OB 06.30.2014 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 quarterly period ended June 30, 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 (or for such shorter period that the Registrant was required to submit and post such files). 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 July 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 (UNAUDITED)

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
 
 
(in millions, except
share and per share
amounts)
Assets
 
 
 
 
Investment Securities:
 
 
 
 
Fixed maturity investments, at fair value
 
$
1,808.8

 
$
1,700.9

Short-term investments, at amortized cost (which approximates fair value)
 
76.8

 
157.0

Common equity securities, at fair value
 
359.6

 
336.9

Convertible fixed maturity investments, at fair value
 
25.9

 
30.5

Other investments
 
143.7

 
139.6

Total investment securities
 
2,414.8

 
2,364.9

Cash
 
130.1

 
168.1

Reinsurance recoverables
 
95.3

 
89.9

Premiums receivable
 
276.0

 
228.2

Deferred acquisition costs
 
108.9

 
103.7

Net deferred tax asset
 
78.8

 
90.6

Investment income accrued
 
10.4

 
10.1

Accounts receivable on unsettled investment sales
 
37.2

 
3.3

Other assets
 
309.8

 
272.7

Assets held for sale
 
1,750.7

 
1,880.1

Total assets
 
$
5,212.0

 
$
5,211.6

Liabilities
 
 
 
 
Unpaid loss and loss adjustment expense reserves
 
$
1,125.4

 
$
1,054.3

Unearned premiums
 
591.9

 
544.9

Debt
 
274.7

 
274.7

Accounts payable on unsettled investment purchases
 
13.7

 
11.6

Other liabilities
 
316.4

 
338.6

Liabilities held for sale
 
1,750.7

 
1,880.1

Total liabilities
 
4,072.8

 
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)
 
1,022.3

 
1,022.5

Retained earnings
 
106.8

 
75.0

Accumulated other comprehensive income, after tax
 
6.9

 
6.8

Total OneBeacon's common shareholders' equity
 
1,136.0

 
1,104.3

Total noncontrolling interests
 
3.2

 
3.1

Total OneBeacon's common shareholders' equity and noncontrolling interests
 
1,139.2

 
1,107.4

Total liabilities, OneBeacon's common shareholders' equity and noncontrolling interests
 
$
5,212.0

 
$
5,211.6

   
See Notes to Consolidated Financial Statements.

1

Table of Contents

ONEBEACON INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
($ in millions, except per share
amounts)
Revenues
 
 
 
 
 
 
 
 
Earned premiums
 
$
290.9

 
$
280.8

 
$
567.4

 
$
567.3

Net investment income
 
11.7

 
11.4

 
21.7

 
20.8

Net realized and change in unrealized investment gains
 
21.9

 
(25.5
)
 
40.8

 
2.9

Net other revenues
 
1.0

 
0.6

 
2.0

 
24.6

Total revenues
 
325.5

 
267.3

 
631.9

 
615.6

Expenses
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
186.1

 
157.0

 
335.5

 
305.9

Policy acquisition expenses
 
49.6

 
52.5

 
96.3

 
107.3

Other underwriting expenses
 
51.7

 
54.6

 
101.1

 
103.9

General and administrative expenses
 
3.6

 
2.9

 
6.9

 
6.9

Interest expense
 
3.3

 
3.3

 
6.5

 
6.5

Total expenses
 
294.3

 
270.3

 
546.3

 
530.5

Pre-tax income (loss) from continuing operations
 
31.2

 
(3.0
)
 
85.6

 
85.1

Income tax (expense) benefit
 
(5.3
)
 
1.0

 
(11.8
)
 
(18.8
)
Net income (loss) from continuing operations
 
25.9

 
(2.0
)
 
73.8

 
66.3

Loss from discontinued operations, net of tax
 
(0.1
)
 
(0.5
)
 
(0.6
)
 

Loss from sale of discontinued operations, net of tax
 
(0.5
)
 

 
(0.5
)
 

Net income (loss), including noncontrolling interests
 
25.3

 
(2.5
)
 
72.7

 
66.3

Less: Net income attributable to noncontrolling interests
 
(0.5
)
 
(0.4
)
 
(0.9
)
 
(0.8
)
Net income (loss) attributable to OneBeacon's common shareholders
 
24.8

 
(2.9
)
 
71.8

 
65.5

Other comprehensive income, net of tax
 
0.1

 
0.2

 
0.1

 
0.3

Comprehensive income (loss) attributable to OneBeacon's common shareholders
 
$
24.9

 
$
(2.7
)
 
$
71.9

 
$
65.8

 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to OneBeacon's common shareholders—basic and diluted
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations, per share
 
$
0.26

 
$
(0.03
)
 
$
0.76

 
$
0.68

Loss from discontinued operations, net of tax, per share
 

 

 
(0.01
)
 

Net income (loss) attributable to OneBeacon's common shareholders per share
 
$
0.26

 
$
(0.03
)
 
$
0.75

 
$
0.68

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

 
$
0.21

 
$
0.42

 
$
0.42

   
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
 

 
71.8

 

 
71.8

 
0.9

 
72.7

Other comprehensive income, net of tax
 

 

 
0.1

 
0.1

 

 
0.1

Total comprehensive income
 

 
71.8

 
0.1

 
71.9

 
0.9

 
72.8

Amortization of restricted share awards
 
1.6

 

 

 
1.6

 

 
1.6

Issuance of common shares
 

 

 

 

 
0.2

 
0.2

Repurchase and retirement of common shares
 
(1.8
)
 

 

 
(1.8
)
 

 
(1.8
)
Dividends
 

 
(40.0
)
 

 
(40.0
)
 
(1.0
)
 
(41.0
)
Balances at June 30, 2014
 
$
1,022.3

 
$
106.8

 
$
6.9

 
$
1,136.0

 
$
3.2

 
$
1,139.2


 
 
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
 

 
65.5

 

 
65.5

 
0.8

 
66.3

Other comprehensive income, net of tax
 

 

 
0.3

 
0.3

 

 
0.3

Total comprehensive income
 

 
65.5

 
0.3

 
65.8

 
0.8

 
66.6

Amortization of restricted share awards
 
1.6

 

 

 
1.6

 

 
1.6

Issuance of common shares
 
0.3

 

 

 
0.3

 
0.1

 
0.4

Dividends
 

 
(40.1
)
 

 
(40.1
)
 
(0.8
)
 
(40.9
)
Balances at June 30, 2013
 
$
1,021.0

 
$
34.6

 
$
(13.5
)
 
$
1,042.1

 
$
2.9

 
$
1,045.0


   See Notes to Consolidated Financial Statements.

3

Table of Contents

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

 
 
Six months ended June 30,
 
 
2014
 
2013
 
 
($ in millions)
Cash flows from operations:
 
 
 
 
Net income including noncontrolling interests
 
$
72.7

 
$
66.3

Charges (credits) to reconcile net income to cash flows provided from (used for) operations:
 
 
 
 
Net loss from discontinued operations
 
0.6

 

Net loss from sale of discontinued operations
 
0.5

 

Net realized and change in unrealized investment gains
 
(40.8
)
 
(2.9
)
Net realized gain on sale of business
 

 
(23.0
)
Deferred income tax expense
 
12.6

 
19.1

Other operating items:
 
 
 
 
Net change in loss and LAE reserves
 
71.1

 
27.8

Net change in unearned premiums
 
47.0

 
(56.6
)
Net change in premiums receivable
 
(47.8
)
 
(8.1
)
Net change in reinsurance recoverable on paid and unpaid losses
 
(5.4
)
 
26.0

Net change in other assets and liabilities
 
(55.0
)
 
11.3

Net cash provided from operations—continuing operations
 
55.5

 
59.9

Net cash used for operations—discontinued operations
 
(33.9
)
 
(77.2
)
Net cash provided from (used for) operations
 
21.6

 
(17.3
)
Cash flows from investing activities:
 
 
 
 
Net maturities, purchases and sales of short-term investments
 
80.1

 
73.2

Maturities of fixed maturity investments
 
185.6

 
154.1

Sales of fixed maturity investments
 
850.9

 
912.2

Sales of common equity securities
 
47.6

 
109.6

Sales of convertible fixed maturity investments
 
12.2

 
37.3

Return of capital and distributions of other investments
 
3.2

 
11.3

Purchases of fixed maturity investments
 
(1,101.9
)
 
(1,078.8
)
Purchases of common equity securities
 
(48.7
)
 
(125.8
)
Purchases of convertible fixed maturity investments
 
(8.4
)
 
(8.6
)
Contributions for other investments
 
(3.3
)
 
(5.5
)
Proceeds from sale of business
 

 
31.3

Net change in unsettled investment purchases and sales
 
(31.8
)
 
20.6

Net acquisitions of property and equipment
 
(0.7
)
 
(4.0
)
Net cash provided from (used for) investing activities—continuing operations
 
(15.2
)
 
126.9

Net cash provided from investing activities—discontinued operations
 

 

Net cash provided from (used for) from investing activities
 
(15.2
)
 
126.9

Cash flows from financing activities:
 
 
 
 
Cash dividends paid to common shareholders
 
(40.0
)
 
(40.1
)
Repurchases and retirements of common stock
 
(1.8
)
 

Payments on capital lease obligation
 
(2.6
)
 
(2.6
)
Net cash used for financing activities—continuing operations
 
(44.4
)
 
(42.7
)
Net cash used for financing activities—discontinued operations
 

 

Net cash used for financing activities
 
(44.4
)
 
(42.7
)
Net increase (decrease) in cash during period
 
(38.0
)
 
66.9

Cash balance at beginning of period
 
168.1

 
43.9

Cash balance at end of period
 
$
130.1

 
$
110.8


  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 June 30, 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 June 30, 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 prospectively 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. 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 may 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
On April 10, 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 transactions entered into after December 15, 2014.

6

Table of Contents

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

Revenue from Contracts with Customers
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606) which modifies the guidance for revenue recognition. The scope of the new ASU excludes insurance contracts but is applicable to certain fee arrangements, such as investment management fees. The Company is in the process of evaluating the new guidance and has not yet determined the potential effect of adoption on its financial position, results of operations, or cash flows. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016.
Share-Based Compensation Awards
On June 19, 2014, the FASB issued ASU 2014-12, Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance is intended to eliminate diversity in practice for employee share-based awards containing performance targets that could be achieved after the requisite service period. Some reporting entities account for performance targets that can be achieved after the requisite service period as performance conditions that affect the vesting of the award while other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. The Company is in the process of evaluating the new guidance and has not yet determined the potential effect of adoption on its financial position, results of operations, or cash flows. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015.
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. As disclosed in Form 8-K filed on June 23, 2014, the Company amended the Stock Purchase Agreement during the second quarter, primarily to increase the cap on seller financing by $6.7 million to $80.9 million, as well as to extend the termination date to December 31, 2014. Consistent with the proposed closing balance sheet, pro forma as of June 30, 2014, the Company expects to provide seller financing at closing in the form of surplus notes with an estimated par value of $80.9 million.
The Runoff Transaction is subject to various closing conditions, primarily the receipt of regulatory approvals. The Pennsylvania Insurance Department is currently conducting its regulatory review of the Runoff Transaction, which included a public hearing on July 23, 2014. The regulatory review process included a third party actuarial review of the Runoff Business loss and LAE reserves, completed in September 2013 and, subsequently, an independent stochastic modeling of the future cash flows of the Runoff Business, which was completed in June 2014. The Company expects the Runoff Transaction to close in the second half of 2014.
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.
As described in Note 1, the Runoff Business is presented as held for sale as of June 30, 2014 and December 31, 2013, and as discontinued operations for the three and six months ended June 30, 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

7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. Acquisitions and Dispositions

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 and six months ended June 30, 2014 and earned premiums of $28.8 million and $69.4 million for the three and six months ended June 30, 2013, respectively, related to the Collector Cars and Boats underwriting operating segment.
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 and six months ended June 30, 2014 and 2013:
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
($ in millions)
 
($ in millions)
Gross beginning balance
 
$
1,069.8

 
$
1,010.3

 
$
1,054.3

 
$
1,000.0

Less beginning reinsurance recoverable on unpaid losses
 
(80.1
)
 
(105.8
)
 
(80.2
)
 
(107.3
)
Net beginning loss and LAE reserves
 
989.7

 
904.5

 
974.1

 
892.7

Loss and LAE incurred relating to:
 
 
 
 
 
 
 
 
Current year losses
 
177.7

 
158.0

 
328.5

 
309.8

Prior year losses
 
8.4

 
(1.0
)
 
7.0

 
(3.9
)
Total incurred loss and LAE from continuing operations
 
186.1

 
157.0

 
335.5

 
305.9

Loss and LAE paid relating to:
 
 
 
 
 
 
 
 
Current year losses
 
(41.3
)
 
(41.2
)
 
(59.6
)
 
(61.0
)
Prior year losses
 
(101.1
)
 
(74.3
)
 
(216.6
)
 
(191.6
)
Total loss and LAE payments from continuing operations
 
(142.4
)
 
(115.5
)
 
(276.2
)
 
(252.6
)
Net ending loss and LAE reserves
 
1,033.4

 
946.0

 
1,033.4

 
946.0

Plus ending reinsurance recoverable on unpaid losses
 
92.0

 
81.8

 
92.0

 
81.8

Gross ending loss and LAE reserves
 
$
1,125.4

 
$
1,027.8

 
$
1,125.4

 
$
1,027.8


Loss and LAE development - Ongoing Business
Loss and LAE development—2014
During the three months ended June 30, 2014, OneBeacon experienced $8.4 million of net unfavorable loss and LAE reserve development on prior accident year reserves primarily related to its Professional Insurance underwriting operating segment, as well as its Entertainment, Government Risks and Accident underwriting operating segments, partially offset by favorable loss and LAE reserve development primarily in its Specialty Property underwriting operating segment. The unfavorable development was driven by a few large claims.
During the six months ended June 30, 2014, OneBeacon experienced $7.0 million of net unfavorable loss and LAE reserve development on prior accident year reserves primarily related to its Professional Insurance underwriting operating segment, as well as its Entertainment, Government Risks and Accident underwriting operating segments, partially offset by favorable loss and LAE reserve development in its Specialty Property underwriting operating segment, as well as its International Marine Underwriters underwriting operating segment. The unfavorable development was driven by a few large claims.
Loss and LAE development—2013
During the three and six months ended June 30, 2013, OneBeacon recorded $1.0 million and $3.9 million, respectively, of net favorable loss and LAE reserve development on prior accident year reserves primarily related to its healthcare business within the Professional Insurance underwriting operating segment, its ocean marine business within the International Marine Underwriters underwriting operating segment, and its Government Risks underwriting operating segment. This favorable loss

8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. Unpaid Loss and Loss Adjustment Expense (LAE) Reserves

and LAE reserve development was partially offset by unfavorable loss and LAE reserve development in the Collector Cars and Boats underwriting operating segment for the three months ended June 30, 2013.
See Note 15—"Discontinued Operations" for a discussion of impacts to reserves for unpaid losses and LAE related to discontinued operations.
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.
Reinsurance Treaties
The Company's catastrophe reinsurance coverage is discussed in Note 4—"Reinsurance" in the Company's 2013 Annual Report on Form 10-K. Except as discussed below, there have been no material changes to the Company's reinsurance coverage from that reported in the 2013 Annual Report on Form 10-K.
Effective May 1, 2014, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2015. The program provides coverage for OneBeacon's property business as well as certain acts of terrorism. Under the program, the first $20.0 million of losses resulting from any single catastrophe are retained and 100% of the next $110.0 million of losses resulting from the catastrophe are reinsured. The part of a catastrophe loss in excess of $130.0 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.
Also effective May 1, 2014, OneBeacon lowered its retention on its property-per-risk reinsurance program from $10.0 million to $5.0 million.
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.
In addition to the corporate catastrophe reinsurance protection, the Company also purchased dedicated reinsurance protection for certain specific lines of business.
Reinsurance Recoverables
At June 30, 2014, OneBeacon had reinsurance recoverable on paid losses of $3.3 million and reinsurance recoverables on unpaid losses of $92.0 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
June 30, 2014
 
% of total
Standard & Poor's Rating(1):
 
($ in millions)
 
 
AA
 
$
25.4

 
27
%
A
 
58.6

 
61
%
BBB+, Not Rated and Other
 
11.3

 
12
%
Total reinsurance recoverables
 
$
95.3

 
100
%
_______________________________________________________________________________
(1) Standard & Poor's ratings as detailed above are "AA" (Very strong), "A" (Strong) and "BBB+" (Adequate).

9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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.
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 and six months ended June 30, 2014, and 2013 consisted of the following:
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
($ in millions)
Fixed maturity investments
 
$
10.6

 
$
10.4

 
$
20.9

 
$
20.3

Common equity securities
 
2.0

 
1.6

 
3.7

 
2.9

Convertible fixed maturity investments
 
0.1

 
0.3

 
0.1

 
0.7

Other investments
 
0.6

 
0.7

 
0.3

 
0.4

Gross investment income
 
13.3

 
13.0

 
25.0

 
24.3

Less investment expenses
 
(1.6
)
 
(1.6
)
 
(3.3
)
 
(3.5
)
Net investment income
 
$
11.7

 
$
11.4

 
$
21.7

 
$
20.8

The composition of net realized investment gains consisted of the following:
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
($ in millions)
Fixed maturity investments
 
$
1.6

 
$
3.9

 
$
2.4

 
$
7.8

Short-term investments
 

 
0.1

 

 
0.1

Common equity securities
 
6.5

 
1.2

 
11.9

 
17.9

Convertible fixed maturity investments
 
1.2

 
(1.9
)
 
2.3

 
(0.4
)
Other investments
 

 
2.9

 

 
4.7

Net realized investment gains
 
$
9.3

 
$
6.2

 
$
16.6

 
$
30.1

Accounts payable on unsettled investment purchases as of June 30, 2014 and December 31, 2013 were $13.7 million and $11.6 million, respectively, and accounts receivable on unsettled investment sales were $37.2 million and $3.3 million, respectively.

10

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

The net changes in fair value for the three and six months ended June 30, 2014, and 2013 are as follows:
 
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
 
Changes in net
unrealized investment
gains (losses)(1)
 
Changes in net
foreign currency
translation
gains (losses)(1)
 
Total net changes
in fair value reflected
in revenues(1)
 
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
 
$
7.3

 
$

 
$
7.3

 
$
12.0

 
$

 
$
12.0

Common equity securities
 
6.6

 

 
6.6

 
9.7

 

 
9.7

Convertible fixed maturity investments
 
(3.0
)
 

 
(3.0
)
 
(2.3
)
 

 
(2.3
)
Other investments
 
1.7

 

 
1.7

 
4.8

 

 
4.8

Net change in fair value
 
$
12.6

 
$

 
$
12.6

 
$
24.2

 
$

 
$
24.2

 
 
Three months ended June 30, 2013
 
Six months ended June 30, 2013
 
 
Changes in net
unrealized investment
gains (losses)(1)
 
Changes in net
foreign currency
translation
gains (losses)(1)
 
Total net changes
in fair value reflected
in revenues(1)
 
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
 
$
(29.8
)
 
$
(0.1
)
 
$
(29.9
)
 
$
(34.2
)
 
$
(0.1
)
 
$
(34.3
)
Common equity securities
 
(2.4
)
 

 
(2.4
)
 
5.5

 

 
5.5

Convertible fixed maturity investments
 
(0.7
)
 

 
(0.7
)
 
(1.6
)
 

 
(1.6
)
Other investments
 
1.3

 

 
1.3

 
3.2

 

 
3.2

Net change in fair value
 
$
(31.6
)
 
$
(0.1
)
 
$
(31.7
)
 
$
(27.1
)
 
$
(0.1
)
 
$
(27.2
)
_______________________________________________________________________________
(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 six months ended June 30, 2013, with no such changes in net deferred gains and losses for the three months ended June 30, 2013 or the three and six months ended June 30, 2014.
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 June 30, 2014 and December 31, 2013 were as follows:
 
 
June 30,
2014
 
December 31,
2013
 
 
($ in millions)
Investment securities:
 
 
 
 
Gross unrealized investment gains
 
$
154.2

 
$
133.7

Gross unrealized investment losses
 
(5.6
)
 
(9.3
)
Total net unrealized investment gains, pre-tax
 
148.6

 
124.4

Income taxes
 
(40.9
)
 
(33.8
)
Total net unrealized investment gains, after tax
 
$
107.7

 
$
90.6


11

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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 June 30, 2014 and December 31, 2013 were as follows:
 
 
June 30, 2014(1)
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net unrealized foreign
currency
translation gains (losses)
 
Carrying
value
 
 
($ in millions)
U.S. Government and agency obligations
 
$
159.2

 
$
0.3

 
$

 
$

 
$
159.5

Debt securities issued by corporations
 
782.9

 
18.4

 

 

 
801.3

Municipal obligations
 
62.1

 
0.8

 
(0.2
)
 

 
62.7

Mortgage-backed and asset-backed securities
 
901.6

 
2.8

 
(1.4
)
 

 
903.0

Foreign government obligations
 
1.0

 
0.3

 

 

 
1.3

Preferred stocks
 
78.3

 
6.5

 

 

 
84.8

Total fixed maturity investments
 
$
1,985.1

 
$
29.1

 
$
(1.6
)
 
$

 
$
2,012.6

 
 
December 31, 2013(1)
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net unrealized foreign
currency
translation gains (losses)
 
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 $203.8 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 June 30, 2014 and December 31, 2013, respectively.

12

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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 June 30, 2014 and December 31, 2013 were as follows:
 
 
June 30, 2014
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net unrealized foreign
currency
translation gains (losses)
 
Carrying
value
 
 
($ in millions)
Common equity securities
 
$
280.2

 
$
80.5

 
$
(1.3
)
 
$
0.2

 
$
359.6

Convertible fixed maturity investments
 
23.8

 
2.2

 
(0.1
)
 

 
25.9

Other investments
 
103.9

 
42.4

 
(2.6
)
 

 
143.7

Total common equity securities, convertible fixed maturity investments and other investments
 
$
407.9

 
$
125.1

 
$
(4.0
)
 
$
0.2

 
$
529.2

 
 
December 31, 2013
 
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net unrealized foreign
currency
translation gains (losses)
 
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 June 30, 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 $63.4 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 June 30, 2014 and December 31, 2013, approximately 91% and 92%, respectively, 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 June 30, 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 June 30, 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 June 30, 2014 and December 31, 2013 were comprised of $53.6 million and $49.4 million, respectively, in hedge funds, $56.9 million and $56.1 million, respectively, in private equity funds, and $14.2 million and $14.4 million, respectively, in an investment in a community reinvestment vehicle. Additionally, other investments accounted for at fair value as of June 30, 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 June 30, 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 $15.4 million and $14.9 million at June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, other investments also included $18.8 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

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

The following tables summarize the Company's fair value measurements for investments at June 30, 2014 and December 31, 2013 by level:
 
 
Fair value at
June 30, 2014
(2)
 
Level 1
 
Level 2
 
Level 3
 
 
($ in millions)
Fixed maturity investments:
 
 
 
 
 
 
 
 
U.S. Government and agency obligations
 
$
159.5

 
$
159.5

 
$

 
$

Debt securities issued by corporations:
 
 

 
 
 
 
 
 
Consumer
 
253.3

 

 
253.3

 

Financial
 
161.5

 

 
161.5

 

Communications
 
109.3

 

 
109.3

 

Industrial
 
90.7

 

 
90.7

 

Energy
 
62.8

 

 
62.8

 

Basic materials
 
55.7

 

 
55.7

 

Utilities
 
39.0

 

 
39.0

 

Technology
 
29.0

 

 
29.0

 

Debt securities issued by corporations
 
801.3

 

 
801.3

 

Mortgage-backed and asset-backed securities
 
903.0

 

 
857.8

 
45.2

Preferred stocks
 
84.8

 

 
13.3

 
71.5

Municipal obligations
 
62.7

 

 
62.7

 

Foreign government obligations
 
1.3

 
0.7

 
0.6

 

Fixed maturity investments
 
2,012.6

 
160.2

 
1,735.7

 
116.7

Short-term investments
 
76.8

 
76.6

 
0.2

 

Common equity securities:
 
 
 
 
 
 
 
 
Consumer
 
126.2

 
126.2

 

 

Financials
 
81.0

 
80.5

 

 
0.5

Energy
 
42.0

 
42.0

 

 

Basic Materials
 
20.3

 
20.3

 

 

Utilities
 
9.1

 
9.1

 

 

Other
 
81.0

 
81.0

 

 

Common equity securities
 
359.6

 
359.1

 

 
0.5

Convertible fixed maturity investments
 
25.9

 

 
25.9

 

Other investments(1)
 
124.9

 

 

 
124.9

Total(1)
 
$
2,599.8

 
$
595.9

 
$
1,761.8

 
$
242.1

_______________________________________________________________________________
(1)
Excludes the carrying value of $18.8 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of June 30, 2014.
(2)
Fair value includes $203.8 million of fixed maturity investments reclassified to assets held for sale in the June 30, 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 June 30, 2014 and December 31, 2013, OneBeacon held one private preferred stock that represented approximately 84% and 85%, respectively, 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 June 30, 2014 and December 31, 2013:
 
 
June 30,
2014
 
December 31,
2013
 
 
($ in millions)
AA
 
$
47.1

 
$
51.2

A
 
356.4

 
357.9

BBB
 
397.0

 
345.4

BB
 

 

Other
 
0.8

 

Debt securities issued by corporations(1)
 
$
801.3

 
$
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 and six months ended June 30, 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

Amortization/accretion
 

 

 

 

 

Net realized and unrealized gains (losses)
 
1.3

 
12.8

 

 

 
14.1

Purchases
 
256.6

 
22.6

 

 

 
279.2

Sales
 
(309.4
)
 
(23.3
)
 

 

 
(332.7
)
Transfers in
 

 

 

 

 

Transfers out
 

 

 

 

 

Balance at June 30, 2014
 
$
160.2

 
$
359.1

 
$

 
$

 
$
519.3

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

16

Table of Contents

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

The changes in Level 2 fair value measurements for the three and six months ended June 30, 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
 
$
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