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 June 30, 2012

 

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

 

(I.R.S. Employer

incorporation or organization)

 

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. Yes x  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 July 25, 2012, 23,633,774 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.

 

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets:
As of June 30, 2012 and December 31, 2011

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income:
Three and six months ended June 30, 2012 and 2011

3

 

 

 

 

Consolidated Statements of Common Shareholders’ Equity:
Six months ended June 30, 2012 and 2011

4

 

 

 

 

Consolidated Statements of Cash Flows:
Six months ended June 30, 2012 and 2011

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

ITEM 2.

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

40

 

 

 

 

Results of Operations —For the three and six months ended June 30, 2012 and 2011

42

 

 

 

 

Liquidity and Capital Resources

57

 

 

 

 

Critical Accounting Estimates

61

 

 

 

 

Forward-Looking Statements

62

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

63

 

 

 

ITEM 4.

Controls and Procedures

63

 

 

 

PART II

OTHER INFORMATION

 

 

 

63

ITEM 1.

Legal Proceedings

 

 

 

 

ITEM 1A.

Risk Factors

63

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

ITEM 4.

Mine Safety Disclosure

64

 

 

 

ITEM 6.

Exhibits

64

 

 

 

SIGNATURES

65

 


 


Table of Contents

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

(in millions, except

 

 

 

share and per share

 

 

 

amounts)

 

Assets

 

 

 

 

 

Investment Securities:

 

 

 

 

 

Fixed maturity investments, at fair value

 

$

2,020.1

 

$

1,886.2

 

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

 

148.8

 

320.0

 

Common equity securities, at fair value

 

266.5

 

266.5

 

Convertible fixed maturity investments, at fair value

 

75.6

 

79.8

 

Other investments

 

155.3

 

155.1

 

Total investments

 

2,666.3

 

2,707.6

 

Cash

 

27.0

 

54.9

 

Reinsurance recoverable on unpaid losses

 

2,040.7

 

2,167.5

 

Reinsurance recoverable on paid losses

 

24.2

 

16.5

 

Premiums receivable

 

275.9

 

230.9

 

Deferred acquisition costs

 

120.9

 

123.5

 

Ceded unearned premiums

 

10.9

 

10.7

 

Net deferred tax asset

 

84.3

 

93.6

 

Investment income accrued

 

13.7

 

14.1

 

Accounts receivable on unsettled investment sales

 

7.1

 

0.5

 

Other assets

 

270.0

 

269.2

 

Assets held for sale

 

 

132.6

 

Total assets

 

$

5,541.0

 

$

5,821.6

 

Liabilities

 

 

 

 

 

Loss and LAE reserves

 

$

3,175.3

 

$

3,358.6

 

Unearned premiums

 

570.4

 

528.0

 

Debt

 

269.8

 

269.7

 

Ceded reinsurance payable

 

26.6

 

23.4

 

Accounts payable on unsettled investment purchases

 

38.1

 

22.7

 

Other liabilities

 

314.5

 

397.7

 

Liabilities held for sale

 

 

107.6

 

Total liabilities

 

4,394.7

 

4,707.7

 

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, 95,388,512 and 95,068,457 shares)

 

1,017.6

 

1,002.2

 

Retained earnings

 

124.8

 

108.5

 

Accumulated other comprehensive loss, after tax:

 

 

 

 

 

Other comprehensive income and loss items

 

(10.6

)

(10.9

)

Total OneBeacon’s common shareholders’ equity

 

1,131.8

 

1,099.8

 

Total noncontrolling interests

 

14.5

 

14.1

 

Total OneBeacon’s common shareholders’ equity and noncontrolling interests

 

1,146.3

 

1,113.9

 

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

 

$

5,541.0

 

$

5,821.6

 

 

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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

282.0

 

$

247.5

 

$

554.8

 

$

492.6

 

Net investment income

 

14.0

 

18.7

 

28.7

 

39.7

 

Net realized and unrealized investment (losses) gains

 

(11.9

)

11.0

 

17.9

 

34.1

 

Net other revenues (expenses)

 

0.2

 

(11.5

)

0.3

 

(10.7

)

Total revenues

 

284.3

 

265.7

 

601.7

 

555.7

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and LAE

 

152.5

 

137.9

 

301.8

 

268.3

 

Policy acquisition expenses

 

60.1

 

53.5

 

117.5

 

102.5

 

Other underwriting expenses

 

52.0

 

44.1

 

100.8

 

93.4

 

General and administrative expenses

 

2.6

 

2.6

 

5.3

 

4.9

 

Interest expense on debt

 

4.0

 

6.0

 

8.1

 

12.3

 

Total expenses

 

271.2

 

244.1

 

533.5

 

481.4

 

Pre-tax income from continuing operations

 

13.1

 

21.6

 

68.2

 

74.3

 

Income tax expense

 

(0.6

)

(4.4

)

(11.0

)

(14.1

)

Net income from continuing operations

 

12.5

 

17.2

 

57.2

 

60.2

 

Loss from discontinued operations, net of tax

 

 

(1.2

)

(0.1

)

(1.9

)

Net income including noncontrolling interests

 

12.5

 

16.0

 

57.1

 

58.3

 

Less: Net income attributable to noncontrolling interests

 

(0.2

)

(0.5

)

(0.8

)

(0.9

)

Net income attributable to OneBeacon’s common  shareholders

 

12.3

 

15.5

 

56.3

 

57.4

 

Change in other comprehensive income and loss items

 

0.1

 

 

0.3

 

0.1

 

Comprehensive income attributable to OneBeacon’s common shareholders

 

$

12.4

 

$

15.5

 

$

56.6

 

$

57.5

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net income from continuing operations per share

 

$

0.13

 

$

0.18

 

$

0.60

 

$

0.64

 

Loss from discontinued operations, net of tax, per share

 

 

(0.01

)

 

(0.02

)

Net income attributable to OneBeacon’s common shareholders per share

 

0.13

 

0.16

 

0.59

 

0.61

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per OneBeacon’s common share

 

$

0.21

 

$

1.21

 

$

0.42

 

$

1.42

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

OneBeacon’s Common Shareholders’ Equity

 

 

 

 

 

 

 

Common

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

 

 

comprehensive

 

Noncontrolling

 

 

 

shareholders’

 

paid-in

 

Retained

 

(loss) income

 

interests,

 

 

 

equity

 

surplus

 

earnings

 

after tax

 

after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

1,099.8

 

$

1,002.2

 

$

108.5

 

$

(10.9

)

$

14.1

 

Net income

 

56.3

 

 

56.3

 

 

0.8

 

Amortization of restricted share awards

 

1.1

 

1.1

 

 

 

 

Issuance of common shares

 

0.3

 

0.3

 

 

 

0.2

 

Dividends

 

(40.0

)

 

(40.0

)

 

(0.6

)

Other comprehensive income, after tax

 

0.3

 

 

 

0.3

 

 

Gain on sale of OneBeacon Holdings (Luxembourg) S.à r.l.

 

14.0

 

14.0

 

 

 

 

Balances at June 30, 2012

 

$

1,131.8

 

$

1,017.6

 

$

124.8

 

$

(10.6

)

$

14.5

 

 

 

 

OneBeacon’s Common Shareholders’ Equity

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

Common

 

shares and

 

 

 

Accum. other

 

Noncontrolling

 

 

 

shareholders’

 

paid-in

 

Retained

 

comprehensive

 

interests,

 

 

 

equity

 

surplus

 

earnings

 

income, after tax

 

after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011

 

$

1,229.0

 

$

1,000.5

 

$

228.2

 

$

0.3

 

$

19.9

 

Net income

 

57.4

 

 

57.4

 

 

0.9

 

Amortization of restricted share and option awards

 

0.4

 

0.4

 

 

 

 

Issuance of common shares

 

0.3

 

0.3

 

 

 

0.3

 

Repurchases and retirements of common shares

 

 

 

 

 

(1.3

)

Dividends

 

(134.9

)

 

(134.9

)

 

(0.9

)

Other comprehensive income, after tax

 

0.1

 

 

 

0.1

 

 

Balances at June 30, 2011

 

$

1,152.3

 

$

1,001.2

 

$

150.7

 

$

0.4

 

$

18.9

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

ONEBEACON INSURANCE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

Cash flows from operations:

 

 

 

 

 

Net income including noncontrolling interests

 

$

57.1

 

$

58.3

 

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

 

 

 

 

 

Net loss from discontinued operations

 

0.1

 

1.9

 

Net realized and unrealized investment gains

 

(17.9

)

(34.1

)

Net other realized losses

 

 

11.7

 

Deferred income tax expense

 

9.7

 

8.8

 

Other operating items:

 

 

 

 

 

Net change in loss and LAE reserves

 

(183.3

)

(154.4

)

Net change in unearned premiums

 

42.4

 

(54.8

)

Net change in ceded reinsurance payable

 

3.2

 

(98.3

)

Net change in ceded unearned premiums

 

(0.2

)

87.7

 

Net change in premiums receivable

 

(45.0

)

(4.8

)

Net change in reinsurance recoverable on paid and unpaid losses

 

119.1

 

95.6

 

Net change in other assets and liabilities

 

(55.8

)

(34.7

)

Net cash used for operations — continuing operations

 

(70.6

)

(117.1

)

Net cash used for operations — discontinued operations

 

(2.0

)

(0.3

)

Net cash used for operations

 

(72.6

)

(117.4

)

Cash flows from investing activities:

 

 

 

 

 

Net maturities, purchases and sales of short-term investments

 

102.6

 

183.9

 

Maturities of fixed maturity investments

 

95.0

 

303.9

 

Sales of fixed maturity investments

 

862.7

 

809.9

 

Sales of common equity securities

 

26.9

 

28.1

 

Sales of convertible fixed maturity investments

 

9.0

 

29.5

 

Distributions and redemptions of other investments

 

10.6

 

26.6

 

Purchases of fixed maturity investments

 

(1,004.1

)

(915.0

)

Purchases of common equity securities

 

(31.7

)

(40.6

)

Purchases of convertible fixed maturity investments

 

(3.6

)

(16.3

)

Contributions for other investments

 

(6.8

)

(3.1

)

Net change in unsettled investment purchases and sales

 

8.8

 

7.6

 

Net acquisitions of property and equipment

 

(0.7

)

(2.9

)

Net cash provided from investing activities — continuing operations

 

68.7

 

411.6

 

Net cash provided from investing activities — discontinued operations

 

 

 

Net cash provided from investing activities

 

68.7

 

411.6

 

Cash flows from financing activities:

 

 

 

 

 

Repurchases of debt

 

 

(161.6

)

Cash dividends paid to common shareholders

 

(40.0

)

(134.9

)

Gain on sale of OneBeacon Holdings (Luxembourg) S.à r.l.

 

14.0

 

 

Net cash used for financing activities — continuing operations

 

(26.0

)

(296.5

)

Net cash used for financing activities — discontinued operations

 

 

 

Net cash used for financing activities

 

(26.0

)

(296.5

)

Net decrease in cash during period

 

(29.9

)

(2.3

)

Cash reclassified from assets held for sale

 

5.5

 

 

Cash transferred as part of the AutoOne Transaction

 

(3.5

)

 

Net decrease excluding cash relating to the AutoOne Transaction

 

(27.9

)

(2.3

)

Cash balance at beginning of period

 

54.9

 

33.6

 

Cash balance at end of period

 

$

27.0

 

$

31.3

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

8.1

 

$

10.6

 

Net tax payments (refunds from) to state and national governments

 

0.3

 

(4.3

)

 

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 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 June 30, 2012, White Mountains owned 75.2% 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 a number of 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 the results of the non-specialty commercial lines business, to which OneBeacon sold the renewal rights, 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 Company and its intermediate subsidiaries which include OneBeacon U.S. Financial Services, 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.

 

On February 22, 2012, OneBeacon completed the sale of its AutoOne Insurance business (“AutoOne”) to Interboro Holdings, Inc. (“Interboro”) (the “AutoOne Transaction”). See Note 2. AutoOne has offered products and services to assigned risk markets primarily in New York and New Jersey. AutoOne had been included within the Other Insurance Operations segment, however, as a result of the sale, AutoOne has been presented as discontinued operations in the statements of operations and cash flows with the prior periods reclassified to conform to the current presentation. The AutoOne disposal group excludes investing and financing activities from amounts classified as discontinued operations. OneBeacon’s investing and financing operations are conducted on an overall consolidated level and accordingly, there are no separately identifiable investing or financing cash flows associated with AutoOne. Pursuant to the terms of the AutoOne Transaction, at closing, the legal entities included in the sale held an agreed upon level of invested assets and capital. The assets and liabilities associated with the AutoOne business as of December 31, 2011 have been presented in the balance sheet as held for sale assuming the investing and financing steps required to effect the sale were completed as of December 31, 2011.

 

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 state 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 2011 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 2011 Annual Report on Form 10-K for a complete discussion regarding OneBeacon’s significant accounting policies. As described above, certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.

 

6



Table of Contents

 

Recently Adopted Changes in Accounting Principles

 

Policy Acquisition Costs

 

On January 1, 2012, OneBeacon adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, codified within Accounting Standards Codification (“ASC”) 944. ASU 2010-26 changes the types of policy acquisition costs that are eligible for deferral. Specifically, ASU 2010-26 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 ASC 2010-26, 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.

 

OneBeacon adopted ASU 2010-26 prospectively. As a result of adopting ASU 2010-26, $5.6 million of unamortized deferred acquisition costs as of January 1, 2012, primarily relating to a portion of profit sharing commission that had been deferred under prior guidance, have been determined to no longer be deferrable and will be recognized in expense over the original amortization period. During the three and six months ended June 30, 2012, $2.0 million and $4.4 million, respectively, of the $5.6 million of unamortized acquisitions costs as of January 1, 2012 was recognized in expense. If OneBeacon had followed ASU 2010-26 in 2011, $2.5 million and $4.3 million, respectively, of acquisition costs that had been deferred would have been recognized in expense during the three and six months ended June 30, 2011.

 

Fair Value Measurements and Disclosures

 

On January 1, 2012, OneBeacon adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS (ASC 820). ASU 2011-04 clarifies existing guidance with respect to the concepts of highest and best use and valuation premise and measuring instruments classified within a reporting entity’s shareholders’ equity. ASU 2011-04 also clarifies disclosure requirements, requiring disclosure of quantitative information about unobservable inputs used in Level 3 fair value measurements. ASU 2011-04 also amends existing guidance. In circumstances where a reporting entity manages a portfolio of financial assets and liabilities based on the net market and counterparty credit risk exposures, ASU 2011-04 permits determination of the fair value of those instruments to be based on the net risk exposure. In addition, ASU 2011-04 permits the application of premiums or discounts to be applied in a fair value measurement to the extent that market participants would consider them in valuing the financial instruments. ASU 2011-04 also expands the required disclosures for Level 3 measurements, requiring that reporting entities provide a narrative description of the sensitivity of Level 3 fair value measurements to changes in unobservable inputs and the interrelationships between those inputs, if any. As a result of adopting ASU 2011-04, OneBeacon expanded its fair value disclosures. See Note 5.

 

Comprehensive Income

 

On January 1, 2012, OneBeacon adopted ASU 2011-05, Comprehensive Income (ASC 220). ASU 2011-05 requires all components of comprehensive income to be reported in a continuous financial statement or in two consecutive statements displaying the components of net income and the components of other comprehensive income. Since OneBeacon already presents comprehensive income in a continuous financial statement, adoption of ASU 2011-05 had no effect on OneBeacon’s financial statement presentation.

 

Goodwill Impairment

 

On January 1, 2012, OneBeacon adopted ASU 2011-08, Testing Goodwill for Impairment (ASC 350). ASU 2011-08 amends the guidance that requires an entity to test goodwill for impairment on at least an annual basis using a two-step quantitative test. The new guidance permits an entity to first assess facts and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines on the basis of this assessment that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performance of the two-step quantitative test is not required. Upon adoption, ASU 2011-08 had no effect on OneBeacon’s financial position, results of operations or cash flows.

 

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Recently Issued Accounting Pronouncements

 

Offsetting Assets and Liabilities

 

On December 16, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities (ASC 210). The new standard expands the required disclosures in circumstance where either balances have been offset or the right of offset exists. The required disclosures are intended to provide information to enable financial statement users to evaluate the effect or potential effect of netting arrangements on a reporting entity’s financial position. Disclosures required under the new standard include the gross amount of assets and liabilities recognized; the amounts that have been offset to arrive at the amounts presented in the statement of financial position; and any amounts subject to an enforceable master netting arrangement, whether or not such amounts have been offset. In addition, a description of the rights of offset should be disclosed. ASU 2011-11 is effective for periods beginning on or after January 1, 2013. OneBeacon is currently evaluating the effect adoption will have on its disclosures, but does not expect adoption to have a material effect on its financial position, results of operations or cash flows.

 

NOTE 2. Acquisitions and Dispositions

 

On February 22, 2012, OneBeacon completed the sale of the AutoOne business to Interboro. Pursuant to the terms of the sale, at closing, OneBeacon transferred to Interboro all of the issued and outstanding shares of common stock of AutoOne Insurance Company (“AOIC”) and AutoOne Select Insurance Company (“AOSIC”), through which substantially all of the AutoOne business was written on a direct basis. At closing, OneBeacon also transferred the assets, liabilities (including loss reserves and unearned premiums) and capital of the business as well as substantially all of the AutoOne infrastructure including systems and office space as well as certain staff. The closing balance sheet is subject to post-closing adjustments. The AutoOne Transaction also included the execution of a reinsurance agreement with certain subsidiaries of the Company pursuant to which OneBeacon cedes, on a 100% quota share basis, AutoOne business not directly written by AOIC and AOSIC. See Note 14 for further information regarding balances classified as held for sale and activity reported as discontinued operations.

 

As part of the AutoOne Transaction, Interboro LLC, the parent company of Interboro, issued a $3.0 million promissory note to OneBeacon Insurance Company (“OBIC”). Interboro LLC is required to repay the note in $1.0 million increments on each of the third, fourth and fifth anniversaries of the closing date, or February 22, 2015, 2016 and 2017. In addition, Interboro LLC is required to pre-pay principal in an amount equal to 100% of any dividend or distribution received from its subsidiaries, net of taxes and less $0.2 million. Interest accrues and is payable quarterly at a rate of LIBOR plus 550 basis points.

 

On January 24, 2012, OneBeacon sold all of the issued and outstanding shares of common stock of OneBeacon Holdings (Luxembourg) S.à r.l. (“OB Lux”) to White Sands Holdings (Luxembourg) S.à r.l (“White Sands”), a subsidiary of White Mountains, for $24.7 million. As a result of the sale, OneBeacon recorded a gain of $14.0 million as additional paid in capital. Net of transaction costs expensed through the statement of operations, the gain was $13.6 million.

 

Except as described above, during the three and six months ended June 30, 2012 and 2011, there were no acquisitions or dispositions.

 

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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 and six months ended June 30, 2012 and 2011:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Gross beginning balance

 

$

3,249.6

 

$

3,224.7

 

$

3,358.6

 

$

3,295.5

 

Less beginning reinsurance recoverable on unpaid losses

 

(2,109.0

)

(1,864.0

)

(2,167.5

)

(1,893.2

)

Net loss and LAE reserves

 

1,140.6

 

1,360.7

 

1,191.1

 

1,402.3

 

Loss and LAE incurred relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

155.8

 

148.0

 

294.6

 

283.5

 

Prior year losses

 

(3.3

)

(10.1

)

7.2

 

(15.2

)

Total incurred loss and LAE from continuing operations

 

152.5

 

137.9

 

301.8

 

268.3

 

Loss and LAE paid relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

(45.9

)

(54.1

)

(68.2

)

(79.2

)

Prior year losses

 

(112.6

)

(133.9

)

(290.1

)

(276.2

)

Total loss and LAE payments from continuing operations

 

(158.5

)

(188.0

)

(358.3

)

(355.4

)

Total incurred loss and LAE from discontinued operations

 

 

13.9

 

6.7

 

28.1

 

Total loss and LAE payments from discontinued operations

 

 

(18.9

)

(7.6

)

(37.7

)

Net loss and LAE reserves

 

1,134.6

 

1,305.6

 

1,133.7

 

1,305.6

 

Net loss and LAE reserves reclassified from held for sale (1)(2) 

 

 

 

64.7

 

 

Net loss and LAE reserves sold as part of the AutoOne Transaction (2) 

 

 

 

(63.8

)

 

Net ending balance

 

1,134.6

 

1,305.6

 

1,134.6

 

1,305.6

 

Plus ending reinsurance recoverable on unpaid losses

 

2,040.7

 

1,825.9

 

2,040.7

 

1,825.9

 

Gross ending balance

 

$

3,175.3

 

$

3,131.5

 

$

3,175.3

 

$

3,131.5

 

 

During the three months ended June 30, 2012, OneBeacon experienced $3.3 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $3.4 million in Specialty Insurance Operations, partially offset by $0.1 million of unfavorable loss and LAE reserve development on prior accident year loss reserves 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 June 30, 2011, OneBeacon experienced $10.1 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $7.1 million in Specialty Insurance Operations and $3.0 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 six months ended June 30, 2012, OneBeacon experienced $7.2 million of unfavorable loss and LAE reserve development on prior accident year loss reserves, with $12.5 million in Other Insurance Operations, partially offset by $5.3 million of favorable loss and LAE reserve development on prior accident year loss reserves in Specialty Insurance Operations. The unfavorable loss reserve development in the run-off business was primarily driven by case incurred development on a small number of claims related to multiple peril liability lines and general liability lines and also the impact of an adverse court ruling in Mississippi regarding a disputed assessment from an involuntary pool for hurricane Katrina claims. 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 general liability lines. During the six months ended June 30, 2011, OneBeacon experienced $15.2 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $8.3 million in Specialty Insurance Operations and $6.9 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.

 

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Table of Contents

 

In connection with purchase accounting for the OneBeacon Acquisition, OneBeacon was required to adjust to fair value the loss and LAE reserves and the related reinsurance recoverables on the balance sheet. As of June 30, 2012 and December 31, 2011, the remaining fair value reductions to both loss and LAE reserves and reinsurance recoverable on unpaid losses were $156.7 million and $163.3 million, respectively. The net reduction to loss and LAE reserves is being accreted through an income statement charge ratably with and over the period the claims are settled.

 

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 May 1, 2012, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2013. The program provides coverage for OneBeacon’s property business as well as certain acts of terrorism. Under the program, the first $25.0 million of losses resulting from any single catastrophe are retained and the next $155.0 million of losses resulting from the catastrophe are reinsured in three layers, although OneBeacon retains a co-participation of 55% of losses from $25.0 million to $40.0 million, 15% of losses from $40.0 million to $80.0 million, and 10% of losses from $80.0 million to $180.0 million. Any loss above $180.0 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.

 

At June 30, 2012, OneBeacon had $24.2 million of reinsurance recoverables on paid losses and $2,197.4 million (gross of $156.7 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.

 

 

 

 

Balance at

 

 

 

A.M. Best

 

($ in millions)

 

June 30, 2012

 

% of total

 

Rating (1)

 

National Indemnity Company and General Reinsurance Corporation (2) 

 

$

1,475.1

 

66

%

A

++

Hanover Insurance Company

 

74.8

 

3

%

A

 

Tokio Marine and Nichido Fire (3) 

 

54.4

 

2

%

A

++

Tower Insurance Company

 

26.2

 

1

%

A

-

Munich Reinsurance America

 

25.5

 

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), “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 $198.3 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 $28.3 million of reinsurance recoverables from the 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.

 

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Table of Contents

 

In connection with the OneBeacon Acquisition, Aviva caused OneBeacon to purchase two reinsurance contracts from subsidiaries of Berkshire Hathaway Inc.: 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 $2.3 billion of the coverage provided by NICO at June 30, 2012. Net losses paid totaled approximately $1.4 billion as of June 30, 2012. 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 $198.3 million of protection remaining under the NICO Cover at June 30, 2012.

 

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. OneBeacon has ceded estimated incurred losses of $562.0 million to GRC under the GRC Cover. As of June 30, 2012, OneBeacon has $409.3 million of reinsurance recoverable on unpaid losses outstanding under the GRC Cover.

 

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 2011 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 fixed maturity investments, 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 June 30, 2012 and December 31, 2011.

 

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 is accounted for under the equity method.

 

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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 and six months ended June 30, 2012 and 2011 consisted of the following:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

12.9

 

$

19.0

 

$

26.6

 

$

39.4

 

Short-term investments

 

0.1

 

0.1

 

0.1

 

0.1

 

Common equity securities

 

1.6

 

1.0

 

3.3

 

2.4

 

Convertible fixed maturity investments

 

1.2

 

0.8

 

2.3

 

1.8

 

Other investments

 

(0.1

)

(0.4

)

(0.2

)

(0.4

)

Gross investment income

 

15.7

 

20.5

 

32.1

 

43.3

 

Less investment expenses

 

(1.7

)

(1.8

)

(3.4

)

(3.6

)

Net investment income, pre-tax

 

$

14.0

 

$

18.7

 

$

28.7

 

$

39.7

 

 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

0.9

 

$

11.4

 

$

16.1

 

$

18.6

 

Short-term investments

 

 

 

 

 

Common equity securities

 

(6.7

)

1.5

 

(3.1

)

4.2

 

Convertible fixed maturity investments

 

0.5

 

1.2

 

1.4

 

4.5

 

Other investments (1) 

 

0.9

 

2.8

 

2.0

 

7.6

 

Net realized investment (losses) gains, pre-tax

 

$

(4.4

)

$

16.9

 

$

16.4

 

$

34.9

 

 


(1)          The three and six months ended June 30, 2011 include $1.3 million of realized losses related to the impairment of a receivable related to an outstanding hedge fund redemption.

 

12


 


Table of Contents

 

The net changes in fair value for the three and six months ended June 30, 2012 are as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 2012 (1)

 

June 30, 2012 (1)

 

 

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

foreign currency

 

changes in fair

 

Changes in net

 

foreign currency

 

changes in fair

 

 

 

unrealized gains

 

translation gains

 

value reflected

 

unrealized gains

 

translation gains

 

value reflected

 

 

 

and losses

 

and losses

 

in revenues

 

and losses

 

and losses

 

in revenues

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

4.8

 

$

(0.1

)

$

4.7

 

$

2.7

 

$

 

$

2.7

 

Short-term investments

 

 

 

 

 

 

 

Common equity securities

 

(6.5

)

 

(6.5

)

(1.7

)

 

(1.7

)

Convertible fixed maturity investments

 

(3.8

)

 

(3.8

)

(1.4

)

 

(1.4

)

Other investments

 

(1.9

)

 

(1.9

)

1.9

 

 

1.9

 

Total

 

$

(7.4

)

$

(0.1

)

$

(7.5

)

$

1.5

 

$

 

$

1.5

 

 


(1)       Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(0.1) million and $(0.2) million, pre-tax, for the three and six months ended June 30, 2012, respectively.

 

The net changes in fair value for the three and six months ended June 30, 2011 are as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 2011 (1)

 

June 30, 2011 (1)

 

 

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

foreign currency

 

changes in fair

 

Changes in net

 

foreign currency

 

changes in fair

 

 

 

unrealized gains

 

translation gains

 

value reflected

 

unrealized gains

 

translation gains

 

value reflected

 

 

 

and losses

 

and losses

 

in revenues

 

and losses

 

and losses

 

in revenues

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

2.5

 

$

 

$

2.5

 

$

(0.4

)

$

0.1

 

$

(0.3

)

Short-term investments

 

 

0.1

 

0.1

 

 

0.1

 

0.1

 

Common equity securities

 

(5.6

)

(0.1

)

(5.7

)

2.9

 

(0.1

)

2.8

 

Convertible fixed maturity investments

 

(4.1

)

 

(4.1

)

(6.3

)

 

(6.3

)

Other investments

 

1.3

 

 

1.3

 

2.9

 

 

2.9

 

Total

 

$

(5.9

)

$

 

$

(5.9

)

$

(0.9

)

$

0.1

 

$

(0.8

)

 


(1)       Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(1.0) million and $(1.4) million, pre-tax, for the three and six months ended June 30, 2011, respectively.

 

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Table of Contents

 

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 June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

Investment securities:

 

 

 

 

 

Gross unrealized investment gains

 

$

114.5

 

$

123.5

 

Gross unrealized investment losses

 

(10.9

)

(21.6

)

Net unrealized gains from investment securities

 

103.6

 

101.9

 

Income taxes

 

(36.3

)

(33.9

)

Total net unrealized investment gains, after tax

 

$

67.3

 

$

68.0

 

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of OneBeacon’s fixed maturity investments as of June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30, 2012

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

losses

 

value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

196.7

 

$

0.7

 

$

 

$

 

$

197.4

 

Debt securities issued by corporations

 

740.3

 

33.2

 

(1.0

)

(0.1

)

772.4

 

Municipal obligations

 

3.3

 

0.1

 

 

 

3.4

 

Asset-backed securities

 

949.1

 

7.5

 

(0.4

)

 

956.2

 

Foreign government obligations

 

7.6

 

0.5

 

(0.1

)

 

8.0

 

Preferred stocks

 

78.3

 

4.4

 

 

 

82.7

 

Total fixed maturity investments

 

$

1,975.3

 

$

46.4

 

$

(1.5

)

$

(0.1

)

$

2,020.1

 

 

 

 

December 31, 2011 (1)

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

losses

 

value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

213.6

 

$

1.8

 

$

 

$

 

$

215.4

 

Debt securities issued by corporations

 

725.8

 

34.9

 

(1.9

)

(0.1

)

758.7

 

Municipal obligations

 

2.2

 

 

 

 

2.2

 

Asset-backed securities

 

928.5

 

10.6

 

(0.8

)

 

938.3

 

Foreign government obligations

 

7.7

 

0.5

 

(0.1

)

 

8.1

 

Preferred stocks

 

78.3

 

3.2

 

(6.2

)

 

75.3

 

Total fixed maturity investments

 

$

1,956.1

 

$

51.0

 

$

(9.0

)

$

(0.1

)

$

1,998.0

 

 


(1)       Carrying value includes $111.8 million of fixed maturity investments reclassified to assets held for sale in the consolidated balance sheet as part of the AutoOne Transaction.

 

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The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of OneBeacon’s common equity securities, convertible fixed maturity investments and other investments as of June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30, 2012

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

gains

 

value

 

 

 

($ in millions)

 

Common equity securities

 

$

242.3

 

$

29.2

 

$

(5.0

)

$

 

$

266.5

 

Convertible fixed maturity investments

 

73.5

 

3.2

 

(1.1

)

 

75.6

 

Other investments

 

122.9

 

35.7

 

(3.3

)

 

155.3

 

 

 

 

December 31, 2011

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

gains

 

value

 

 

 

($ in millions)

 

Common equity securities

 

$

240.6

 

$

30.3

 

$

(4.4

)

$

 

$

266.5

 

Convertible fixed maturity investments

 

76.3

 

4.4

 

(0.9

)

 

79.8

 

Other investments

 

124.6

 

37.8

 

(7.3

)

 

155.1

 

 

Fair value measurements

 

OneBeacon records its investments in accordance with ASC 820 which defines 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”). Fair value measurements are categorized into a 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”). 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 June 30, 2012 and December 31, 2011, approximately 92% and 93%, 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 or are not considered reasonable, OneBeacon estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating prepayment speeds and other relevant inputs. In those circumstances, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

 

OneBeacon’s investments in debt securities, including asset-backed securities, are generally valued using matrix and other pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.

 

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.

 

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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 June 30, 2012 and December 31, 2011, 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 both June 30, 2012 and December 31, 2011, other investments reported at fair value represented approximately 5% of the investment portfolio recorded at fair value. Other investments accounted for at fair value as of June 30, 2012 and December 31, 2011 were comprised of $53.2 million and $53.5 million, respectively, in hedge funds, $66.5 million and $65.7 million, respectively, in private equity funds, $14.1 million for both periods of an investment in a community reinvestment vehicle. At June 30, 2012 and December 31, 2011, OneBeacon held investments in 9 hedge funds and 15 and 14 private equity funds, respectively. The largest investment in a single fund was $12.4 million and $13.7 million, respectively, at June 30, 2012 and December 31, 2011. As of June 30, 2012 and December 31, 2011, other investments also included $21.5 million and $21.8 million, respectively, of an investment in a tax advantaged federal affordable housing development fund which is accounted for using the equity method.

 

The fair value measurements at June 30, 2012 and December 31, 2011 and their related inputs are as follows:

 

 

 

Fair value at

 

 

 

 

 

 

 

 

 

June 30, 2012

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

197.4

 

$

197.4

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

276.3

 

 

276.3

 

 

Industrial

 

152.5

 

 

152.5

 

 

Financial

 

87.8

 

 

87.8

 

 

Communications

 

51.2

 

 

51.2

 

 

Energy

 

50.7

 

 

50.7

 

 

Basic materials

 

95.2

 

 

95.2

 

 

Utilities

 

43.6

 

 

43.6

 

 

Technology

 

15.1

 

 

15.1

 

 

Debt securities issued by corporations

 

772.4

 

 

772.4

 

 

Municipal obligations

 

3.4

 

 

3.4

 

 

Asset-backed securities

 

956.2

 

 

941.5

 

14.7

 

Foreign government obligations

 

8.0

 

7.3

 

0.7

 

 

Preferred stocks

 

82.7

 

 

12.6

 

70.1

 

Fixed maturity investments

 

2,020.1

 

204.7

 

1,730.6

 

84.8

 

Short-term investments

 

148.8

 

148.8

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

74.2

 

73.3

 

0.1

 

0.8

 

Basic Materials

 

50.2

 

50.2

 

 

 

Consumer

 

44.5

 

44.4

 

0.1

 

 

Energy

 

27.9

 

27.9

 

 

 

Utilities

 

17.2

 

17.2

 

 

 

Other

 

52.5

 

52.5

 

 

 

Common equity securities

 

266.5

 

265.5

 

0.2

 

0.8

 

Convertible fixed maturity investments

 

75.6

 

 

75.6

 

 

Other investments(1) 

 

133.8

 

 

 

133.8

 

Total(1) 

 

$

2,644.8

 

$

619.0

 

$

1,806.4

 

$

219.4

 

 

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Table of Contents

 

 

 

Fair value at

 

 

 

 

 

 

 

 

 

December 31, 2011 (2)

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

215.4

 

$

215.4

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

299.7

 

 

299.7

 

 

Industrial

 

140.1

 

 

140.1

 

 

Financial

 

66.4

 

 

66.4

 

 

Communications

 

53.3

 

 

53.3

 

 

Energy

 

60.5

 

 

60.5

 

 

Basic materials

 

81.5

 

 

81.5

 

 

Utilities

 

42.5

 

 

42.5

 

 

Technology

 

14.7

 

 

14.7

 

 

Debt securities issued by corporations

 

758.7

 

 

758.7

 

 

Municipal obligations

 

2.2

 

 

2.2

 

 

Asset-backed securities

 

938.3

 

 

936.0

 

2.3

 

Foreign government obligations

 

8.1

 

7.4

 

0.7

 

 

Preferred stocks

 

75.3

 

 

11.5

 

63.8

 

Fixed maturity investments

 

1,998.0

 

222.8

 

1,709.1

 

66.1

 

Short-term investments

 

320.0

 

320.0

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

69.9

 

69.1

 

 

0.8

 

Basic Materials

 

56.2

 

56.2

 

 

 

Consumer

 

71.3

 

71.2

 

0.1

 

 

Energy

 

32.5

 

32.5

 

 

 

Utilities

 

17.9

 

17.9

 

 

 

Other

 

18.7

 

18.7

 

 

 

Common equity securities

 

266.5

 

265.6

 

0.1

 

0.8

 

Convertible fixed maturity investments

 

79.8

 

 

79.8

 

 

Other investments(1) 

 

133.3

 

 

 

133.3

 

Total(1) 

 

$

2,797.6

 

$

808.4

 

$

1,789.0

 

$

200.2

 

 


(1)       Excludes the carrying value of $21.5 million and $21.8 million, respectively, associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of June 30, 2012 and December 31, 2011.

 

(2)       Fair value includes $111.8 million of fixed maturity investments reclassified to assets held for sale in the December 31, 2011 consolidated balance sheet as part of the AutoOne Transaction.

 

At both June 30, 2012 and December 31, 2011, OneBeacon held one private preferred stock that represented approximately 85% 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 $38.1 million and $36.9 million, respectively, of liabilities recorded at fair value and included in other liabilities as of June 30, 2012 and December 31, 2011. 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 June 30, 2012 and December 31, 2011, all of the liabilities included in the $38.1 million and $36.9 million, respectively, have been classified as Level 1 measurements.

 

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Table of Contents

 

The following table summarizes the ratings of OneBeacon’s corporate debt securities as of June 30, 2012 and December 31, 2011:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

AA

 

$

65.3

 

$

61.9

 

A

 

349.5

 

307.3

 

BBB

 

346.2

 

378.2

 

BB

 

7.5

 

6.2

 

Other

 

3.9

 

5.1

 

Debt securities issued by corporations

 

$

772.4

 

$

758.7

 

 

Rollforwards of Fair Value Measurements by Level

 

The changes in Level 1 fair value measurements for the three and six months ended June 30, 2012 are as follows:

 

 

 

Fixed

 

Common

 

Convertible

 

 

 

 

 

 

 

maturity

 

equity

 

fixed maturity

 

Other

 

 

 

 

 

investments

 

securities

 

investments

 

investments

 

Total(1)

 

 

 

($ in millions)

 

Balance at January 1, 2012

 

$

222.8

 

$

265.6

 

$

 

$

 

$

488.4

 

Amortization/accretion

 

(0.1

)

 

 

 

(0.1

)

Total net realized and unrealized gains (losses)

 

0.1

 

8.4

 

 

 

8.5

 

Purchases

 

17.8

 

18.0

 

 

 

35.8

 

Sales

 

(28.8

)

(11.4

)

 

 

(40.2

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at March 31, 2012

 

$

211.8

 

$

280.6

 

$

 

$

 

$

492.4

 

Amortization/accretion

 

0.2

 

 

 

 

0.2

 

Total net realized and unrealized gains (losses)

 

(0.7

)

(12.3

)

 

 

(13.0

)

Purchases

 

6.6

 

15.1

 

 

 

21.7

 

Sales

 

(13.2

)

(17.9

)

 

 

(31.1

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at June 30, 2012

 

$

204.7

 

$

265.5

 

$

 

$

 

$

470.2

 

 


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

 

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Table of Contents

 

The changes in Level 2 fair value measurements for the three and six months ended June 30, 2012 are as follows:

 

 

 

Fixed

 

Common

 

Convertible

 

 

 

 

 

 

 

maturity

 

equity

 

fixed maturity

 

Other