercial and personal products and services, however, in the wake of recent transactions OneBeacon is now focused exclusively on specialty business. On December 3, 2009, OneBeacon sold the renewal rights to its non-specialty commercial lines business and on July 1, 2010, OneBeacon completed the sale of its traditional personal lines business (Note 2). To better align OneBeacon’s operating and reporting structure with its business profile as a result of the transactions, OneBeacon revised its segment structure into Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations, as described above. As part of the resegmentation, agency results for business written on OneBeacon paper for which OneBeacon has an ownership interest have been reclassified within the underwriting results. The prior period has been reclassified to conform to the current presentation. See Note 7.

 

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 2010 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 2010 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.

 

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Recently Issued Accounting Pronouncements

 

Policy Acquisition Costs

 

On October 13, 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, codified within Accounting Standards Codification (“ASC”) 944. The new standard changes the types of policy acquisition costs that are eligible for deferral. Specifically, the new guidance limits deferrable costs to those that are incremental direct costs of contract acquisition and certain costs related to acquisition activities performed by the insurer, such as underwriting, policy issuance and processing, medical and inspection costs and sales force contract selling. ASU 2010-26 defines incremental direct costs as those costs that result directly from and were essential to the contract acquisition and would not have been incurred absent the acquisition. Accordingly, under the new guidance, deferrable acquisition costs are limited to costs related to successful contract acquisitions. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred.

 

ASU 2010-26 is effective for interim periods and annual fiscal years beginning after December 15, 2011 and may be applied prospectively or retrospectively. OneBeacon is in the process of determining the expected effect on its financial position, results of operations and cash flows upon adoption.

 

NOTE 2. Acquisitions and Dispositions

 

During the first quarter of 2011 and 2010, there were no acquisitions or dispositions.

 

On July 1, 2010, OneBeacon completed the sale of its traditional personal lines business (the “Personal Lines Transaction”) to Tower Group, Inc. (“Tower”) for consideration of $166.6 million. The Personal Lines Transaction included two insurance companies, York Insurance Company of Maine (“York”) and Massachusetts Homeland Insurance Company (“MHIC”), through which the majority of the traditional personal lines business was written on a direct basis, two attorneys-in-fact managing the reciprocal insurance exchanges (“reciprocals”) that wrote the traditional personal lines business in New York and New Jersey, the surplus notes issued by the New York and New Jersey reciprocals and the remaining renewal rights to certain other traditional personal lines insurance policies. In addition, the Personal Lines Transaction included the execution of reinsurance agreements with certain subsidiaries of the Company pursuant to which OneBeacon cedes, on a 100% quota share basis, traditional personal lines business not directly written by York and MHIC and assumes, on a 100% quota share basis, non-traditional personal lines business written directly by York.

 

OneBeacon and Tower also entered into a Transition Services Agreement (“TSA”), pursuant to which OneBeacon is providing certain services to Tower during the three-year term of the TSA. Tower reimburses OneBeacon for all expenses incurred to provide these services. Reimbursement for these services is netted against the expense incurred. The Personal Lines Transaction did not meet the criteria for discontinued operations accounting because of significant continuing cash flows between OneBeacon and the business sold relating to TSA services and reinsurance activities.

 

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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, 2011 and 2010:

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Gross beginning balance

 

$

3,295.5

 

$

3,934.8

 

Less beginning reinsurance recoverable on unpaid losses

 

(1,893.2

)

(2,192.9

)

Net loss and LAE reserves

 

1,402.3

 

1,741.9

 

Loss and LAE incurred relating to:

 

 

 

 

 

Current year losses

 

149.7

 

339.7

 

Prior year losses

 

(5.1

)

(6.0

)

Total incurred loss and LAE

 

144.6

 

333.7

 

Loss and LAE paid relating to:

 

 

 

 

 

Current year losses

 

(28.1

)

(73.0

)

Prior year losses

 

(158.1

)

(212.1

)

Total loss and LAE payments

 

(186.2

)

(285.1

)

Net ending balance

 

1,360.7

 

1,790.5

 

Plus ending reinsurance recoverable on unpaid losses

 

1,864.0

 

2,200.8

 

Gross ending balance

 

$

3,224.7

 

$

3,991.3

 

 

During the three months ended March 31, 2011, OneBeacon experienced $5.1 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $1.2 million in Specialty Insurance Operations and $3.9 million in Other Insurance Operations. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and other general liability lines. 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, with $2.7 million in Specialty Insurance Operations and $3.3 million in Other Insurance Operations. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and other general liability lines.

 

In connection with purchase accounting for the OneBeacon Acquisition, OneBeacon was required to adjust to fair value OneBeacon’s loss and LAE reserves and the related reinsurance recoverables on the balance sheet. 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. As of both March 31, 2011 and December 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, 2010, OneBeacon renewed its property catastrophe reinsurance program through June 30, 2011. The program provides coverage for OneBeacon’s property business as well as certain acts of terrorism. Under the program, the first $80.0 million of losses resulting from any single catastrophe are retained and the next $195.0 million of losses resulting from the catastrophe are reinsured, although OneBeacon retains a co-participation (20% of losses in excess of $80.0 million up to $100.0 million and 8% of losses in excess of $100.0 million up to $140.0 million). Any loss above $275.0 million would be retained in full. In the event of a catastrophe, OneBeacon’s property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

 

OneBeacon had entered into a 30% quota share agreement with a group of reinsurers that ran from January 1, 2009 through December 31, 2009, and had renewed the agreement effective January 1, 2010. During the three months ended March 31, 2010, OneBeacon ceded $11.6 million of written premiums from its Northeast homeowners business written through OneBeacon Insurance Company (“OBIC”) and its subsidiary companies, along with Adirondack Insurance Exchange (“Adirondack Insurance”) and New

 

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Jersey Skylands Insurance Agency (“NJSIA”) in New York and New Jersey, respectively. Effective July 1, 2010, the closing date of the Personal Lines Transaction, the agreement was amended to remove OneBeacon as a signatory.

 

At March 31, 2011, OneBeacon had $18.3 million of reinsurance recoverables on paid losses and $2,037.2 million (gross of $173.2 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, 2011

 

% of total

 

A.M. Best
Rating(1)

 

National Indemnity Company and General Reinsurance Corporation(2)

 

$

1,524.7

 

74

%

A++

 

Hanover Insurance Company

 

108.9

 

5

%

A

 

Tower Insurance Company

 

74.0

 

4

%

A-

 

Tokio Marine and Nichido Fire(3)

 

67.5

 

3

%

A++

 

Munich Reinsurance America

 

33.4

 

2

%

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

 

(3)                                  Includes $40.3 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.

 

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, 2011. Since entering into the NICO Cover, approximately 8% of the $2.2 billion of utilized coverage relates to uncollectible Third Party Recoverables and settlements on Third Party Recoverables through March 31, 2011. Net losses paid totaled approximately $1.3 billion as of March 31, 2011. 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, 2011.

 

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. During the three months ended March 31, 2011, $33.8 million was collected under the GRC Cover.

 

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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 2010 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 in net realized and unrealized investment gains and losses in revenues on a pre-tax basis.

 

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, 2011 and December 31, 2010.

 

Other investments primarily 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 net realized and unrealized investment gains and losses in revenues on a pre-tax basis. Other investments also includes an investment in a community reinvestment vehicle which is accounted for at fair value and a tax advantaged federal affordable housing development fund which OneBeacon accounts for under the equity method.

 

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, 2011 and 2010 consisted of the following:

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Investment income:

 

 

 

 

 

Fixed maturity investments

 

$

20.4

 

$

27.7

 

Short-term investments

 

 

0.1

 

Common equity securities

 

1.4

 

0.8

 

Convertible bonds

 

1.0

 

1.6

 

Other investments

 

 

0.4

 

Gross investment income

 

22.8

 

30.6

 

Less investment expenses

 

(1.8

)

(2.3

)

Net investment income, pre-tax

 

$

21.0

 

$

28.3

 

 

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,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

7.2

 

$

24.4

 

Short-term investments

 

 

 

Common equity securities

 

2.7

 

0.3

 

Convertible bonds

 

3.3

 

4.1

 

Other investments

 

4.8

 

(2.4

)

Net realized investment gains (losses), pre-tax

 

$

18.0

 

$

26.4

 

 

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The net changes in fair value for the three months ended March 31, 2011 and 2010 are as follows:

 

 

 

Three months ended March 31, 2011

 

 

 

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

 

$

(2.9

)

$

0.1

 

$

(2.8

)

Short-term investments

 

 

 

 

Common equity securities

 

8.5

 

 

8.5

 

Convertible bonds

 

(2.2

)

 

(2.2

)

Other investments

 

1.6

 

 

1.6

 

Total

 

$

5.0

 

$

0.1

 

$

5.1

 

 

 

 

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

 

 


(1)                                 Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(0.4) million and $(0.9) million, pre-tax, for the three months ended March 31, 2011 and 2010, respectively.

 

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 investment portfolio as of March 31, 2011 and December 31, 2010 were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Investment securities:

 

 

 

 

 

Gross unrealized investment gains

 

$

165.9

 

$

162.8

 

Gross unrealized investment losses

 

(17.7

)

(20.0

)

Net unrealized gains from investment securities

 

148.2

 

142.8

 

Income taxes

 

(51.9

)

(50.0

)

Total net unrealized investment gains, after tax

 

$

96.3

 

$

92.8

 

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and carrying values of OneBeacon’s fixed maturity investments as of March 31, 2011 and December 31, 2010 were as follows:

 

 

 

March 31, 2011

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

250.2

 

$

5.3

 

$

(0.3

)

$

 

$

255.2

 

Debt securities issued by industrial corporations

 

899.0

 

41.9

 

(6.1

)

 

934.8

 

Municipal obligations

 

2.1

 

 

(0.1

)

 

2.0

 

Asset-backed securities

 

1,133.0

 

8.0

 

(5.1

)

 

1,135.9

 

Foreign government obligations

 

7.7

 

0.5

 

 

0.1

 

8.3

 

Preferred stocks

 

76.9

 

8.9

 

 

 

85.8

 

Total fixed maturity investments

 

$

2,368.9

 

$

64.6

 

$

(11.6

)

$

0.1

 

$

2,422.0

 

 

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Table of Contents

 

 

 

December 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

 

$

241.7

 

$

9.0

 

$

 

$

 

$

250.7

 

Debt securities issued by industrial corporations

 

908.5

 

46.5

 

(6.4

)

 

948.6

 

Municipal obligations

 

2.1

 

 

 

 

2.1

 

Asset-backed securities

 

1,117.2

 

9.1

 

(8.9

)

 

1,117.4

 

Foreign government obligations

 

12.7

 

0.6

 

 

 

13.3

 

Preferred stocks

 

77.5

 

5.9

 

 

 

83.4

 

Total fixed maturity investments

 

$

2,359.7

 

$

71.1

 

$

(15.3

)

$

 

$

2,415.5

 

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and carrying values of OneBeacon’s common equity securities, convertible bonds and other investments as of March 31, 2011 and December 31, 2010 were as follows:

 

 

 

March 31, 2011

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

253.3

 

$

59.2

 

$

(2.7

)

$

0.1

 

$

309.9

 

Convertible bonds

 

82.6

 

9.8

 

(0.1

)

 

92.3

 

Other investments

 

134.0

 

32.3

 

(3.3

)

 

163.0

 

 

 

 

December 31, 2010

 

 

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains

 

Carrying
value

 

 

 

($ in millions)

 

Common equity securities

 

$

237.2

 

$

48.4

 

$

(0.4

)

$

0.1

 

$

285.3

 

Convertible bonds

 

82.2

 

11.6

 

 

 

93.8

 

Other investments

 

144.0

 

31.7

 

(4.3

)

 

171.4

 

 

Fair value measurements

 

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 prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including quoted prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).

 

As of March 31, 2011 and December 31, 2010, approximately 92% and 91%, respectively, of the investment portfolio recorded at fair value was priced based upon observable inputs.

 

OneBeacon uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, OneBeacon uses the quoted market prices provided by the outside pricing services to determine fair value. The outside pricing services OneBeacon uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable, OneBeacon utilizes fair value estimates based upon reference to other observable inputs other than quoted prices, including matrix pricing, 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.

 

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Table of Contents

 

Other investments, which are primarily 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, 2011 and December 31, 2010, OneBeacon did not record a liquidity adjustment to the net asset value related to its investments in hedge funds or private equity funds.

 

As of March 31, 2011 and December 31, 2010, other investments reported at fair value represented approximately 4% and 5%, respectively, of the investment portfolio recorded at fair value. Other investments accounted for at fair value as of March 31, 2011 and December 31, 2010 were comprised of $54.0 million and $63.4 million, respectively, in hedge funds, $73.3 million and $72.7 million, respectively, in private equity funds, $14.1 million for both periods of an investment in a community reinvestment vehicle. At March 31, 2011 and December 31, 2010, OneBeacon held investments in 9 and 10 hedge funds, respectively, and 15 private equity funds. The largest investment in a single fund was $23.1 million and $24.6 million, respectively, at March 31, 2011 and December 31, 2010.

 

As of March 31, 2011 and December 31, 2010, other investments also included $21.6 million and $21.2 million, respectively, of an investment in a tax advantaged federal affordable housing development fund which is accounted for using the equity method.

 

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Table of Contents

 

The fair value measurements at March 31, 2011 and December 31, 2010 and their related inputs are as follows:

 

 

 

Fair value at
March 31, 2011

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

255.2

 

$

255.2

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

332.4

 

 

332.4

 

 

Industrial

 

215.8

 

 

215.8

 

 

Financial

 

86.8

 

 

86.5

 

0.3

 

Communications

 

84.2

 

 

84.2

 

 

Energy

 

58.4

 

 

58.4

 

 

Basic materials

 

82.2

 

 

82.2

 

 

Utilities

 

60.3

 

 

60.3

 

 

Technology

 

14.7

 

 

14.7

 

 

Debt securities issued by corporations

 

934.8

 

 

934.5

 

0.3

 

Municipal obligations

 

2.0

 

 

2.0

 

 

Asset-backed securities

 

1,135.9

 

 

1,135.9

 

 

Foreign government obligations

 

8.3

 

7.6

 

0.7

 

 

Preferred stocks

 

85.8

 

 

12.6

 

73.2

 

Fixed maturity investments

 

2,422.0

 

262.8

 

2,085.7

 

73.5

 

Short-term investments

 

244.8

 

244.8

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

105.6

 

66.7

 

 

38.9

 

Basic Materials

 

59.3

 

59.3

 

 

 

Consumer

 

61.2

 

60.4

 

0.1

 

0.7

 

Energy

 

40.1

 

40.1

 

 

 

Utilities

 

24.1

 

21.5

 

 

2.6

 

Other

 

19.6

 

19.5

 

0.1

 

 

Common equity securities

 

309.9

 

267.5

 

0.2

 

42.2

 

Convertible bonds

 

92.3

 

 

92.3

 

 

Other investments(1)

 

141.4

 

 

 

141.4

 

Total(1)

 

$

3,210.4

 

$

775.1

 

$

2,178.2

 

$

257.1

 

 

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Table of Contents

 

 

 

Fair value at
December 31, 2010

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

250.7

 

$

250.7

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

330.4

 

 

330.4

 

 

Industrial

 

227.9

 

 

227.9

 

 

Financial

 

90.5

 

 

90.5

 

 

Communications

 

84.7

 

 

84.7

 

 

Energy

 

60.7

 

 

60.7

 

 

Basic materials

 

78.9

 

 

78.9

 

 

Utilities

 

61.0

 

 

61.0

 

 

Technology

 

14.5

 

 

14.5

 

 

Debt securities issued by corporations

 

948.6

 

 

948.6

 

 

Municipal obligations

 

2.1

 

 

2.1

 

 

Asset-backed securities

 

1,117.4

 

 

1,089.7

 

27.7

 

Foreign government obligations

 

13.3

 

12.6

 

0.7

 

 

Preferred stocks

 

83.4

 

 

12.0

 

71.4

 

Fixed maturity investments

 

2,415.5

 

263.3

 

2,053.1

 

99.1

 

Short-term investments

 

300.0

 

300.0

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

104.1

 

66.7

 

 

37.4

 

Basic Materials

 

57.0

 

57.0

 

 

 

Consumer

 

50.0

 

49.9

 

0.1

 

 

Energy

 

36.0

 

33.7

 

 

2.3

 

Utilities

 

22.4

 

22.4

 

 

 

Other

 

15.8

 

15.7

 

0.1

 

 

Common equity securities

 

285.3

 

245.4

 

0.2

 

39.7

 

Convertible bonds

 

93.8

 

 

93.8

 

 

Other investments(1)

 

150.2

 

 

 

150.2

 

Total(1)

 

$

3,244.8

 

$

808.7

 

$

2,147.1

 

$

289.0

 

 


(1)                                  Excludes the carrying value of $21.6 million and $21.2 million, respectively, associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of March 31, 2011 and December 31, 2010.

 

At March 31, 2011 and December 31, 2010, OneBeacon held one private preferred stock that represented approximately 85% and 86%, respectively, 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 $45.5 million and $41.3 million, respectively, of liabilities recorded at fair value and included in other liabilities as of March 31, 2011 and December 31, 2010. 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. As of March 31, 2011, $45.3 million of these liabilities have been deemed to have a Level 1 designation and $0.2 million of these liabilities have been deemed to have a Level 2 designation. As of December 31, 2010, all of the liabilities included in the $41.3 million have been deemed to have a Level 1 designation.

 

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Table of Contents

 

The following table summarizes the ratings of OneBeacon’s corporate debt securities as of March 31, 2011 and December 31, 2010:

 

 

 

March 31,
2011

 

December 31,
2010

 

 

 

($ in millions)

 

AA

 

$

71.1

 

$

88.6

 

A

 

383.2

 

387.7

 

BBB

 

479.2

 

463.1

 

BB

 

1.0

 

8.8

 

Other

 

0.3

 

0.4

 

Debt securities issued by corporations

 

$

934.8

 

$

948.6

 

 

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 and structurally senior, with more than 25 points of subordination on average for fixed rate CMBS and more than 65 points of subordination on average for floating rate CMBS as of March 31, 2011. 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 this structural protection mitigates the risk of loss tied to refinancing challenges facing the commercial real estate market. As of March 31, 2011, on average approximately 4% 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 did not hold any residential mortgage-backed securities (“RMBS”) categorized as sub-prime as of March 31, 2011. 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, 2011. OneBeacon considers sub-prime mortgage backed securities to be those that are issued from dedicated sub-prime shelves or have underlying loan pools that exhibit weak credit characteristics or 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).

 

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, 2011, 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.

 

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The following table summarizes the carrying value of OneBeacon’s asset-backed securities as of March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Fair Value

 

Level 2

 

Level 3

 

Fair Value

 

Level 2

 

Level 3

 

 

 

($ in millions)

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

GNMA

 

$

623.1

 

$

623.1

 

$

 

$

684.7

 

$

663.4

 

$

21.3

 

FNMA

 

135.3

 

135.3

 

 

143.0

 

143.0

 

 

FHLMC

 

14.6

 

14.6

 

 

19.0

 

19.0

 

 

Total agency(1)

 

773.0

 

773.0

 

 

846.7

 

825.4

 

21.3

 

Non-agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

6.5

 

6.5

 

 

6.4

 

 

6.4

 

Commercial

 

35.1

 

35.1

 

 

36.3

 

36.3

 

 

Total Non-agency

 

41.6

 

41.6

 

 

42.7

 

36.3

 

6.4

 

Total mortgage-backed securities

 

814.6

 

814.6

 

 

889.4

 

861.7

 

27.7

 

Other asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card receivables

 

190.1

 

190.1

 

 

97.5

 

97.5

 

 

Vehicle receivables

 

131.2

 

131.2

 

 

130.5

 

130.5

 

 

Total other asset-backed securities

 

321.3

 

321.3

 

 

228.0

 

228.0

 

 

Total asset-backed securities

 

$

1,135.9

 

$

1,135.9

 

$

 

$

1,117.4

 

$

1,089.7

 

$

27.7

 

 


(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).

 

Non-agency Mortgage-backed Securities

 

The security issuance years of OneBeacon’s investments in non-agency RMBS and non-agency CMBS securities as of March 31, 2011 are as follows:

 

 

 

Security Issuance Year

 

 

 

Fair Value

 

2003

 

2005

 

2007

 

2010

 

2011

 

 

 

($ in millions)

 

Non-agency RMBS

 

$

6.5

 

$

 

$

 

$

 

$

6.5

 

$

 

Non-agency CMBS

 

35.1

 

1.4

 

12.9

 

10.8

 

 

$

10.0

 

Total

 

$

41.6

 

$

1.4

 

$

12.9

 

$

10.8

 

$

6.5

 

$

10.0

 

 

Non-agency Residential Mortgage-backed 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, 2011:

 

 

 

Fair Value

 

Super Senior(1)

 

Senior(2)

 

Subordinate(3)

 

 

 

($ in millions)

 

Prime

 

$

6.5

 

$

 

$

6.5

 

$

 

Sub-prime

 

 

 

 

 

Total

 

$

6.5

 

$

 

$

6.5

 

$

 

 


(1)                                  At issuance, Super Senior were rated AAA by Standard & Poor’s Rating Service (“Standard & Poor’s”) or Aaa by Moody’s Investors Service, Inc. and were senior to other AAA or Aaa bonds.

 

(2)           At issuance, Senior were rated AAA by Standard & Poor’s and were senior to non-AAA bonds.

 

(3)           At issuance, Subordinate were not rated AAA by Standard & Poor’s and were junior to other bonds.

 

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Non-agency Commercial Mortgage-backed Securities

 

The amount of fixed and floating rate securities and their tranche levels are as follows as of March 31, 2011:

 

 

 

Fair Value

 

Super Senior(1)

 

Senior(2)

 

Subordinate(3)

 

 

 

($ in millions)

 

Fixed rate CMBS

 

$

20.9

 

$

9.5

 

$

11.4

 

$

 

Floating rate CMBS

 

14.2

 

14.2

 

 

 

Total

 

$

35.1

 

$

23.7

 

$

11.4

 

$

 

 


(1)           At issuance, Super Senior were rated AAA by Standard & Poor’s and were senior to other AAA bonds.

 

(2)           At issuance, Senior were rated AAA by Standard & Poor’s and were senior to non-AAA bonds.

 

(3)           At issuance, Subordinate were not rated AAA by Standard & Poor’s and were senior to other bonds.

 

Rollforwards of Fair Value Measurements by Level

 

The changes in Level 1 fair value measurements for the three months ended March 31, 2011 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments

 

Total(1)

 

 

 

($ in millions)

 

Balance at January 1, 2011

 

$

263.3

 

$

245.4

 

$

 

$

 

$

508.7

 

Amortization/accretion

 

0.8

 

 

 

 

0.8

 

Total net realized and unrealized gains (losses)

 

1.9

 

12.5

 

 

 

14.4

 

Purchases

 

130.7

 

35.2

 

 

 

165.9

 

Sales

 

(133.9

)

(25.6

)

 

 

(159.5

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at March 31, 2011

 

$

262.8

 

$

267.5

 

$

 

$

 

$

530.3

 

 


(1)                                  Excludes short-term investments which are deemed to have a Level 1 designation.

 

The changes in Level 2 fair value measurements for the three months ended March 31, 2011 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments

 

Total

 

 

 

($ in millions)

 

Balance at January 1, 2011

 

$

2,053.1

 

$

0.2

 

$

93.8

 

$

 

$

2,147.1

 

Amortization/accretion

 

(5.1

)

 

0.3

 

 

(4.8

)

Total net realized and unrealized gains (losses)

 

0.7

 

 

1.1

 

 

1.8

 

Purchases

 

576.2

 

 

17.4

 

 

593.6

 

Sales

 

(565.5

)

 

(21.7

)

 

(587.2

)

Transfers in

 

27.7

 

 

1.4

 

 

29.1

 

Transfers out

 

(1.4

)

 

 

 

(1.4

)

Balance at March 31, 2011

 

$

2,085.7

 

$

0.2

 

$

92.3

 

$

 

$

2,178.2

 

 

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Table of Contents

 

The changes in Level 3 fair value measurements for the three months ended March 31, 2011 are as follows:

 

 

 

Fixed
maturity
investments

 

Common
equity
securities

 

Convertible
bonds

 

Other
investments(1)

 

Total(1)

 

 

 

($ in millions)

 

Balance at January 1, 2011

 

$

99.1

 

$

39.7

 

$

 

$

150.2

 

$

289.0

 

Amortization/accretion

 

 

 

 

 

 

Total net realized and unrealized gains (losses)

 

1.8

 

(1.3

)

 

6.4

 

6.9

 

Purchases

 

0.3

 

3.9

 

 

1.8

 

6.0

 

Sales

 

 

(0.1

)

 

(17.0

)

(17.1

)

Transfers in

 

 

 

 

 

 

Transfers out

 

(27.7

)

 

 

 

(27.7

)

Balance at March 31, 2011

 

$

73.5

 

$

42.2

 

$

 

$

141.4

 

$

257.1

 

 


(1)                                  Excludes the carrying value of $21.6 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method.

 

“Transfers out” of Level 3 fixed maturity investments of $27.7 million for the three months ended March 31, 2011 were comprised of securities which had been previously classified as a Level 3 measurement and were 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.

 

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, 2011 and 2010:

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

1.8

 

$

2.3

 

Short-term investments

 

 

 

Common equity securities

 

(1.3

)

2.3

 

Convertible bonds

 

 

 

Other investments

 

1.5

 

 

Total

 

$

2.0

 

$

4.6

 

 

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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 tables summarize investments in hedge funds and private equity funds at March 31, 2011 and December 31, 2010:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Fair
Value

 

Unfunded
Commitments

 

Fair
Value

 

Unfunded
Commitments

 

 

 

($ in millions)

 

Hedge funds

 

 

 

 

 

 

 

 

 

Long/short credit and distressed

 

$

15.5

 

 

$

15.1

 

 

Long bank loan

 

1.3

 

 

2.0

 

 

Long/short equity

 

35.0

 

 

39.8

 

 

Long/short equity activist

 

2.2

 

 

6.5

 

 

Total hedge funds

 

$

54.0

 

 

$

63.4

 

 

Private equity funds

 

 

 

 

 

 

 

 

 

Insurance

 

$

4.2

 

$

0.1

 

$

3.5

 

$

0.1

 

Distressed residential real estate

 

23.1

 

 

24.6

 

 

Energy infrastructure and services

 

14.3

 

5.2

 

13.6

 

5.2

 

Healthcare

 

1.2

 

3.5

 

0.8

 

4.0

 

Multi-sector

 

19.3

 

5.7

 

19.1

 

6.3

 

Private equity secondaries

 

6.6

 

2.7

 

6.9

 

2.9

 

Real estate

 

4.6

 

0.5

 

4.2

 

0.7

 

Total private equity funds

 

$

73.3

 

$

17.7

 

$

72.7

 

$

19.2

 

Total hedge funds and private equity funds(1)

 

$

127.3

 

$

17.7

 

$

136.1

 

$

19.2

 

 


(1)           Other investments also includes $14.1 million of an investment in a community reinvestment vehicle and $21.6 million and $21.2 million, respectively, of an investment in a tax advantaged federal affordable housing development fund as of March 31, 2011 and December 31, 2010.

 

Redemptions of investments in certain funds are subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period. The following summarizes the March 31, 2011 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:

 

 

 

Hedge Funds—Active Funds

 

 

 

30 - 59 days
notice

 

60 - 89 days
notice

 

90 - 119 days
notice

 

120+ days
notice

 

Total

 

 

 

($ in millions)

 

Redemption frequency