OB 03.31.2014 10-Q
 
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, 2014
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
(State or other jurisdiction of
incorporation or organization)
 
98-0503315
(I.R.S. Employer
Identification No.)
 
 
 
601 Carlson Parkway
Minnetonka, Minnesota
(Address of principal executive offices)
 
55305
(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the Registrant 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
 
 
 
 
 (Do not check if a
smaller reporting company)
 
 
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 24, 2014, 23,541,649 Class A common shares, par value $0.01 per share, and 71,754,738 Class B common shares, par value $0.01 per share, were outstanding.
 




ONEBEACON INSURANCE GROUP, LTD.
TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I.     FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
 
 
(in millions, except
share and per share
amounts)
Assets
 
 
 
 
Investment Securities:
 
 
 
 
Fixed maturity investments, at fair value
 
$
1,743.6

 
$
1,700.9

Short-term investments, at amortized cost (which approximates fair value)
 
152.7

 
157.0

Common equity securities, at fair value
 
347.1

 
336.9

Convertible fixed maturity investments, at fair value
 
29.3

 
30.5

Other investments
 
143.0

 
139.6

Total investment securities
 
2,415.7

 
2,364.9

Cash
 
138.6

 
168.1

Reinsurance recoverables
 
83.1

 
89.9

Premiums receivable
 
249.2

 
228.2

Deferred acquisition costs
 
105.9

 
103.7

Net deferred tax asset
 
79.8

 
90.6

Investment income accrued
 
9.1

 
10.1

Accounts receivable on unsettled investment sales
 
6.7

 
3.3

Other assets
 
289.9

 
272.7

Assets held for sale
 
1,803.1

 
1,880.1

Total assets
 
$
5,181.1

 
$
5,211.6

Liabilities
 
 
 
 
Unpaid loss and loss adjustment expense reserves
 
$
1,069.8

 
$
1,054.3

Unearned premiums
 
582.2

 
544.9

Debt
 
274.7

 
274.7

Accounts payable on unsettled investment purchases
 
25.6

 
11.6

Other liabilities
 
292.6

 
338.6

Liabilities held for sale
 
1,803.1

 
1,880.1

Total liabilities
 
4,048.0

 
4,104.2

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, 95,296,387 and 95,404,138 shares)
 
1,021.5

 
1,022.5

Retained earnings
 
102.0

 
75.0

Accumulated other comprehensive income, after tax
 
6.8

 
6.8

Total OneBeacon's common shareholders' equity
 
1,130.3

 
1,104.3

Total noncontrolling interests
 
2.8

 
3.1

Total OneBeacon's common shareholders' equity and noncontrolling interests
 
1,133.1

 
1,107.4

Total liabilities, OneBeacon's common shareholders' equity and noncontrolling interests
 
$
5,181.1

 
$
5,211.6

   
See Notes to Consolidated Financial Statements.

1

Table of Contents

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended
March 31,
 
 
2014
 
2013
 
($ in millions, except per share
amounts)
Revenues
 
 
 
 
Earned premiums
 
$
276.5

 
$
286.5

Net investment income
 
10.0

 
9.4

Net realized and change in unrealized investment gains
 
18.9

 
28.4

Net other revenues
 
1.0

 
24.0

Total revenues
 
306.4

 
348.3

Expenses
 
 
 
 
Loss and loss adjustment expenses
 
149.4

 
148.9

Policy acquisition expenses
 
46.7

 
54.8

Other underwriting expenses
 
49.4

 
49.3

General and administrative expenses
 
3.3

 
4.0

Interest expense
 
3.2

 
3.2

Total expenses
 
252.0

 
260.2

Pre-tax income from continuing operations
 
54.4

 
88.1

Income tax expense
 
(6.5
)
 
(19.8
)
Net income from continuing operations
 
47.9

 
68.3

Income (loss) from discontinued operations, net of tax
 
(0.5
)
 
0.5

Net income, including noncontrolling interests
 
47.4

 
68.8

Less: Net income attributable to noncontrolling interests
 
(0.4
)
 
(0.4
)
Net income attributable to OneBeacon's common shareholders
 
47.0

 
68.4

Other comprehensive income, net of tax
 

 
0.1

Comprehensive income attributable to OneBeacon's common shareholders
 
$
47.0

 
$
68.5

 
 
 
 
 
Earnings per share attributable to OneBeacon's common shareholders—basic and diluted
 
 
 
 
Net income from continuing operations, per share
 
$
0.50

 
$
0.71

Loss from discontinued operations, net of tax, per share
 
(0.01
)
 

Net income attributable to OneBeacon's common shareholders per share
 
$
0.49

 
$
0.71

Dividends declared and paid per OneBeacon's common share
 
$
0.21

 
$
0.21

   
See Notes to Consolidated Financial Statements.


2

Table of Contents

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Unaudited)
 
 
OneBeacon's Common Shareholders' Equity
 
 
 
Total OneBeacon's common shareholders' equity and noncontrolling interests
 
 
Common
shares and
paid-in
surplus
 
Retained
earnings
 
Accum. other
comprehensive
income
 
Total OneBeacon common
shareholders'
equity
 
Noncontrolling
interests,
after tax
 
 
($ in millions)
Balances at January 1, 2014
 
$
1,022.5

 
$
75.0

 
$
6.8

 
$
1,104.3

 
$
3.1

 
$
1,107.4

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
47.0

 

 
47.0

 
0.4

 
47.4

Other comprehensive income, net of tax
 

 

 

 

 

 

Total comprehensive income
 

 
47.0

 

 
47.0

 
0.4

 
47.4

Amortization of restricted share awards
 
0.8

 

 

 
0.8

 

 
0.8

Issuance of common shares
 

 

 

 

 
0.2

 
0.2

Repurchase and retirement of common shares
 
(1.8
)
 

 

 
(1.8
)
 

 
(1.8
)
Dividends
 

 
(20.0
)
 

 
(20.0
)
 
(0.9
)
 
(20.9
)
Balances at March 31, 2014
 
$
1,021.5

 
$
102.0

 
$
6.8

 
$
1,130.3

 
$
2.8

 
$
1,133.1


 
 
OneBeacon's Common Shareholders' Equity
 
 
 
Total OneBeacon's common shareholders' equity and noncontrolling interests
 
 
Common
shares and
paid-in
surplus
 
Retained
earnings
 
Accum. other
comprehensive
income (loss)
 
Total OneBeacon common
shareholders'
equity
 
Noncontrolling
interests,
after tax
 
 
($ in millions)
Balances at January 1, 2013
 
$
1,019.1

 
$
9.2

 
$
(13.8
)
 
$
1,014.5

 
$
2.8

 
$
1,017.3

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
68.4

 

 
68.4

 
0.4

 
68.8

Other comprehensive income, net of tax
 

 

 
0.1

 
0.1

 

 
0.1

Total comprehensive income
 

 
68.4

 
0.1

 
68.5

 
0.4

 
68.9

Amortization of restricted share awards
 
0.8

 

 

 
0.8

 

 
0.8

Issuance of common shares
 

 

 

 

 
0.1

 
0.1

Dividends
 

 
(20.0
)
 

 
(20.0
)
 
(0.8
)
 
(20.8
)
Balances at March 31, 2013
 
$
1,019.9

 
$
57.6

 
$
(13.7
)
 
$
1,063.8

 
$
2.5

 
$
1,066.3

   See Notes to Consolidated Financial Statements.

3

Table of Contents

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three months ended March 31,
 
 
2014
 
2013
 
 
($ in millions)
Cash flows from operations:
 
 
 
 
Net income including noncontrolling interests
 
$
47.4

 
$
68.8

Charges (credits) to reconcile net income to cash flows provided from (used for) operations:
 
 
 
 
Net loss (income) from discontinued operations
 
0.5

 
(0.5
)
Net realized and change in unrealized investment gains
 
(18.9
)
 
(28.4
)
Net realized gain on sale of business
 

 
(23.0
)
Deferred income tax expense
 
10.9

 
22.4

Other operating items:
 
 
 
 
Net change in loss and LAE reserves
 
15.5

 
10.3

Net change in unearned premiums
 
37.3

 
(22.8
)
Net change in premiums receivable
 
(21.0
)
 
(1.8
)
Net change in reinsurance recoverable on paid and unpaid losses
 
6.8

 
2.4

Net change in other assets and liabilities
 
(59.5
)
 
(11.0
)
Net cash provided from operations—continuing operations
 
19.0

 
16.4

Net cash used for operations—discontinued operations
 
(14.6
)
 
(40.7
)
Net cash provided from (used for) operations
 
4.4

 
(24.3
)
Cash flows from investing activities:
 
 
 
 
Net maturities, purchases and sales of short-term investments
 
4.3

 
14.8

Maturities of fixed maturity investments
 
115.7

 
103.7

Sales of fixed maturity investments
 
324.6

 
632.7

Sales of common equity securities
 
24.3

 
89.7

Sales of convertible fixed maturity investments
 
6.8

 
29.6

Return of capital and distributions of other investments
 
1.6

 
18.6

Purchases of fixed maturity investments
 
(466.0
)
 
(674.2
)
Purchases of common equity securities
 
(26.0
)
 
(102.3
)
Purchases of convertible fixed maturity investments
 
(3.8
)
 
(5.0
)
Contributions for other investments
 
(2.3
)
 
(16.0
)
Proceeds from sale of business
 

 
31.3

Net change in unsettled investment purchases and sales
 
10.6

 
(18.3
)
Net acquisitions of property and equipment
 
(0.6
)
 
(3.0
)
Net cash (used for) provided from investing activities—continuing operations
 
(10.8
)
 
101.6

Net cash provided from investing activities—discontinued operations
 

 

Net cash (used for) provided from investing activities
 
(10.8
)
 
101.6

Cash flows from financing activities:
 
 
 
 
Cash dividends paid to common shareholders
 
(20.0
)
 
(20.0
)
Repurchases and retirements of common stock
 
(1.8
)
 

Payments on capital lease obligation
 
(1.3
)
 
(1.8
)
Net cash used for financing activities—continuing operations
 
(23.1
)
 
(21.8
)
Net cash used for financing activities—discontinued operations
 

 

Net cash used for financing activities
 
(23.1
)
 
(21.8
)
Net (decrease) increase in cash during period
 
(29.5
)
 
55.5

Cash balance at beginning of period
 
168.1

 
43.9

Cash balance at end of period
 
$
138.6

 
$
99.4


  See Notes to Consolidated Financial Statements.

4

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 U.S.-based operating companies are property and casualty insurance writers, most of which historically have operated in a multi-company pool or have participated in 100% quota share reinsurance agreements. OneBeacon formed an indirect wholly-owned subsidiary in 2013, Split Rock Insurance, Ltd. ("Split Rock"), a Bermuda-based reinsurance company, which reinsures certain risks of an affiliated entity. OneBeacon offers a wide range of specialty insurance products and services primarily 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, 2014, White Mountains owned 75.3% 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.
In October 2012, one of OneBeacon's indirect wholly-owned subsidiaries, OneBeacon Insurance Group LLC ("OneBeacon LLC"), entered into a definitive agreement (as amended, the "Stock Purchase Agreement") with Trebuchet US Holdings, Inc. ("Trebuchet"), a wholly-owned subsidiary of Armour Group Holdings Limited (together with Trebuchet, “Armour”), to sell its run-off business. See Note 2—"Acquisitions and Dispositions" and Note 15—"Discontinued Operations." OneBeacon's run-off business includes the results of OneBeacon's remaining non-specialty commercial lines business and certain other run-off business, including the vast majority of asbestos and environmental reserves, as well as certain purchase accounting adjustments related to the run-off business and the OneBeacon Acquisition (the “Runoff Business,” the sale of which is referred to as the “Runoff Transaction”). The assets and liabilities associated with the Runoff Business as of March 31, 2014 and December 31, 2013, 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 the current balance sheet date. The Runoff Business has been presented as discontinued operations in the consolidated statements of operations and cash flows. The Runoff Business 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 the Runoff Business. Pursuant to the terms of the Stock Purchase Agreement, the legal entities included in the sale and expected to be transferred to Armour will hold an agreed upon level of invested assets and capital at closing.
In anticipation of the Runoff Transaction, and as means to separate the Runoff Business from the ongoing specialty business, OneBeacon sought and received various regulatory approvals to terminate, enter into or amend various intercompany reinsurance agreements which took effect on October 1, 2012.
OneBeacon's reportable segments are Specialty Products, Specialty Industries, and Investing, Financing and Corporate. The Specialty Products segment is comprised of eight underwriting operating segments, including a new Crop underwriting operating segment, as well as the Collector Cars and Boats underwriting operating segment that was exited in 2013, representing an aggregation based on those that offer distinct products and tailored coverages and services to a broad customer base across the United States. During 2013, the Company received approval to provide Multiple Peril Crop Insurance ("MPCI") through the federal crop insurance program administered by the U.S. Department of Agriculture's Risk Management Agency ("RMA"). The Company has entered into an exclusive agreement with a managing general agency, Climate Crop Insurance Agency LLC ("The Climate Corporation"), to provide coverages through the federal program and other supplemental coverages, including crop-hail. MPCI net written premiums are estimated based on processed applications, which are typically received around the sales closing date, with necessary adjustments made as the Company receives acreage reports from the policyholders. Premiums written on this business are recognized as revenues and are earned ratably over the period of risk commencing with the sales closing date, which approximates the inception of the planting season, and ending with the estimated crop harvest date. The Company began writing crop business in the fourth quarter of 2013.

5

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. Nature of Operations and Summary of Significant Accounting Policies

The Specialty Industries segment is comprised of six underwriting operating segments, including the Energy underwriting operating segment that was exited in 2013, representing an aggregation based on those that focus on solving the unique needs of a particular customer or industry group.
The Investing, Financing and Corporate segment includes the investing and financing activities for OneBeacon on a consolidated basis, and certain other activities conducted through the Company and its intermediate subsidiaries.
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 2013 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 2013 Annual Report on Form 10-K for a complete discussion regarding OneBeacon’s significant accounting policies. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.
Recently Adopted Changes in Accounting Principles
Unrecognized Tax Benefits
Effective January 1, 2014, OneBeacon adopted ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASC 740). The new ASU requires balance sheet presentation of an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL") carryforward or tax credit carryforward rather than as a liability. The exception is in circumstances where a carryforward is not available to settle the additional taxes that might arise upon disallowance of the tax position under the tax law of the applicable jurisdiction. Prior to the issuance of ASU 2013-11, the guidance for unrecognized tax benefits under ASC 740 did not provide explicit guidance on whether an entity should present an unrecognized tax benefit as a liability or as a reduction of NOL carryforwards or other tax credits. In circumstances where an NOL carryforward is not available to offset settlement of any additional taxes arising from a disallowed tax position, the unrecognized tax benefit should be presented as a liability. The new guidance becomes effective for fiscal periods beginning on or after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective adoption is allowed. This adoption did not have any impact on the Company's financial statements.
Recently Issued Accounting Pronouncements
Qualified Affordable Housing Projects
In January 2014 the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects ("QAHP"), which permits companies to make an accounting policy election to account for investments in a QAHP using the proportional amortization method, if certain conditions are met. Under this method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, with the net investment performance recognized in the income statement as a component of income tax expense. The new guidance also requires certain new disclosures for all QAHP investments. ASU 2014-01 is effective for annual and interim reporting periods beginning after December 15, 2014 and must be applied retrospectively to all periods presented upon adoption. The Company currently holds an investment in a QAHP that is accounted for under the equity method and does not expect the adoption to have a material impact on its financial position, results of operations or cash flows.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for periods beginning after December 15, 2014. The Company currently has operations that are reported as discontinued operations and does not expect the adoption of this guidance  to have a  material effect on its financial position, results of operations, or cash flows.

6

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 2. Acquisitions and Dispositions
Runoff Business
As described in Note 1, in October 2012, OneBeacon entered into the Stock Purchase Agreement with respect to the sale of its Runoff Business to Armour. Pursuant to the terms of the Stock Purchase Agreement, at closing, OneBeacon will transfer to Armour all of the issued and outstanding shares of common stock of certain legal entities that will contain the assets, liabilities (including gross and ceded loss reserves) and capital supporting the business as well as certain elements of the Runoff Business infrastructure, including staff and office space. Additionally, as part of the Runoff Transaction, OneBeacon may provide, under certain scenarios, financing in the form of surplus notes.
The Runoff Transaction is subject to various closing conditions, primarily the receipt of regulatory approvals. The regulatory review process has included a third party actuarial review of the Runoff Business loss and LAE reserves, completed in September of 2013; in addition, an independent stochastic modeling of the future cash flows of the Runoff Business was subsequently required. At closing, Armour and/or OneBeacon Insurance Company ("OBIC") and certain legal entities within the ongoing OneBeacon structure will enter into various ancillary agreements, including the amendment of existing reinsurance agreements and administrative services agreements, to support the separation of the Runoff Business and subsequent transfer to Armour. Also as part of the Runoff Transaction, at closing, OneBeacon and Armour will enter into a Transition Services Agreement (“TSA”), pursuant to which OneBeacon will provide certain transition services to Armour during the term of the TSA, which has an initial term of one year. OneBeacon has concluded that continuing involvement after the closing of the transaction is insignificant relative to the business being sold.
The Pennsylvania Insurance Department is currently conducting a required examination of the Runoff Business as part of its regulatory review of the Runoff Transaction. The Company expects the Runoff Transaction to close in the second half of 2014.
As described in Note 1, the Runoff Business is presented as held for sale as of March 31, 2014 and December 31, 2013, and as discontinued operations for the three months ended March 31, 2014 and 2013. See Note 15—"Discontinued Operations" for further information regarding balances classified as held for sale and activity reported as discontinued operations.
Essentia Insurance Company
Effective January 1, 2013, OneBeacon completed the sale of Essentia Insurance Company ("Essentia"), an indirect wholly-owned subsidiary which wrote the collector cars and boats business, to Markel Corporation. Concurrently, OneBeacon and Hagerty Insurance Agency ("Hagerty") terminated their underwriting arrangement with respect to the collector cars and boats business. OneBeacon recognized a pre-tax gain on sale of $23.0 million ($15.0 million after tax) in the first quarter of 2013. The Company had negligible earned premiums for the three months ended March 31, 2014 and earned premiums of $40.6 million for the three months ended March 31, 2013 related to the Collector Cars and Boats underwriting operating segment.

7

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 3. Unpaid Loss and Loss Adjustment Expense (LAE) Reserves
Loss and LAE reserve summary - Ongoing Business
The following table summarizes the loss and LAE reserve activities of OneBeacon's insurance subsidiaries for the three months ended March 31, 2014 and 2013:
 
 
Three months ended
March 31,
 
 
 
2014
 
2013
 
 
 
($ in millions)
 
Gross beginning balance
 
$
1,054.3

 
$
1,000.0

 
Less beginning reinsurance recoverable on unpaid losses
 
(80.2
)
 
(107.3
)
 
Net beginning loss and LAE reserves
 
974.1

 
892.7

 
Loss and LAE incurred relating to:
 
 
 
 
 
Current year losses
 
150.8

 
151.8

 
Prior year losses
 
(1.4
)
 
(2.9
)
 
Total incurred loss and LAE from continuing operations
 
149.4

 
148.9

 
Loss and LAE paid relating to:
 
 
 
 
 
Current year losses
 
(18.3
)
 
(19.8
)
 
Prior year losses
 
(115.5
)
 
(117.3
)
 
Total loss and LAE payments from continuing operations
 
(133.8
)
 
(137.1
)
 
Net loss and LAE reserves
 
989.7

 
904.5

 
Total incurred loss and LAE from discontinued operations
 

 

 
Total loss and LAE payments from discontinued operations
 
(11.1
)
 
(45.7
)
 
Net loss and LAE reserves
 
978.6

 
858.8

 
Net change in loss and LAE reserves reported in liabilities held for sale
 
11.1

(1) 
45.7

(2) 
Net ending loss and LAE reserves
 
989.7

 
904.5

 
Plus ending reinsurance recoverable on unpaid losses
 
80.1

 
105.8

 
Gross ending loss and LAE reserves
 
$
1,069.8

 
$
1,010.3

 
_______________________________________________________________________________
(1)
Consists of the change in net loss and LAE reserves to $177.3 million from $188.4 million, which amounts were classified as held for sale as of March 31, 2014 and December 31, 2013, respectively, in connection with the Runoff Transaction.
(2)
Consists of the change in net loss and LAE reserves to $166.1 million from $211.8 million, which amounts were classified as held for sale as of March 31, 2013 and December 31, 2012, respectively, in connection with the Runoff Transaction.
Loss and LAE development - Ongoing Business
Loss and LAE development—2014
During the three months ended March 31, 2014, OneBeacon experienced $1.4 million of favorable net loss and LAE reserve development on prior accident year reserves. The development primarily related to the Ocean Marine business included in the International Marine Underwriters underwriting operating segment and the Technology underwriting operating segment.
Loss and LAE development—2013
During the three months ended March 31, 2013, OneBeacon recorded $2.9 million of favorable loss and LAE reserve development on prior accident year reserves driven by our medical facilities and managed care errors and omissions lines in our healthcare business, which is included in the Professional Insurance underwriting operating segment.
See Note 15—"Discontinued Operations" for a discussion of impacts to reserves for unpaid losses and LAE related to discontinued operations.

8

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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. See Note 15—"Discontinued Operations" for amounts related to the Runoff Business.
New Treaties
Effective January 1, 2014, OneBeacon entered into reinsurance treaties to provide coverage for the 2014 crop year. OneBeacon purchased an aggregate stop loss on its MPCI portfolio, providing 48.5% of coverage in excess of a 101.5% loss ratio on premiums covered by the contract and a separate aggregate stop loss providing 80% of coverage in excess of a 100% loss ratio on its crop-hail portfolio.
Reinsurance Recoverables
At March 31, 2014, OneBeacon had reinsurance recoverable on paid losses of $3.0 million and reinsurance recoverables on unpaid losses of $80.1 million. Reinsurance contracts do not relieve OneBeacon of its obligations. Therefore, collectibility of balances due from reinsurers is critical to OneBeacon's financial strength. The following table summarizes Standard & Poor's Financial Services, LLC ("Standard & Poor's") ratings for OneBeacon's reinsurers for its continuing insurance operations, excluding industry pools and associations, based upon reinsurance recoverable amounts on paid and unpaid losses and LAE:
 
 
Balance at
March 31, 2014
 
% of total
Standard & Poor's Rating(1):
 
($ in millions)
 
 
AA
 
$
26.1

 
31
%
A
 
51.7

 
62
%
BBB+, Not Rated and Other
 
5.3

 
7
%
Total reinsurance recoverables
 
$
83.1

 
100
%
_______________________________________________________________________________
(1) Standard & Poor's ratings as detailed above are "AA" (Very strong), "A" (Strong) and "BBB+" (Adequate).
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 2013 Annual Report on Form 10-K for a complete discussion.
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 change in unrealized investment gains on trading securities are reported in total revenues as net realized and unrealized investment gains 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 approximates fair value.
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 total revenues as net realized and change in unrealized investment gains. Other investments also include 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.

9

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

OneBeacon's net investment income is comprised primarily of interest income associated with fixed maturity investments, dividend income from its equity investments, and interest income from its short-term investments. Other investments primarily include hedge funds and private equity funds. Net investment income for the three months ended March 31, 2014, and 2013 consisted of the following:
 
 
Three months ended
March 31,
 
 
2014
 
2013
 
($ in millions)
Fixed maturity investments
 
$
10.3

 
$
9.9

Common equity securities
 
1.7

 
1.3

Convertible fixed maturity investments
 

 
0.4

Other investments
 
(0.3
)
 
(0.3
)
Gross investment income
 
11.7

 
11.3

Less investment expenses
 
(1.7
)
 
(1.9
)
Net investment income
 
$
10.0

 
$
9.4

The composition of net realized investment gains consisted of the following:
 
 
Three months ended
March 31,
 
 
2014
 
2013
 
($ in millions)
Fixed maturity investments
 
$
0.8

 
$
3.9

Common equity securities
 
5.4

 
16.7

Convertible fixed maturity investments
 
1.1

 
1.5

Other investments
 

 
1.8

Net realized investment gains
 
$
7.3

 
$
23.9

Accounts payable on unsettled investment purchases as of March 31, 2014 and December 31, 2013 were $25.6 million and $11.6 million, respectively, and accounts receivable on unsettled investment sales were $6.7 million and $3.3 million, respectively.

10

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The net changes in fair value for the three months ended March 31, 2014, and 2013 are as follows:
 
 
Three months ended March 31, 2014
 
 
Changes in net
unrealized investment
gains(1)
 
Changes in net
foreign currency
translation
gains (losses)(1)
 
Total net changes
in fair value reflected
in revenues(1)
 
($ in millions)
Fixed maturity investments
 
$
4.7

 
$

 
$
4.7

Common equity securities
 
3.1

 

 
3.1

Convertible fixed maturity investments
 
0.7

 

 
0.7

Other investments
 
3.1

 

 
3.1

Net change in fair value
 
$
11.6

 
$

 
$
11.6

 
 
Three months ended March 31, 2013
 
 
Changes in net
unrealized investment
gains (1)
 
Changes in net
foreign currency
translation
gains (losses)(1)
 
Total net changes
in fair value reflected
in revenues(1)
 
($ in millions)
Fixed maturity investments
 
$
(4.4
)
 
$

 
$
(4.4
)
Common equity securities
 
7.9

 

 
7.9

Convertible fixed maturity investments
 
(0.9
)
 

 
(0.9
)
Other investments
 
1.9

 

 
1.9

Net change in fair value
 
$
4.5

 
$

 
$
4.5

_______________________________________________________________________________
(1)
Includes pre-tax changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains' common control of $(0.1) million for the three months ended March 31, 2013, with none recorded in the 2014 period.
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, 2014 and December 31, 2013 were as follows:
 
 
March 31,
2014
 
December 31,
2013
 
 
($ in millions)
Investment securities:
 
 
 
 
Gross unrealized investment gains
 
$
142.7

 
$
133.7

Gross unrealized investment losses
 
(6.7
)
 
(9.3
)
Total net unrealized investment gains, pre-tax
 
136.0

 
124.4

Income taxes
 
(37.3
)
 
(33.8
)
Total net unrealized investment gains, after tax
 
$
98.7

 
$
90.6


11

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The cost or amortized cost, gross unrealized pre-tax investment gains and losses, net foreign currency losses and carrying values of fixed maturity investments as of March 31, 2014 and December 31, 2013 were as follows:
 
 
March 31, 2014(1)
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
losses
 
Carrying
value
 
 
($ in millions)
U.S. Government and agency obligations
 
$
209.9

 
$
0.2

 
$

 
$

 
$
210.1

Debt securities issued by corporations
 
741.2

 
14.8

 
(0.3
)
 

 
755.7

Municipal obligations
 
32.1

 
0.2

 
(0.2
)
 

 
32.1

Mortgage-backed and asset-backed securities
 
881.8

 
1.7

 
(2.2
)
 

 
881.3

Foreign government obligations
 
2.0

 
0.3

 

 

 
2.3

Preferred stocks
 
78.3

 
6.0

 

 

 
84.3

Total fixed maturity investments
 
$
1,945.3

 
$
23.2

 
$
(2.7
)
 
$

 
$
1,965.8

 
 
December 31, 2013(1)
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains
 
Carrying
value
 
 
($ in millions)
U.S. Government and agency obligations
 
$
131.0

 
$
0.2

 
$
(0.1
)
 
$

 
$
131.1

Debt securities issued by corporations
 
741.7

 
14.1

 
(1.3
)
 

 
754.5

Municipal obligations
 
16.9

 

 
(0.4
)
 

 
16.5

Mortgage-backed and asset-backed securities
 
951.5

 
1.2

 
(3.2
)
 

 
949.5

Foreign government obligations
 
2.0

 
0.3

 

 

 
2.3

Preferred stocks
 
78.3

 
5.0

 

 

 
83.3

Total fixed maturity investments
 
$
1,921.4

 
$
20.8

 
$
(5.0
)
 
$

 
$
1,937.2

_______________________________________________________________________________
(1)
Includes carrying value of $222.2 million and $236.3 million of fixed maturity investments reclassified to assets held for sale in the consolidated balance sheets as part of the Runoff Transaction as of March 31, 2014 and December 31, 2013, respectively.

12

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The cost or amortized cost, gross unrealized pre-tax investment gains and losses, net foreign currency gains and carrying values of common equity securities, convertible fixed maturity investments and other investments as of March 31, 2014 and December 31, 2013 were as follows:
 
 
March 31, 2014
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains
 
Carrying
value
 
 
($ in millions)
Common equity securities
 
$
274.4

 
$
73.5

 
$
(1.0
)
 
$
0.2

 
$
347.1

Convertible fixed maturity investments
 
24.3

 
5.2

 
(0.2
)
 

 
29.3

Other investments
 
105.0

 
40.8

 
(2.8
)
 

 
143.0

Total common equity securities, convertible fixed maturity investments and other investments
 
$
403.7

 
$
119.5

 
$
(4.0
)
 
$
0.2

 
$
519.4

 
 
December 31, 2013
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains
 
Carrying
value
 
 
($ in millions)
Common equity securities
 
$
267.2

 
$
70.4

 
$
(0.9
)
 
$
0.2

 
$
336.9

Convertible fixed maturity investments
 
26.3

 
4.5

 
(0.3
)
 

 
30.5

Other investments
 
104.7

 
38.0

 
(3.1
)
 

 
139.6

Total common equity securities, convertible fixed maturity investments and other investments
 
$
398.2

 
$
112.9

 
$
(4.3
)
 
$
0.2

 
$
507.0

As of March 31, 2014 and December 31, 2013, the Company held unrestricted collateral from its customers, which is included in cash and invested assets, relating to its surety business of $64.3 million and $63.3 million, respectively. The obligation to return these funds is included in other liabilities in the consolidated balance sheets.
Fair value measurements
As of both March 31, 2014 and December 31, 2013, approximately 92% of the investment portfolio recorded at fair value was priced based upon observable inputs.
The fair values of OneBeacon's investments in hedge funds and private equity funds have been classified as Level 3 under the fair value hierarchy since the fund managers do not provide sufficient information to independently evaluate the pricing inputs and methods for each underlying investment, and therefore the inputs are considered to be unobservable. At March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 were comprised of $51.9 million and $49.4 million, respectively, in hedge funds, $57.2 million and $56.1 million, respectively, in private equity funds, and $14.4 million for both periods in an investment in a community reinvestment vehicle. Additionally, other investments accounted for at fair value as of March 31, 2014 included $0.2 million in trust certificates issued upon dissolution of a private equity fund, with no such investments held as of December 31, 2013. As of March 31, 2014 and December 31, 2013, OneBeacon held investments in 9 and 8 hedge funds, respectively, and 18 and 19 private equity funds, respectively. The largest investment in a single fund was $15.1 million and $14.9 million at March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014 and December 31, 2013, other investments also included $19.3 million and $19.7 million, respectively, of an investment in a tax advantaged federal affordable housing development fund which is accounted for using the equity method.

13

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The following tables summarize the Company's fair value measurements for investments at March 31, 2014 and December 31, 2013 by level:
 
 
Fair value at
March 31, 2014
(2)
 
Level 1
 
Level 2
 
Level 3
 
 
($ in millions)
Fixed maturity investments:
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
 
$
210.1

 
$
210.1

 
$

 
$

Debt securities issued by corporations:
 
 

 
 
 
 
 
 
Consumer
 
220.9

 

 
220.9

 

Financial
 
147.1

 

 
147.1

 

Communications
 
100.0

 

 
100.0

 

Industrial
 
97.4

 

 
97.4

 

Energy
 
62.6

 

 
62.6

 

Basic materials
 
55.6

 

 
55.6

 

Utilities
 
43.1

 

 
43.1

 

Technology
 
29.0

 

 
29.0

 

Debt securities issued by corporations
 
755.7

 

 
755.7

 

Mortgage-backed and asset-backed securities
 
881.3

 

 
862.9

 
18.4

Preferred stocks
 
84.3

 

 
13.0

 
71.3

Municipal obligations
 
32.1

 

 
32.1

 

Foreign government obligations
 
2.3

 
1.6

 
0.7

 

Fixed maturity investments
 
1,965.8

 
211.7

 
1,664.4

 
89.7

Short-term investments
 
152.7

 
152.7

 

 

Common equity securities:
 
 
 
 
 
 
 
 
Consumer
 
123.3

 
123.3

 

 

Financials
 
83.0

 
82.9

 

 
0.1

Energy
 
35.9

 
35.9

 

 

Basic Materials
 
20.9

 
20.9

 

 

Utilities
 
9.6

 
9.6

 

 

Other
 
74.4

 
74.4

 

 

Common equity securities
 
347.1

 
347.0

 

 
0.1

Convertible fixed maturity investments
 
29.3

 

 
29.3

 

Other investments(1)
 
123.7

 

 

 
123.7

Total(1)
 
$
2,618.6

 
$
711.4

 
$
1,693.7

 
$
213.5

_______________________________________________________________________________
(1)
Excludes the carrying value of $19.3 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of March 31, 2014.
(2)
Fair value includes $222.2 million of fixed maturity investments reclassified to assets held for sale in the March 31, 2014 consolidated balance sheets as part of the Runoff Transaction.

14

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

 
 
Fair value at
December 31, 2013
(2)
 
Level 1
 
Level 2
 
Level 3
 
 
($ in millions)
Fixed maturity investments:
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
 
$
131.1

 
$
131.1

 
$

 
$

Debt securities issued by corporations:
 
 

 
 
 
 
 
 
Consumer
 
239.6

 

 
239.6

 

Financial
 
145.5

 

 
145.5

 

Industrial
 
106.0

 

 
106.0

 

Communications
 
91.5

 

 
91.5

 

Basic materials
 
64.4

 

 
64.4

 

Energy
 
40.5

 

 
40.5

 

Utilities
 
38.0

 

 
38.0

 

Technology
 
29.0

 

 
29.0

 

Debt securities issued by corporations
 
754.5

 

 
754.5

 

Mortgage-backed and asset-backed securities
 
949.5

 

 
938.6

 
10.9

Preferred stocks
 
83.3

 

 
12.3

 
71.0

Municipal obligations
 
16.5

 

 
16.5

 

Foreign government obligations
 
2.3

 
1.6

 
0.7

 

Fixed maturity investments
 
1,937.2

 
132.7

 
1,722.6

 
81.9

Short-term investments
 
157.0

 
155.9

 
1.1

 

Common equity securities:
 
 
 
 
 
 
 
 
Consumer
 
122.6

 
122.6

 

 

Financials
 
83.3

 
83.2

 

 
0.1

Energy
 
34.7

 
34.7

 

 

Basic Materials
 
20.3

 
20.3

 

 

Utilities
 
8.3

 
8.3

 

 

Other
 
67.7

 
67.7

 

 

Common equity securities
 
336.9

 
336.8

 

 
0.1

Convertible fixed maturity investments
 
30.5

 

 
30.5

 

Other investments(1)
 
119.9

 

 

 
119.9

Total(1)
 
$
2,581.5

 
$
625.4

 
$
1,754.2

 
$
201.9

_______________________________________________________________________________
(1)
Excludes the carrying value of $19.7 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of December 31, 2013.
(2)
Fair value includes $236.3 million of fixed maturity investments reclassified to assets held for sale in the December 31, 2013 consolidated balance sheets as part of the Runoff Transaction.
At both March 31, 2014 and December 31, 2013, OneBeacon held one private preferred stock that represented approximately 85% of its preferred stock portfolio. OneBeacon calculated its fair value using projected discounted cash flows based on a discount yield. The discounted yield was determined with inputs from quoted market yields for similar securities and adjusted for liquidity based on management’s best estimate of market conditions; this security is classified as a Level 3 measurement.

15

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The following table summarizes the ratings of OneBeacon's corporate debt securities as of March 31, 2014 and December 31, 2013:
 
 
March 31,
2014
 
December 31,
2013
 
 
($ in millions)
AA
 
$
47.1

 
$
51.2

A
 
352.2

 
357.9

BBB
 
355.6

 
345.4

BB
 

 

Other
 
0.8

 

Debt securities issued by corporations(1)
 
$
755.7

 
$
754.5

_______________________________________________________________________________
(1) Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor’s Financial Services LLC (“Standard and Poor’s”) and 2) Moody’s Investor Service (“Moody’s”).
Rollforwards of Fair Value Measurements by Level
The changes in Level 1 fair value measurements for the three months ended March 31, 2014 are as follows:
 
 
Fixed
maturity
investments
 
Common
equity
securities
 
Convertible
fixed
maturity
investments
 
Other
investments
 
Total(1)
 
 
($ in millions)
Balance at January 1, 2014
 
$
132.7

 
$
336.8

 
$

 
$

 
$
469.5

Amortization/accretion
 

 

 

 

 

Net realized and unrealized gains (losses)
 
0.1

 
8.5

 

 

 
8.6

Purchases
 
114.6

 
26.0

 

 

 
140.6

Sales
 
(35.7
)
 
(24.3
)
 

 

 
(60.0
)
Transfers in
 

 

 

 

 

Transfers out
 

 

 

 

 

Balance at March 31, 2014
 
$
211.7

 
$
347.0

 
$

 
$

 
$
558.7

_______________________________________________________________________________
(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, 2014 are as follows:
 
 
Fixed
maturity
investments
 
Common
equity
securities
 
Convertible
fixed
maturity
investments
 
Other
investments
 
Total
 
 
($ in millions)
Balance at January 1, 2014
 
$
1,722.6

 
$

 
$
30.5

 
$

 
$
1,753.1

Amortization/accretion
 
(2.6
)
 

 
(0.1
)
 

 
(2.7
)
Net realized and unrealized gains (losses)
 
5.0

 

 
1.9

 

 
6.9

Purchases
 
344.0

 

 
3.8

 

 
347.8

Sales
 
(404.6
)
 

 
(6.8
)
 

 
(411.4
)
Transfers in
 

 

 

 

 

Transfer out
 

 

 

 

 

Balance at March 31, 2014
 
$
1,664.4

 
$

 
$
29.3

 
$

 
$
1,693.7


16

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The changes in Level 3 fair value measurements for the three months ended March 31, 2014 and 2013 are as follows:
 
 
Fixed
maturity
investments
 
Common
equity
securities
 
Convertible
fixed
maturity
investments
 
Other
investments(1)
 
Total(1)
 
 
($ in millions)
Balance at January 1, 2014
 
$
81.9

 
$
0.1

 
$

 
$
119.9

 
$
201.9

Amortization/accretion
 

 

 

 

 

Net realized and unrealized gains (losses)
 
0.3

 

 

 
3.1

 
3.4

Purchases
 
7.5

 

 

 
2.3

 
9.8

Sales
 

 

 

 
(1.6
)
 
(1.6
)
Transfers in
 

 

 

 

 

Transfers out
 

 

 

 

 

Balance at March 31, 2014
 
$
89.7

 
$
0.1

 
$

 
$
123.7

 
$
213.5


 
 
Fixed
maturity
investments
 
Common
equity
securities
 
Convertible
fixed
maturity
investments
 
Other
investments(1)
 
Total(1)
 
 
($ in millions)
Balance at January 1, 2013
 
$
76.1

 
$
0.1

 
$

 
$
122.7

 
$
198.9

Amortization/accretion
 

 

 

 

 

Net realized and unrealized gains (losses)
 
0.1

 

 

 
3.7

 
3.8

Purchases
 
1.8

 

 

 
1.8

 
3.6

Sales
 

 

 

 
(4.5
)
 
(4.5
)
Transfers in
 

 

 

 

 

Transfers out
 

 

 

 

 

Balance at March 31, 2013
 
$
78.0

 
$
0.1

 
$

 
$
123.7

 
$
201.8

_______________________________________________________________________________
(1)
Excludes the carrying value of $19.3 million and $20.6 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of March 31, 2014 and 2013, respectively.
There were no “Transfers in” to Level 3 or "Transfers out" of Level 3 for the three months ended March 31, 2014 and 2013.
Significant Unobservable Inputs
As previously described, in certain circumstances, OneBeacon estimates the fair value of investments using industry standard pricing models and both observable and unobservable inputs.

17

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3, other than hedge funds and private equity funds, at March 31, 2014. The fair value of investments in hedge funds and private equity funds, which are classified within Level 3, are estimated using the net asset value of the funds.
Description(1)
 
Fair Value
 
Rating(2)
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
 
 
 
 
 
 
 
 
 
 
Non-agency commercial mortgage-backed securities
 
$
6.4

 
AAA
 
Broker indication
 
Prepayment/Default Rate
Discount Spread over Swap
 
0 CPY/0 CDR
0.8%
Non-agency commercial mortgage-backed securities
 
$
1.1

 
BBB-
 
Broker pricing
 
Broker quote
 
N/A
Other asset-backed securities
 
$
10.9

 
AA+
 
Broker pricing
 
Broker quote
 
N/A
Preferred stock
 
$
71.3

 
N/R
 
Discounted cash flow
 
Discount yield
 
6.9%
_________________________________________________________________________
(1) 
As of March 31, 2014, each asset type consists of one security.
(2) 
Credit ratings are assigned based on the following hierarchy: 1) Standard & Poor's and 2) Moody's
The assumed prepayment rate is a significant unobservable input used to estimate the fair value of investments in agency commercial mortgage-backed securities. Generally for bonds priced at a premium, increases in prepayment speeds will result in a lower fair value, while decreases in prepayment speed may result in a higher fair value, with the inverse for bonds priced at a discount.
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, 2014 and 2013:
 
 
Three months ended
March 31,
 
 
2014
 
2013
 
($ in millions)
Fixed maturity investments
 
$
0.3

 
$
0.1

Short-term investments
 

 

Common equity securities
 

 

Convertible fixed maturity investments
 

 

Other investments
 
3.1

 
1.9

Total
 
$
3.4

 
$
2.0

Mortgage-backed Securities
OneBeacon purchases commercial mortgage-backed securities ("CMBS") and residential mortgage-backed securities ("RMBS") to maximize its risk adjusted returns in the context of a diversified portfolio. OneBeacon's non-agency CMBS are generally short tenor and structurally senior, with approximately 30 points of subordination on average for fixed rate and floating rate CMBS as of March 31, 2014. 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, 2014, on average less than 1% of the underlying loans were reported as non-performing for both agency and non-agency CMBS held by OneBeacon. OneBeacon is not an originator of residential mortgage loans. OneBeacon did not hold any RMBS categorized as sub-prime as of March 31, 2014. OneBeacon's investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage-backed securities as of March 31, 2014. OneBeacon considers sub-prime mortgage-backed securities to be those that have underlying loan pools that exhibit weak credit characteristics or are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., OneBeacon considers investments backed primarily by second-liens to be sub-prime risks 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, 2014, OneBeacon held one mortgage-backed security with a market value of $6.4 million that was classified as non-prime.

18

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. Investment Securities

OneBeacon's non-agency residential mortgage-backed portfolio is generally of moderate average life, fixed rate and structurally senior. OneBeacon does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.
The following table summarizes the carrying value of OneBeacon's mortgage-backed and asset-backed securities as of March 31, 2014 and December 31, 2013:
 
 
March 31, 2014
 
December 31, 2013
 
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
 
 
($ in millions)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency:
 
 
 
 
 
 
 
 
 
 
 
 
GNMA
 
$
305.9

 
$
305.9

 
$

 
$
321.8

 
$
321.8

 
$

FNMA
 
64.8

 
64.8

 

 
36.5

 
36.5

 

FHLMC
 
23.0