Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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.)
 
 
 
605 North Highway 169
Plymouth, Minnesota
(Address of principal executive offices)
 
55441
(Zip Code)
Registrant's telephone number, including area code: (952) 852-2431
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A Common Shares, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 Act). Yes o    No x
The aggregate market value of voting shares (based on the closing price of Class A common shares listed on the New York Stock Exchange and the consideration received for those shares not listed on a national or regional exchange) held by non-affiliates of the Registrant as of June 30, 2016, was $302,481,883.
As of February 22, 2017, 22,525,458 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to the Registrant's Annual General Meeting of Members scheduled to be held May 24, 2017 (the “2017 Definitive Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the 2017 Definitive Proxy Statement specifically incorporated herein by reference, the 2017 Definitive Proxy Statement is not deemed to be filed as part of this Form 10-K.
 


Table of Contents

ONEBEACON INSURANCE GROUP, LTD.
Annual Report on Form 10-K
For the Year Ended December 31, 2016

TABLE OF CONTENTS
 
 
Page
 
 


Table of Contents

PART I
ITEM 1.
BUSINESS
Overview
OneBeacon Insurance Group, Ltd. (the Company or the Registrant), an exempted Bermuda limited liability company, through its subsidiaries (collectively, OneBeacon, we, us, or our) is a specialty property and casualty insurance provider that offers a wide range of insurance products in the U.S. primarily through independent agencies, regional and national brokers, wholesalers and managing general agencies. As a specialty underwriter, we believe that we will generate superior returns compared to an underwriter that takes a more "generalist" underwriting approach, and that our knowledge about specialized insurance products, targeted industries, classes of business, risk characteristics and limited number of specialized competitors provides us with a competitive edge when determining terms and conditions on individual accounts.
Historically, we offered a range of specialty, commercial and personal products and services. However, as a result of a series of transactions over the past several years, we are now focused exclusively on specialty businesses. The most recent of these transactions was the sale of certain of our run-off business consisting of assets, liabilities and capital related principally to our non-specialty business, including the vast majority of our asbestos and environmental reserves (Runoff Business), to an affiliate of Armour Group Holdings Limited (Armour Ltd), which closed on December 23, 2014 (Runoff Transaction). See Note 2—"Acquisitions and Dispositions" of the accompanying consolidated financial statements.
With the closing of the Runoff Transaction, we completed our transformation into a specialty insurance company and our balance sheet and risk profile have changed significantly. Our exposure to claims from policies related to the Runoff Business, such as commercial general liability, including asbestos and environmental exposures, and workers compensation policies, is now limited to the value of the surplus notes issued in conjunction with the transaction, which have a fair value of $71.9 million as of December 31, 2016. Our outstanding reserves as of December 31, 2016 for 2004 and prior accident years total $0.1 million and for accident years prior to 2007 total $6.9 million.
As of both December 31, 2016 and 2015, OneBeacon had $3.6 billion of total assets and $1.0 billion of common shareholders' equity. OneBeacon wrote $1.1 billion, $1.1 billion and $1.2 billion in net written premiums in 2016, 2015 and 2014, respectively.
Our reportable segments are Specialty Products, Specialty Industries, and Investing, Financing and Corporate. The Specialty Products segment is comprised of ten active underwriting operating segments representing an aggregation based on those that offer distinct products and tailored coverages and services to a broad customer base across the United States. The Specialty Products segment also includes the exited Crop underwriting operating segment. The Specialty Industries segment is comprised of six active underwriting operating segments 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 our intermediate subsidiaries. See Note 12—"Segment Information" of the accompanying consolidated financial statements.
Our parent company, White Mountains Insurance Group, Ltd. (White Mountains), is a holding company whose businesses provide property and casualty insurance, and certain other products. As of December 31, 2016, White Mountains owned 76.1% of our common shares.
Our headquarters are located at 26 Reid Street, Hamilton HM 11, Bermuda. Our U.S. corporate headquarters are located at 605 North Highway 169, Plymouth, Minnesota, 55441 and our registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
The claims-paying (or financial strength) ratings assigned to our principal insurance operating subsidiaries as of February 27, 2017 ranged from "Good" to "Strong" or "Excellent." See "Item 1. Business—Ratings" for additional discussion of our ratings.
Our Operating Principles
We strive to operate within the spirit of four operating principles. These are:
Underwriting Comes First. An insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written, and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.

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Maintain a Disciplined Balance Sheet. The first concern here is that insurance liabilities must always be fully recognized. Loss reserves and expense reserves must be solid before any other aspect of the business can be solid. Pricing, marketing and underwriting all depend on informed judgment of ultimate loss costs and that can be managed effectively only with a disciplined balance sheet.
Invest for Total Return. Historically, accounting tends to hide unrealized gains and losses in the investment portfolio and over-reward reported investment income (interest and dividends). Regardless of the accounting, we must invest for the best growth in after tax value over time. In addition to investing our bond portfolios for total after tax return, that will also mean prudent investment in a balanced portfolio consistent with leverage and insurance risk considerations.
Think Like Owners. Thinking like owners has a value all its own. There are stakeholders in a business enterprise and doing good work requires more than this quarter's profit. But thinking like an owner embraces all that without losing the touchstone of a capitalist enterprise.
Business Overview
Generally, property and casualty insurance companies write insurance policies in exchange for premiums paid by their customers (the insureds). An insurance policy is a contract between the insurance company and the insured where the insurance company agrees to pay for losses suffered by the insured, or a third party claimant, that are covered under the contract. Such contracts are often subject to subsequent legal interpretation by courts, legislative action and arbitration.
We write both property insurance and casualty insurance in our Specialty Products and Specialty Industries segments. Property insurance generally covers the financial consequences of accidental losses to the insured's property, such as a business's building, inventory and equipment or personal property. Casualty insurance (often referred to as liability insurance) generally covers the financial consequences of a legal liability of an individual or an organization resulting from negligent acts or omissions causing bodily injury, property and/or economic damages to a third party. Premiums from ocean and inland marine, certain commercial multiple peril, and fire and allied lines generally represent our property (short-tail) lines of business, and claims from such business are typically reported and settled in a relatively short period of time. Premiums from general liability, workers compensation, commercial auto liability and certain commercial multiple peril policies generally represent our casualty (long-tail) lines of business, and claims from such business can take years, even decades, to settle. In addition, there are some coverages that do not fall into the “Property” or “Casualty” insurance definitions, including surety which typically has few losses but those can be very severe, as well as accident and credit insurance.

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Our various lines of business generally fall into three major categories, which reflect how we view the primary risk classification associated with each line: property lines, casualty lines, and other lines of business. Net written premiums by line of business for 2016, 2015 and 2014 consist of the following:
 
 
Year ended December 31,
Line of business
 
2016
 
2015
 
2014
 
 
($ in millions)
Property Lines:
 
 
 
 
 
 
Ocean and Inland Marine
 
$
176.0

 
$
190.1

 
$
201.9

Commercial Multiple Peril and Auto Physical Damage
 
88.9

 
94.6

 
82.0

Fire and Allied
 
36.5

 
39.3

 
44.7

Total Property Lines
 
301.4

 
324.0

 
328.6

Casualty Lines:
 
 
 
 
 
 
General Liability
 
344.9

 
334.8

 
402.1

Workers Compensation
 
78.1

 
86.1

 
83.7

Automobile Liability
 
67.6

 
88.4

 
91.4

Other Casualty
 
59.9

 
51.8

 
40.3

Total Casualty Lines
 
550.5

 
561.1

 
617.5

Other Lines:
 
 
 
 
 
 
Accident and Health
 
131.4

 
151.1

 
149.8

Credit and Other
 
62.6

 
59.0

 
58.0

Surety
 
54.6

 
50.7

 
28.9

Crop
 
0.2

 
(9.3
)
(1) 
34.1

Total Other
 
248.8

 
251.5

 
270.8

Total net written premiums
 
$
1,100.7

 
$
1,136.6

 
$
1,216.9

_______________________________________________________________________________
(1) 
Amount primarily relates to the premiums ceded under a 100% quota share agreement to reinsure the remaining net Crop Business exposure for the 2015 reinsurance year.
We derive substantially all of our revenues from earned premiums, investment income, and net realized and change in unrealized investment gains on investment securities. Written premiums are an operating metric and represent the amount we charge to an insured in order to provide coverage under an insurance contract, which are recognized as earned premiums within revenue over the period of time that insurance coverage is provided (i.e., ratably over the life of the policy). A significant period of time often elapses between receipt of insurance premiums and payment of insurance claims. During this time, we invest premiums, earn investment income, and generate net realized and change in unrealized investment gains on investment activities.
Insurance companies incur a significant amount of their total expenses from policy obligations, which are commonly referred to as claims or losses. In settling policyholder losses, various loss adjustment expenses (LAE) are incurred such as insurance adjusters' fees and litigation expenses. Loss and LAE are categorized by the year in which the claim is incurred, or “accident year.” In the following calendar years, as we increase or decrease our estimate for the ultimate loss and LAE for claims incurred in prior accident years, we will record favorable or adverse loss reserve development which is recorded in the current calendar year period. In addition, insurance companies incur policy acquisition expenses, such as commissions paid to agents and premium taxes, and other expenses related to the underwriting process, including employee compensation and benefits. The key measure of relative underwriting performance for an insurance company is the combined ratio. An insurance company's combined ratio is calculated by adding the ratio of incurred loss and LAE to earned premiums (the loss and LAE ratio) and the ratio of policy acquisition and other underwriting expenses to earned premiums (the expense ratio). A combined ratio under 100% indicates that an insurance company is generating an underwriting profit. However, when considering investment returns, insurance companies operating at a combined ratio of greater than 100% can be profitable.

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Insurance Business
Our net written premiums by segment for 2016, 2015 and 2014 consist of the following:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Specialty Industries
 
$
559.8

 
$
603.6

 
$
610.0

Specialty Products
 
540.9

 
533.0

 
606.9

Total
 
$
1,100.7

 
$
1,136.6

 
$
1,216.9


Specialty Products
The Specialty Products segment is comprised of ten active underwriting operating segments, representing an aggregation based on those that offer distinct products and tailored coverages and services to a broad customer base across the United States. The Specialty Products segment includes Healthcare, Tuition Reimbursement, Programs, Surety, Other Professional Lines, Management Liability, Financial Services, Specialty Property, Environmental, and Financial Institutions, as well as the inactive Crop and Collector Cars and Boats underwriting operating segments which were exited in 2015 and 2013, respectively.
For 2016, 2015 and 2014, our Specialty Products segment's net written premiums by underwriting operating segment were as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Healthcare
 
$
132.4

 
$
147.1

 
$
180.4

Tuition Reimbursement
 
76.8

 
72.1

 
70.5

Programs
 
66.8

 
99.1

 
50.8

Other Professional Lines
 
51.8

 
46.8

 
80.4

Surety
 
50.3

 
47.4

 
28.9

Management Liability
 
45.3

 
40.6

 
50.1

Financial Services
 
42.0

 
38.2

 
40.8

Other Specialty Products
 
75.5

 
41.7

 
105.0

Total Specialty Products
 
$
540.9

 
$
533.0

 
$
606.9


A description of business written by each underwriting operating segment in the Specialty Products segment follows:
OneBeacon Healthcare Group (Healthcare)
Healthcare provides professional liability coverages and other specialized coverages including provider excess insurance and excess of loss or HMO reinsurance, targeting a variety of customer groups, including: hospitals and physicians; free-standing medical facilities; senior living organizations; and managed care organizations.
Tuition Reimbursement
A.W.G. Dewar, Inc. (Dewar) has been a leading provider of tuition reimbursement insurance since 1930. Dewar's product, generally classified as credit insurance for financial reporting purposes, protects both schools and parents from the financial consequences of a student's withdrawal or dismissal from school. We own approximately 81% of Dewar.
OneBeacon Program Group (Programs)
Programs provides a full range of multi-line package insurance for select specialty programs overseen by dedicated agencies that perform all policy administration functions. Products are available on an admitted and nonadmitted basis. Programs works primarily with managing general agents and managing general underwriters, commonly referred to as program administrators.
Other Professional Lines
Other Professional Lines includes primarily the results of OneBeacon Architects & Engineers and our Media business. Architects & Engineers offers professional liability coverages for various design customer groups including architects, civil

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engineers, construction managers and design/build contractors. Media offers professional liability coverages for various customer groups including publishers, broadcasters, advertising agencies, authors and producers, with coverage that is customizable for any company or individual that creates content. Other Professional Lines also includes the results of our exited lawyers professional liability business.
OneBeacon Surety Group (Surety)
Surety offers a broad range of commercial bonds targeting Fortune 2500 and large private companies written through a network of independent agencies, brokers and wholesalers. Business is serviced through eight regions throughout the United States.
OneBeacon Management Liability (Management Liability)
Management Liability offers directors and officers liability, employment practices liability, fiduciary liability and crime insurance for nonprofit organizations (all classes), private/nonprofit healthcare organizations and private for-profit companies of all sizes and types. Coverages are available on a modular form approach, allowing for tailored solutions.
OneBeacon Financial Services (Financial Services)
Financial Services offers property and casualty coverages for commercial banks, savings banks and savings and loan institutions, security broker-dealers, investment advisers, insurance companies and credit unions. Specialty coverages, including professional liability, trust errors & omissions, cyber liability and financial institution bond, are additionally available for institutions with less than $3 billion in assets.
Other Specialty Products
OneBeacon Specialty Property (Specialty Property)
Specialty Property provides excess property and inland marine solutions for layered insurance policies. Target classes of business include apartments and condominiums, commercial real estate, small-to-medium manufacturing, retail/wholesale, education and public entities. Specialty Property products are provided primarily through surplus lines wholesalers.
OneBeacon Environmental (Environmental)
Environmental specializes in environmental risk solutions designed to address a variety of exposures for a broad range of businesses, including multiline casualty placements for the environmental industry. The product suite includes commercial general liability, contractors' environmental liability, professional services liability, environmental premises liability, products pollution liability, follow-form excess, environmental excess and business auto.
OneBeacon Financial Institutions (Financial Institutions)
Financial Institutions provides a wide range of coverage solutions to address the insurance needs of financial institutions, including, but not limited to, professional and management liability. Target industries include banks (greater than $5 billion in corporate assets), security broker dealers and captive agents, insurance companies, insurance agents and brokers, investment advisers, mutual funds, hedge funds, real estate investment trusts, business development companies, private equity and venture capital firms. Products include directors and officers liability, professional liability, fiduciary liability, cyber liability, and financial institutions bonds.
OneBeacon Crop Insurance (Crop)
Prior to July 2015, we offered multiple peril crop insurance and the related crop-hail business (collectively, Crop). We exited the Crop business in 2015 because the managing general agency, through which the business was generated, was sold by a third party to a competitor.
Collector Cars and Boats
Prior to the termination of our relationship on January 1, 2013, we offered tailored coverages primarily for collector vehicles through an exclusive partnership with Hagerty Insurance Agency (Hagerty).
Specialty Industries
The Specialty Industries segment is comprised of six active underwriting operating segments, representing an aggregation based on those that focus on solving the unique needs of a particular customer or industry group. The Specialty Industries segment includes the Accident, Technology, Ocean Marine, Government Risks, Entertainment, and Inland Marine underwriting operating segments.

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For 2016, 2015 and 2014, our Specialty Industries segment's net written premiums by underwriting operating segment were as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Technology
 
$
124.1

 
$
127.3

 
$
133.1

Ocean Marine
 
115.7

 
122.7

 
127.1

Accident
 
114.5

 
118.8

 
113.4

Government Risks
 
82.8

 
84.5

 
82.3

Entertainment
 
61.5

 
88.0

 
88.6

Inland Marine
 
61.2

 
62.3

 
65.5

Total Specialty Industries
 
$
559.8

 
$
603.6

 
$
610.0

A description of business written by each underwriting operating segment in OneBeacon's Specialty Industries segment follows:
OneBeacon Technology Insurance (Technology)
Technology delivers all-lines underwriting solutions for the technology, life science and medical technology, and telecommunications industries. The specific capabilities offered include risk control, claims and third-party vendor solutions. Products span property, casualty, cyber, errors & omissions, international, products liability and professional coverages.
International Marine Underwriters (IMU)—Ocean Marine (Ocean Marine)
Ocean Marine traces its roots to the early 1900s, and offers a full range of ocean marine insurance solutions. Ocean Marine products include, but are not limited to, commercial hull and marine liabilities at both the primary and excess levels; ocean and air cargo with coverage extensions such as inland transit, warehousing and processing; yachts; and several marine package products with comprehensive property, auto and liability coverage.
OneBeacon Accident Group (Accident) 
Accident focuses on analyzing and developing unique accident solutions for the transportation, non-subscription and corporate accident marketplace, while also developing specialized accident insurance programs. Accident's product suite includes accidental death and dismemberment, occupational accident, sports accident, non-truckers liability, vehicle physical damage and other accident coverages. Accident also provides employers and affinity groups with access to unique services including identity theft management services and travel assistance services.
OneBeacon Government Risks (Government Risks)
Government Risks provides solutions for mid-sized municipalities and counties, special districts including water, sanitation and fire, non-rail transit authorities and other publicly funded agencies. Government Risks products include property, casualty, and professional liability (comprised of law enforcement, public officials, and employment practices liability coverages) offered on a fully insured, deductible, self-insured retention or assumed reinsurance basis.
OneBeacon Entertainment (Entertainment)
Entertainment provides specialized commercial insurance, including professional liability protection, for the entertainment, sports and leisure industries. Coverages include film and television portfolio, producers portfolio, theatrical package, event cancellation, premises liability, event liability and participant liability.
IMU—Inland Marine (Inland Marine)
Inland Marine offers a full range of inland marine insurance solutions. Inland Marine solutions include builders risks, contractors equipment, installation floaters, fine arts, motor truck cargo, transportation, miscellaneous articles floaters, warehousemen’s legal liability and other inland marine opportunities.

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Geographic Concentration
Substantially all of our net written premiums are derived from business produced in the United States. We produced business in the following geographies during 2016, 2015 and 2014:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
California
 
18.2
%
 
17.6
%
 
16.4
%
New York
 
11.5

 
10.4

 
10.0

Texas
 
7.0

 
6.4

 
6.7

District of Columbia
 
6.0

 
6.0

 
5.3

Florida
 
4.7

 
5.1

 
5.7

Other(1)
 
52.6

 
54.5

 
55.9

Total
 
100.0
%
 
100.0
%
 
100.0
%
_______________________________________________________________________________
(1) 
No other individual state accounts for more than 5% of net written premiums for 2016, 2015 or 2014.
Marketing and Distribution
We offer our products and services through a network of approximately 2,300 independent agents, regional and national brokers, wholesalers and managing general agencies. We selectively enter these relationships with producers who demonstrate an understanding of our target markets, our capabilities and the specialized needs of their clients. We believe this selective distribution approach creates greater insight into the underwriting and management of the risks associated with our particular lines of business. Further, we believe agents and brokers will continue to represent a significant share of the business we desire going forward.
Underwriting and Pricing
We believe there must be a realistic expectation of attaining an underwriting profit on all the business we write, as well as a demonstrated fulfillment of that expectation over time. Consistent with our "Underwriting Comes First" operating principle, adequate pricing is a critical component for achieving an underwriting profit. We underwrite our book with a disciplined approach towards pricing our insurance products and are willing to forgo a business opportunity if we believe it is not priced appropriately.
We actively monitor pricing activity and measure our use of tiers, credits, debits and limits. In addition, we regularly update base rates to achieve targeted returns on capital and attempt to shift writings away from lines and classes where pricing is inadequate. To the extent changes in premium rates, policy forms or other matters are subject to regulatory approval (see "Item 1. Business—Regulatory Matters—General" and "Item 1A. Risk Factors—Risks Relating to our Business—Regulation may restrict our ability to operate"), we proactively monitor our pending regulatory filings to facilitate, to the extent possible, their prompt processing and approval. Lastly, we expend considerable effort to measure and verify exposures and insured values.
Competition
Property and casualty insurance is highly competitive. Our businesses each compete against a different subset of companies. In general, we compete in one or more of our businesses with most of the large multi-line insurance companies, such as Chubb, AIG, Beazley, CNA, Hartford, Liberty Mutual, Travelers and Zurich. We also compete with most specialty companies, such as Axis, Tokio Marine HCC, Navigators, Markel, RLI, and W.R. Berkley, as well as various local and regional insurance companies and niche carriers.
The more significant competitive factors for most of our insurance products are price, product terms and conditions, agency and broker relationships, claims service, company scale and financial stability. Our underwriting principles and dedication to independent distribution partners are unlikely to make us the low-cost provider in most markets. While it is often difficult for insurance companies to differentiate their products, we believe that providing superior specialty products to satisfy market needs and relying on agents and brokers who value our targeted expertise, superior claims service, and disciplined underwriting establishes a competitive advantage.

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Claims Management
Effective claims management is a critical factor in achieving satisfactory underwriting results. We maintain an experienced staff of claims handlers and managers located throughout our operating territories.

We have dedicated claims managers and adjusters for many of our specialty businesses. These individuals ensure that we have the appropriate level of expertise to handle claims often involving complex issues. Within the claims organization, we also use various shared services to both more efficiently manage costs and ensure we are delivering superior claims results. These services include: shared non-specialty property and casualty insurance claims adjusters, operational and information technology support, subrogation and recovery support, medical and legal bill review, a special investigation unit to detect insurance fraud, and dedicated legal support.

We have adopted a total claims cost management approach, which gives equal importance to appropriately controlling claims handling expenses, legal expenses and claims payments. This approach enables us to deliver effective and efficient claims results. We collect and review various metrics to analyze our claims handling results.

Our claims department utilizes an online claims system to record reserves, payments and adjuster activity. The workstation also helps claim handlers identify recovery potential, estimate property damage, evaluate claims and identify fraud. We maintain a paperless claim file system.
Catastrophe Risk Management and Reinsurance Protection
Catastrophes are severe losses resulting from a wide variety of events. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and terrorist acts. While our exposure to catastrophe losses has decreased meaningfully as a result of our repositioning in recent years as a specialty-only company, we are still exposed to catastrophe losses. The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to our operating results and financial condition. The extent of losses caused by a catastrophic event is a function of severity and the amount and type of insured exposure in the affected area. In the normal course of business, our insurance subsidiaries seek to limit losses that may arise from catastrophes or other events through individual risk selection, imposing deductibles and limits, limiting our concentration of insurance in catastrophe-prone areas such as coastal regions and reinsuring with third-party reinsurers.
We use models (primarily AIR Worldwide Touchstone version 4.1) to estimate potential losses from catastrophes. We use the model output in conjunction with other data to manage our exposure to catastrophe losses based on a probable maximum loss forecast to quantify our exposure to an extreme catastrophe event.
Our insurance subsidiaries enter into reinsurance contracts to protect their businesses from losses due to concentration of risk and to limit losses arising from catastrophic events. We utilize a general catastrophe reinsurance treaty with unaffiliated reinsurers to manage our exposure to large catastrophe losses. Effective May 1, 2016, we renewed our property catastrophe reinsurance program through April 30, 2017. The program provides coverage for our 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, with 100% of the next $110.0 million of losses resulting from the catastrophe being reinsured. Any part of a catastrophe loss in excess of $130.0 million would be retained in full. In the event of a catastrophe, our 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. We anticipate that the $130.0 million limit is more than sufficient to cover the maximum hurricane and earthquake losses with a modeled 0.4% probability of occurrence (1-in-250-year). This $130.0 million limit is consistent with the limit that our previous catastrophe reinsurance program provided.
Our property catastrophe reinsurance program does not cover property losses resulting from any nuclear events or biological, chemical or radiological terrorist attacks. Also excluded are losses resulting from certified acts of terrorism committed by an individual or individuals acting on behalf of any foreign person or foreign interest as defined under the Terrorism Risk Insurance Program (the Terrorism Act).
We also purchase property-per-risk reinsurance coverage to reduce large loss volatility. The property-per-risk reinsurance program reinsures 100% of losses in excess of $3.0 million, up to $100.0 million. Individual risk facultative reinsurance is purchased above $100.0 million. The property-per-risk treaty provides one limit of reinsurance protection for losses in excess of $3.0 million up to $100.0 million on an individual risk basis for certified acts of foreign terrorism committed on behalf of any foreign person or foreign interest. However, any nuclear events, or biological, chemical or radiological terrorist attacks are not covered.

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In addition to the corporate catastrophe and property-per-risk reinsurance protection, we also purchase dedicated reinsurance protection for certain lines of business. Our specialty property business purchases a dedicated property catastrophe program providing 100% coverage for $34.0 million of loss in excess of $6.0 million of loss, which inures to the benefit of the broader property catastrophe reinsurance program described previously. This treaty limit cannot be reinstated.
In addition to the coverage provided under these treaties, we utilize a number of other catastrophe and general insurance treaties covering specific lines of business. See Note 4—"Reinsurance" of the accompanying consolidated financial statements for descriptions of the significant types of our reinsurance agreements.
As reinsurance contracts do not relieve us of our obligation to our policyholders, collectability of balances due from reinsurers is critical to our financial strength.
Our current third party reinsurance programs provide varying degrees of coverage for terrorism events. Our overall terrorism exposure is impacted by the Terrorism Act, which is a federal program administered by the Department of the Treasury that provides for a shared system of public and private compensation for commercial property and casualty losses resulting from events that reach the threshold for losses ($140 million in 2017 and increasing $20 million in subsequent years until the threshold becomes $200 million in 2020) and are certified as an act of terrorism by the U.S. Secretary of the Treasury, in concurrence with the Secretary of Homeland Security and the Attorney General of the United States. The current program was signed into law on January 12, 2015 and is authorized through December 31, 2020. See Note 4—“Reinsurance” of the accompanying consolidated financial statements for a further description of the Terrorism Act, including our estimated retention level.
We closely monitor and manage our concentration of risk for terrorism losses by geographic area. We control our exposures so that total maximum expected loss from a terrorism event within any half-mile radius in a metropolitan area or around a target risk will not exceed $450 million on a pre-tax basis before considering the federal government participation under the Terrorism Act. Reports monitoring our terrorism exposures are generated quarterly. In addition, our underwriting process evaluates all potential new business to determine if it would add exposure to an already existing concentration of risk or would individually add significant risk. As a result, we believe that we have appropriately limited our exposure to losses from terrorist attacks. Nonetheless, risks insured by us remain exposed to terrorist attacks and, even considering the coverage provided by the Terrorism Act, the possibility remains that losses resulting from future terrorist attacks could prove to be material.
Loss and LAE Reserves
We establish loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and is always inherently uncertain. See Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates," as well as Note 1—"Nature of Operations and Summary of Significant Accounting Policies—Insurance Operations" and Note 3—"Unpaid Loss and LAE Reserves" in the accompanying consolidated financial statements for further discussion of our accounting for loss and LAE.
The following table reconciles loss and LAE reserves determined on a statutory basis to loss and LAE reserves determined in accordance with GAAP as of December 31, 2016 and 2015 as follows:
 
 
December 31,
 
 
2016
 
2015
 
 
($ in millions)
Statutory reserves
 
$
1,192.7

 
$
1,203.8

Reinsurance recoverable on unpaid losses and LAE(1)
 
172.9

 
186.0

GAAP reserves
 
$
1,365.6

 
$
1,389.8

_______________________________________________________________________________
(1) 
Represents adjustments made to add back reinsurance recoverables on unpaid losses and LAE included with the presentation of reserves under statutory accounting.
Investing, Financing and Corporate
Investing, Financing and Corporate primarily consists of investing and financing activities, as well as other assets and liabilities, and general and administrative expenses and interest expense incurred at the holding company level.

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Investing
Our traditional investment philosophy is to maximize long-term total returns (after-tax) while taking prudent levels of risk and maintaining a diversified portfolio, subject to our investment guidelines and various regulatory restrictions. Under this approach, each dollar of after-tax investment income and realized and unrealized investment gains and losses is valued equally.
Invested assets are not allocated to our Specialty Products or Specialty Industries reportable underwriting segments since we do not manage our invested assets by segment. Invested assets, net investment income, and net realized and change in unrealized investment gains (losses) related to our Specialty Products and Specialty Industries segments are included in the Investing, Financing and Corporate segment since these assets are available for payment of losses and expenses for all segments.
Substantially all of our investment portfolio is managed under an agreement with White Mountains Advisors LLC (WM Advisors), a registered investment advisor and wholly owned subsidiary of White Mountains. See Note 15—"Related Party Disclosures" of the accompanying consolidated financial statements. Our investment portfolio mix as of December 31, 2016, consisted in large part of high quality, short duration fixed maturity investments and short-term investments. During the third quarter of 2016, we established a portfolio of high-yield fixed maturity investments. We also maintain a portfolio of common equity securities, and other investments, including surplus notes, hedge funds and private equity funds. Our management believes that prudent levels of investments in common equity securities, other investments and high yield fixed maturity investments are likely to enhance long-term after tax total returns.
WM Advisors' fixed maturity investment strategy is to purchase securities that are attractively priced in relation to their investment risks. WM Advisors manages the interest rate risk associated with holding fixed maturity investments by actively managing the average duration of the portfolio to achieve an adequate after tax total return without subjecting the portfolio to an unreasonable level of interest rate risk. WM Advisors has established relationships with third party registered investment advisers to invest in taxable and tax-exempt municipal securities and high-yield fixed maturity investments.
WM Advisors' looks to enhance long term after-tax total returns by investing a portion of the portfolio in common equity securities and other investments. A majority of our common equity securities represent passive exchange traded funds (ETFs) that seek to provide investment results that, before expenses, generally correspond to the performance of broad market indices. WM Advisors has established a relationship with a third party registered investment adviser to invest in publicly-traded common equity securities, excluding our ETFs.
Financing
Debt and the related interest expense on debt also are not allocated to or managed by segment and are included in the Investing, Financing and Corporate segment.
2012 Senior Notes
In November 2012, OneBeacon U.S. Holdings, Inc. (OBH), an intermediate holding company of OneBeacon, issued $275.0 million face value of 4.6% senior unsecured notes (the 2012 Senior Notes) through a public offering, with the proceeds used to repurchase OBH's then existing outstanding senior notes, and mature on November 9, 2022. The Company provides an irrevocable and unconditional guarantee as to the payment of principal and interest on the 2012 Senior Notes.
Credit Facility
On September 29, 2015, the Company and OBH, as co-borrowers and co-guarantors, entered into a revolving credit facility administered by U.S. Bank N.A. and also including BMO Harris Bank N.A., which has a total commitment of $65.0 million and has a maturity date of September 29, 2019 (the Credit Facility). As of December 31, 2016, the Credit Facility was undrawn.
See Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations—Financing."
Corporate
Our corporate operations consist of the activities of the Company, and our intermediate subsidiaries which include OneBeacon U.S. Enterprises Holdings, Inc., OneBeacon U.S. Financial Services, Inc., and OBH, all U.S.-domiciled holding companies, as well as various other intermediate holding and financing companies domiciled in the United States, Barbados, Bermuda, Ireland and Luxembourg. The primary purpose of these entities is to efficiently manage the group's various capital and financing activities.

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Regulatory Matters
General
Our insurance operations are subject to regulation and supervision in each of the United States jurisdictions in which they are domiciled and licensed to conduct business. Generally, state regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, statutory deposits, methods of accounting, form and content of the consolidated financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, annual and other report filings, and other market conduct. In general, such regulation is for the protection of policyholders rather than shareholders. We are also subject to Bermuda insurance regulations, which are generally similar to insurance regulations imposed by U.S. states on U.S.-domiciled insurers, though there are important differences, as described below.
State Accreditation and Monitoring
All states have laws establishing standards that an insurer must meet to maintain its license to write business. In addition, all states have enacted laws substantially similar to the National Association of Insurance Commissioners’ (NAIC) risk-based capital (RBC) standards for property and casualty companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for property and casualty insurance companies measures three major areas of risk: underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; declines in asset values arising from market and/or credit risk; and off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates or other contingent liabilities, and excessive premium growth. Under laws adopted by individual states, insurers having less total adjusted capital than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy.
The NAIC has a set of financial relationships or tests known as the Insurance Regulatory Information System (IRIS) to assist state insurance regulators in monitoring the financial condition of insurance companies and identifying companies that require special regulatory attention. Insurance companies generally submit data annually to the NAIC, which in turn analyzes the data using prescribed financial data ratios (IRIS ratios), each with defined "usual ranges." Generally, regulators will begin to investigate or monitor an insurance company if its IRIS ratios fall outside the usual ranges for four or more of the ratios. If an insurance company has insufficient capital, regulators may act to reduce the amount of insurance it can issue or, in severe situations, assume control of the company. We currently believe that all of our insurance subsidiaries are within an acceptable IRIS range, and we are not aware of any IRIS-related regulatory investigation related to our insurance company subsidiaries.
Many states have laws and regulations that limit an insurer's ability to exit a market. For example, certain states prohibit an insurer from withdrawing from one or more lines of insurance business in the state without providing prior notice to or obtaining the state regulator's approval. State regulators may refuse to approve withdrawal plans on the grounds that they could lead to market disruption or for other reasons, including political and tax-related reasons. Some states also prohibit canceling or non-renewing certain policies for specific reasons.
State insurance laws and regulations include numerous provisions governing marketplace activities of insurers, including provisions governing marketing and sales practices, policyholder services, claims management and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Guaranty Funds and Mandatory Shared Market Mechanisms
As a condition of our license to do business in certain states, we are required to participate in guaranty funds in which licensed insurers within the state bear a portion of the loss suffered by claimants due to the insolvency of other insurers. Certain states also impose mandatory shared market mechanisms, such as assigned risk plans, with each state dictating the types of insurance and the level of coverage that must be provided. Assigned risk plans require insurers licensed within the applicable state to accept applications for insurance policies from customers who are unable to obtain insurance in the voluntary market. The total number of such policies an insurer is required to accept is based on its market share of voluntary business in the state. Underwriting results related to assigned risk plans are typically adverse. Accordingly, we may be required to underwrite policies with a higher risk of loss than we would otherwise accept.
Reinsurance facilities are another type of shared market mechanism. Reinsurance facilities require an insurance company to accept all applications submitted by certain state designated agents. The reinsurance facility then allows the insurer to cede some of its business to the reinsurance facility and the facility will reimburse the insurer for claims paid on ceded business. Typically, however, reinsurance facilities operate at a deficit, which is funded through assessments against the same insurers. As a result, we could be required to underwrite policies with a higher risk of loss than we would otherwise voluntarily accept.

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Pricing, Investment and Dividends
Nearly all states have insurance laws requiring property and casualty insurance companies to file their rates, rules and policy or coverage forms with the state's regulatory authority. In most cases, such rates, rules and forms must be approved prior to use. While pricing laws vary from state to state, their objectives are generally to ensure that rates are not excessive, unfairly discriminatory or used to engage in unfair price competition. Our ability to increase rates and the timing of the process are dependent upon the regulatory requirements in each state.
We are subject to state laws and regulations that require investment portfolio diversification and dictate the quality and kind of investments we may hold. Non-compliance may cause non-conforming investments to be non-admitted when measuring statutory surplus and, in some instances, may require divestiture. Our investment portfolio as of December 31, 2016 complied with such laws and regulations in all material respects.
One of the primary sources of cash inflows for us and certain of our intermediary holding companies is dividends or distributions received from our operating subsidiaries. Under the insurance laws of the domiciliary states of our U.S. insurance subsidiaries, an insurer is restricted with respect to the timing or amount of dividends it may pay without prior approval by regulatory authorities. Atlantic Specialty Insurance Company (ASIC), a New York insurance company, is the lead insurance company for our specialty business. ASIC, regulated by the New York Department of Financial Services (NY DFS), has the ability to pay dividends to its immediate parent without the prior approval of regulatory authorities in an amount set by formula based on the lesser of (i) adjusted net investment income, as defined by statute, or (ii) 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus. Additionally, upon ASIC’s request, the NY DFS has the discretion to approve a greater dividend, or allow for a special distribution of funds (including share repurchases).
Split Rock Insurance, Ltd. (Split Rock) our Bermuda-based reinsurance company has the ability to distribute statutory capital without the prior approval of the Bermuda Monetary Authority, provided it does not reduce its total statutory capital, as shown in its previous financial year's statutory financial statements, by 15% or more. In addition, Split Rock has the ability to pay dividends to its immediate parent without the prior notification of regulatory authorities of up to 25% of its previous financial years total statutory capital and surplus, subject to meeting all appropriate liquidity and solvency requirements as specified in the Bermuda Insurance Act of 1978 and related regulations (Insurance Act) and the Companies Act 1981 of Bermuda (Companies Act). See Item 7A—"Liquidity and Capital Resources" for further information regarding dividend capacity for ASIC and Split Rock.
Holding Company Structure
We are subject to regulation under certain state insurance holding company acts. These regulations contain reporting requirements relating to our capital structure, ownership, financial condition and general business operations. These regulations also contain special reporting and prior approval requirements with respect to certain transactions among affiliates. Since we are an insurance holding company, the domiciliary states of our U.S. insurance subsidiaries impose regulatory application and approval requirements on acquisitions of common shares which may be deemed to confer control over those subsidiaries, as that concept is defined under the applicable state laws. Acquisition of as little as 10% of our common shares may be deemed to confer control under the insurance laws of some jurisdictions, and the application process for approval can be extensive and time consuming.
Legislation
Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies impact the industry. In addition, legislation has been introduced in recent years that, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. Notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) created the Federal Insurance Office (FIO) within the Treasury Department, which is responsible for gathering information and monitoring the insurance industry to identify gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or U.S. financial system. In addition to these recent financial regulations, we are impacted by other federal regulations targeted at the insurance industry, such as the Terrorism Act, which established a federal "backstop" for commercial property and casualty losses (see "—Catastrophe Risk Management and Reinsurance Protection" above). For example, the generally applicable levels of reinsurance support that the federal government provides to authorized carriers under the Terrorism Act could be reduced by future legislation. We will continue to monitor new and changing federal regulations and their potential impact, if any, on our insurance company subsidiaries.

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In addition to emerging federal regulation, many states are adopting laws that attempt to strengthen the ability of regulators to understand and regulate the risk management practices of insurers and insurance groups. For example, many states have adopted measures related to the NAIC’s Solvency Modernization Initiative (SMI), which have included model regulations that require insurers to summarize their key risks and risk management strategies to regulators. For example, the SMI resulted in a 2010 amendment to the NAIC’s Model Insurance Company Holding Company System Regulatory Act (the Model Holding Company Act), which requires the ultimate controlling person in an insurer’s holding company structure to identify and report material enterprise risks to the state insurance regulator. The SMI also produced the NAIC Risk Management and Own Risk Solvency Model Act (ORSA), which requires insurers meeting premium thresholds to: 1) maintain a risk management framework; and 2) annually submit a comprehensive report designed to assess the adequacy of an insurer’s risk management practices, including risks related to the insurer’s future solvency position. ORSA requirements became effective in 2015 in all of the domiciliary states of our U.S. insurance company subsidiaries.
Bermuda Law
We are an exempted company organized under the Companies Act. As a result, we are required to comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions from contributed surplus. A company is prohibited from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are reasonable grounds for believing that:
the company is, or would after the payment be, unable to pay its liabilities as they become due; or
the realizable value of the company's assets would thereby be less than its liabilities.
Under our bye-laws, each common share is entitled to dividends if, and when, dividends are declared by our board of directors (the Board), subject to any preferred dividend rights of the holders of any preference shares. Issued share capital is the aggregate par value of the company's issued shares, and the share premium account is the aggregate amount paid for issued shares over and above their par value. Share premium accounts may be reduced in certain limited circumstances. In addition, the Companies Act regulates return of capital, reduction of capital and any purchase or redemption of shares by OneBeacon.
Although we are incorporated in Bermuda, we have been designated as a non-resident of Bermuda for exchange control purposes by the Bermuda Monetary Authority (BMA). Pursuant to our non-resident status, we may hold any currency other than Bermuda dollars and convert that currency into any other currency, other than Bermuda dollars, without restriction.
Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 and the Exchange Control Act 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the BMA has granted a general permission. The BMA, in its policy dated June 1, 2005, provides that, where any equity securities, including our common shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and subsequent transfer of any securities of a company from and/or to a non-resident for as long as any equity securities of such company remain so listed. The New York Stock Exchange is deemed to be an appointed stock exchange under Bermuda law. Notwithstanding the above general permission, the BMA has granted us permission to, subject to our common shares being listed on an appointed stock exchange, (a) issue and transfer our shares, up to the amount of our authorized capital from time to time, to persons resident and non-resident of Bermuda for exchange control purposes; (b) issue and transfer our options, warrants, depositary receipts, rights, and other securities; and (c) issue and transfer our loan notes and other debt instruments and options, warrants, receipts, rights over loan notes and other debt instruments to persons resident and non-resident of Bermuda for exchange control purposes.
Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place in Bermuda. As an exempted company, we may not, without the express authorization of the Bermuda legislature or under a license granted by the Bermuda Minister of Economic Development (Minister), participate in various specified business transactions, including:
the acquisition or holding of land in Bermuda, except land held by way of lease or tenancy agreement which is required for our business and held for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for our officers and employees and held with the consent of the Minister, for a term not exceeding 21 years;
the taking of mortgages on land in Bermuda in excess of $50,000;
the acquisition of any bonds or debentures secured by any land in Bermuda, other than certain types of Bermuda government or public authority securities; or

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subject to some exceptions, the carrying on of business of any kind in Bermuda for which we are not licensed in Bermuda.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent resident certificates and holders of working resident certificates) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian or a holder of a permanent resident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standard requirements for the advertised position. A waiver from advertising is automatically granted in respect of any chief executive officer position and other chief officer positions.
The Company’s indirect, wholly owned subsidiary, Split Rock, is a Bermuda-based reinsurance company. Split Rock is subject to the Insurance Act. The Insurance Act requires Split Rock to be registered with the BMA. The Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Bermuda insurance companies, including Split Rock, and grants the BMA powers to supervise, investigate, and intervene in the affairs of Bermuda insurance companies. While Bermuda insurance regulations are generally similar to insurance regulations imposed by U.S. states on U.S.-domiciled insurers, there are important differences. These differences must be accounted for in order for Split Rock to maintain its Bermuda insurance license. For example, instead of using the RBC formula to determine the minimum amount of capital needed to support an insurer’s overall business operations, under the Insurance Act, Split Rock is required to maintain available statutory capital and surplus at a level equal to or in excess of its enhanced capital requirement which is established by reference to either the BMA's Bermuda Solvency Capital Requirement (BSCR) model or an approved internal capital model in lieu thereof. Split Rock currently uses the BSCR model in calculating its capital and solvency requirements, which it files with the BMA annually along with its annual statutory return and which forms part of its overall capital and solvency return. Another difference relates to the regulation of insurer investments. Under the Insurance Act, Split Rock is required to maintain a minimum liquidity ratio to ensure that it has sufficient liquidity in its investment portfolio. See the Pricing, Investing and Dividends section above for Bermuda restrictions with respect to distributions and dividends and Item 7A—"Liquidity and Capital Resources" for further information regarding dividend capacity for ASIC and Split Rock. Split Rock also submits audited GAAP financial statements and audited statutory financial statements to the BMA, the former of which are published on the BMA’s website. In addition, Split Rock files a financial condition report with the BMA, which is available from the Company for public inspection on request. Finally, in addition to compliance under the Insurance Act, Split Rock must also comply with provisions of the Companies Act relating to exempted companies, including with respect to payment of dividends, as set out above.
Ratings
Insurance companies are evaluated by various rating agencies in order to measure each company's financial strength. Higher ratings generally indicate financial stability and a stronger ability to pay claims. We believe that strong ratings are an important factor in the marketing of insurance products and services to distribution partners and customers. These claims-paying (or financial strength) ratings do not refer to our ability to meet non-insurance obligations and are not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold, or sell our securities.
The following table presents the financial strength ratings assigned to our principal insurance operating subsidiaries as of February 27, 2017:
 
 
A.M. Best(1)
 
Fitch(2)
 
Moody's(3)
 
Standard & Poor's(4)
Ratings
 
"A" (Excellent)
 
"A" (Strong)
 
"A3" (Good)
 
"A-" (Strong)
Outlook
 
Stable
 
Stable
 
Stable
 
Stable
_______________________________________________________________________________
(1) 
"A" is the third highest of sixteen financial strength ratings assigned by A.M. Best.
(2) 
"A" is the sixth highest of nineteen international financial strength ratings assigned by Fitch.
(3) 
"A3" is the seventh highest of twenty-one financial strength ratings assigned by Moody's.
(4) 
"A-" is the seventh highest of twenty-one financial strength ratings assigned by Standard & Poor's.

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Executive Officers
The section below provides information regarding our executive officers as of February 27, 2017:
Name
 
Age
 
Position(s)
T. Michael Miller
 
58

 
Director, President and Chief Executive Officer
Paul H. McDonough
 
52

 
Executive Vice President and Chief Financial Officer
Paul J. Brehm
 
56

 
Executive Vice President, Chief Actuary, Chief Risk Officer
Dennis A. Crosby
 
58

 
Executive Vice President
Maureen A. Phillips
 
62

 
Senior Vice President and General Counsel
John C. Treacy
 
53

 
Chief Accounting Officer and Treasurer
T. Michael Miller has been President and Chief Executive Officer of the Company since October 2006. Mr. Miller joined OneBeacon in April 2005 to assume responsibility for OneBeacon's insurance operations. Throughout his tenure at OneBeacon, Mr. Miller has also held various chief executive positions with OneBeacon companies. Mr. Miller's experience prior to joining OneBeacon includes 10 years at St. Paul Travelers, most recently as Co-Chief Operating Officer, and 14 years with The Chubb Corporation.
Paul H. McDonough was named Executive Vice President and Chief Financial Officer of the Company in February 2016. Mr. McDonough was Senior Vice President and Chief Financial Officer of the Company since March 2009. Mr. McDonough was appointed Vice President and Chief Financial Officer of the Company in October 2006. Prior to joining OneBeacon in December 2005, Mr. McDonough served as Executive Vice President and Chief Financial Officer of BJ's Wholesale Club, and as Treasurer for St. Paul Travelers, where he worked from 1999-2004. Prior to joining St. Paul Travelers, Mr. McDonough served in various finance roles with Sears and Chevron.

Paul J. Brehm has been Executive Vice President of OneBeacon Services since February 2013. Mr. Brehm has served as Chief Actuary of OneBeacon since 2015 and Chief Risk Officer of OneBeacon since March 2010. Mr. Brehm joined OneBeacon in 2008 as the Chief Actuary for the Specialty Insurance operations and has held various positions with OneBeacon companies. Prior to joining OneBeacon, Mr. Brehm was a Managing Director at Guy Carpenter from 2005 to 2008. Prior to Guy Carpenter, he worked at St. Paul Travelers for 22 years, most recently as Chief Actuary.
Dennis A. Crosby has been Executive Vice President of OneBeacon Services since January 2012. Mr. Crosby joined OneBeacon in July 2010 and serves as the chief executive overseeing our businesses. Prior to joining OneBeacon, Mr. Crosby was with ACE from 2004 through 2010, serving as President and CEO of ACE Westchester and Chairman of ACE Commercial Risk Services. Prior to his 6 years at ACE, he spent 23 years with St. Paul Travelers in a variety of senior roles including commercial middle market, insurance operations and public sector services.
Maureen A. Phillips became Senior Vice President and General Counsel of the Company in February 2012. Prior to joining OneBeacon, Ms. Phillips was Senior Vice President and Chief Legal Officer of Allianz Life Insurance Company of North America since 2008. Ms. Phillips served as Senior Counsel at Fairview Health Services from 2006 to 2008. Her prior experience includes senior legal positions at St. Paul Travelers where she spent 17 years.
John C. Treacy became Chief Accounting Officer and Treasurer of the Company in February 2013 after joining OneBeacon in May of 2012. Prior to joining OneBeacon, Mr. Treacy served as Chief Financial Officer for Berkley Risk from 2009 to 2012 and for JB Collins from 2007 to 2009. Mr. Treacy also served as Senior Vice President and Corporate Controller at Zurich North America from 2005 to 2007 and, previously in the same role, at St. Paul Travelers where he worked for 16 years. Prior to joining St. Paul Travelers, he practiced public accounting with Ernst & Young.
Employees
As of December 31, 2016, we employed approximately 1,100 persons.
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the Securities Exchange Act of 1934. In accordance therewith, we file reports, proxy statements and other information with the Securities and Exchange Commission (SEC). These documents are available free of charge at www.onebeacon.com as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, our Code of Business Conduct and Corporate Governance

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Guidelines, as well as the charters of our Board Committees are available free of charge at www.onebeacon.com. Information contained on our website is expressly not incorporated by reference into this Form 10-K.
We will provide to any shareholder, upon request and without charge, copies of these documents (excluding any applicable exhibits unless specifically requested). Written or telephone requests should be directed to Investor Relations, OneBeacon Insurance Group, Ltd., 605 North Highway 169, Plymouth, Minnesota 55441, (877) 248-8765. Additionally, all such documents are physically available at our registered office at Clarendon House, 2 Church Street, Hamilton, HM 11 Bermuda.
ITEM 1A.
RISK FACTORS
Our business is subject to various risks and uncertainties. Any of the risks described below could materially adversely affect our business, financial condition, and results of operations.
Risks Relating to Our Business
Our loss and loss adjustment expense (LAE) reserves may be inadequate to cover our ultimate liability for the cost of claims and as a result our financial condition and results of operations could be materially adversely affected.
We must maintain reserves adequate to cover our estimated ultimate liabilities for loss and LAE. They are typically comprised of (1) case reserves for claims reported and (2) IBNR reserves, which consist of reserves for losses that have occurred but for which claims have not yet been reported and for expected future development on case reserves.
Loss and LAE reserves are estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. These estimates involve actuarial and claims assessments and depend on a number of assumptions about future events that are subject to unexpected changes and are beyond our control, such as future trends in claim severity, emerging coverage issues, frequency of large claims, overall claim frequency, inflation, legislative and judicial changes, and other factors. Estimating loss and LAE reserves is particularly challenging for new businesses where we do not have sufficient claims experience to select the necessary assumptions and must rely on external data to establish loss and LAE reserves, increasing the likelihood that our estimates will differ from the ultimate cost of claims.
Because of the inherent uncertainties associated with estimating ultimate loss and LAE reserves, it is likely that the ultimate cost of paying claims will be different than our loss and LAE reserves. In the event that reserves become insufficient to cover our actual loss and LAE, we may need to strengthen our reserves, which could have a material adverse effect on our results of operations and financial condition.
For additional information relating to loss and LAE reserve requirements, see "Item 1. Business—Regulatory Matters." For further discussion of our loss and LAE reserves, see "Item 1. Business—Loss and LAE Reserves" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates."
Our investment portfolio may suffer reduced returns or losses, which could adversely affect our results of operations and financial condition. Adverse changes in interest rates, equity markets, debt markets or market volatility could result in significant losses to the fair value of our investment portfolio.
Our investment portfolio, including the assets supporting our benefit plans, consists of fixed maturity investments, short-term investments, common equity securities and other investments such as surplus notes, hedge funds and private equity funds. We invest to maximize long-term total returns (after-tax) while taking prudent levels of risk and maintaining a diversified portfolio, subject to our investment guidelines and various regulatory restrictions. However, investing entails substantial risks. We may not achieve our investment objectives, and our investment performance may vary substantially over time. Investment returns are an important part of our strategy to grow book value, and fluctuations in the fixed income or equity markets could impair our results of operations and financial condition.

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Both the investment income we generate and the fair market value of our investment portfolio are affected by general economic and market conditions, including fluctuations in interest rates, debt market levels, equity market levels and market volatility. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. In particular, a significant increase in interest rates could result in significant losses in the fair value of our investment portfolio and consequently could adversely affect our results of operations and financial condition. We are exposed to changes in equity markets. We are also exposed to changes in the volatility levels of various investment markets. The underlying conditions prompting such changes are outside of our control and could adversely affect the value of our investments and our results of operations and financial condition. We also hold investments, such as surplus notes, hedge funds and private equity funds, which are not regularly traded in active investment markets and may be illiquid. These investments may experience greater volatility in their returns or valuation, which could impair our financial performance.
Successful management of our investment portfolio is highly dependent on WM Advisors, which is owned by White Mountains. If we lose our investment relationship with WM Advisors, we may not be able to secure an investment adviser or advisers who will produce returns on our investments similar to those produced by WM Advisors in the past, or any positive returns at all.
The property and casualty insurance industry is highly competitive and cyclical, and we may not be able to compete effectively in the future.
The property and casualty insurance industry is highly competitive and has historically been cyclical, experiencing periods of severe price competition and less selective underwriting standards (soft markets) followed by periods of relatively high prices and more selective underwriting standards (hard markets). Cyclicality may adversely affect our results of operations and financial condition by reducing the rates we can charge for property and casualty insurance during soft markets. We expect to continue to experience the effects of cyclicality and may not be able to successfully manage the associated risks.
Insurance markets are highly competitive and our businesses each compete against different subsets of companies. In general terms, we compete in one or more of our businesses with most of the large multi-line insurance companies, most of the specialty companies, and various local and regional insurers. We also compete with new companies formed to enter insurance markets. Recent consolidation in the United States property and casualty insurance industry may increase the size and/or financial strength of some of our competitors. Increased competition could result in fewer submissions, lower premium rates and less favorable policy terms and conditions, which could adversely impact our results of operations and financial condition.
We could fail to build and sustain the kind of business relationships, including distribution relationships, that are necessary to compete. We offer our products through a select network of independent agents, regional and national brokers, wholesalers and managing general agencies, or MGAs. If our distribution partners find that our competitor insurers offer better priced coverage, we may be unable to maintain a competitive position, which in turn may adversely affect our results of operations and financial condition. Additionally, consolidation among brokers and agents may make it more difficult to distribute our products.
Catastrophic events could materially adversely affect our results of operations and financial condition
We write insurance policies that cover unpredictable catastrophic events. Covered unpredictable events include natural disasters, such as hurricanes, windstorms, earthquakes, floods, wildfires, and severe winter weather, and also include other disasters such as terrorist attacks, cyber-attacks, explosions, infrastructure failures, political instability, and wide-impact pandemics.
Our exposure to hurricanes and earthquakes is the largest natural catastrophe risk to our business. Key exposures include: (1) hurricane or windstorm damage in the United States Northeast Atlantic Coast and Gulf Coast regions; (2) major California earthquakes; (3) convective storms; and (4) losses from terrorist attacks in the United States, such as the attacks on September 11, 2001.
The extent of catastrophe losses is a function of the number of events, the severity of each event and total amount of insured exposure in the affected area. Increases in the value and concentrations of insured property or insured employees, the effects of inflation, and changes in weather patterns could increase the future frequency and severity of claims from catastrophic events. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year and adversely affect our financial condition. Our ability to write new insurance policies could also be impacted as a result of corresponding reductions in our surplus levels.
Changing climate conditions may add to the unpredictability and frequency of natural disasters and create additional uncertainty as to future trends and exposures. We cannot predict how changing climate conditions and the various governmental and other responses to such changes will impact our business. To the extent that climate change increases the unpredictability,

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frequency or severity of natural disasters, we may face increased claims, which could have a material adverse effect on our results of operations and financial condition. Such climate changes may also not be adequately considered in our catastrophe modeling, described below.
Our efforts to mitigate our exposure to catastrophes—which include analyzing possible catastrophe losses through a variety of tools, such as catastrophe modeling software, and purchasing reinsurance—may be unsuccessful. Loss estimates produced by catastrophe models depend on many variables, including assumptions about demand surge, storm surge, loss adjustment expenses, and event intensity. If the assumptions defining our modeling variables are incorrect, or the model itself is incorrect, the losses we might incur from an actual catastrophe could be materially higher than our expectation of losses generated from modeled catastrophe scenarios. To the extent these losses are not covered by reinsurance, our results of operations and financial condition could be materially adversely affected.
Terrorism risk presents unique challenges because of the unpredictability of targets, the frequency and severity of potential terrorist attacks, the limited availability of terrorism reinsurance, and the limited protection provided by government programs. Furthermore, we cannot predict the extent to which our future insurance contracts will be prohibited from excluding terrorism coverage from insurance offered to certain classes of business. Under the Terrorism Act, the U.S. federal government is required to provide assistance to insurers for certain terrorism events. However, the benefits to insurers are limited, the law is untested, and it is possible that Congress will terminate or modify the Terrorism Act, which could adversely affect our business by increasing our exposure to terrorism losses. There is a possibility that losses resulting from future terrorist attacks could prove to be material to our results of operations and financial condition.
We may need additional capital in the future, which may not be available to us or available to us on favorable terms. Raising additional capital could dilute your ownership in our company and may cause the market price of our common shares to fall.
We may need to raise additional funds through public or private debt or equity financings in order to:
fund liquidity needs;
replace capital lost due to one of the other risks identified herein;
repay the $275.0 million aggregate principal amount of our 2012 Senior Notes;
satisfy letter of credit or guarantee bond requirements that may be imposed by our clients or by regulators;
acquire new businesses or invest in existing businesses;
expand our business into new regions or countries; or
otherwise respond to competitive pressures.
Any additional capital raised through the sale of equity will dilute an existing shareholders' ownership percentage in our company and may decrease the market price of our common shares. Furthermore, the securities may have rights, preferences and privileges that are senior or otherwise superior to those of our common shares. Any additional financing we may need may not be available on terms favorable to us, or at all, and could increase the company’s financial leverage and hence its overall risk levels.
We may not successfully alleviate risk through reinsurance arrangements. Additionally, we may be unable to collect all amounts due from reinsurers under our existing reinsurance arrangements.
We attempt to limit our risk of loss through reinsurance arrangements. The availability and cost of reinsurance protection is subject to market conditions which are outside of our control. In addition, the coverage provided by our reinsurance contracts may be inadequate to cover our future liabilities. As a result, we may not be able to successfully alleviate risk through these arrangements, which could have a material adverse effect on our results of operations and financial condition.
Purchasing reinsurance does not relieve us of our underlying obligations to policyholders, so any inability to collect amounts due from reinsurers could also adversely affect our results of operations and financial condition. Inability to collect amounts due from reinsurers can result from a number of scenarios, including: (1) reinsurers choosing to withhold payment due to a dispute or other factors beyond our control; and (2) reinsurers becoming unable to pay amounts owed to us as a result of a deterioration in financial condition. While we regularly review the financial condition of our reinsurers and currently believe their condition is strong, it is possible that one or more of our reinsurers will be significantly adversely affected by future significant loss or economic events, causing them to be unable or unwilling to pay amounts owed to us.
In addition, due to factors such as the price or availability of reinsurance coverage, we sometimes decide to increase the amount of risk we retain by purchasing less reinsurance. Such determinations have the effect of increasing our financial exposure to losses associated with such risks and, in the event of significant losses associated with a given risk, could have a material adverse effect on our results of operations and financial condition.

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We may be unable to adequately maintain our systems and safeguard the security of our data which may adversely impact our ability to operate our business and cause reputational harm and financial loss.
Because our business and operations rely on secure and efficient information technology systems, we depend on our ability, and the ability of certain third parties, including vendors and business partners, to access our computer systems to perform necessary functions such as providing quotes and product pricing, billing and processing premiums, administering claims, and reporting our financial results. The functioning of these systems may be impacted by any number of events, including power outages, natural and manmade catastrophes, and cyber-attacks. In the event we are unable to access any of our systems, or any third party system that we rely upon, our ability to operate our business effectively may be significantly impaired.
Our business also depends upon our ability to securely process, store, transmit and safeguard confidential and proprietary information that is in our possession. This information includes confidential information relating to our business, and personally identifiable information (PII) and protected health information (PHI) belonging to our employees, customers, claimants and business partners. Because our systems may be vulnerable to a variety of forms of unauthorized access that could result in a data breach, including hackers, computer viruses, and other cyber-attacks, as well as breaches that could result from dishonest employees, errors by employees or lost or stolen computer devices, we may not be able to protect the confidentiality of such information.
Third parties present an additional risk of cyber-related events. We outsource certain technological and business process functions to third-party providers. We rely on these third parties to maintain and store PII and PHI and other confidential information on their systems. We also routinely transmit such information by e-mail and other electronic means. Although we attempt to establish sufficient controls and secure capabilities to transmit such information and to prevent unauthorized disclosure, these controls may not be sufficient. Furthermore, third-party providers may not have appropriate controls in place to protect such information.
Like most insurance companies, our computer systems have been and will continue to be the target of cyber-attacks, although we are not aware that we have experienced a material cybersecurity breach. We are also not aware of any third-party vendor having experienced a material cybersecurity breach that impacted our data. The risk of cyber-attack may increase, and we may experience more significant attacks in the future.
The risks identified above could expose us to data breaches, disruptions of service, financial losses and significant increases in compliance costs and reputational harm to us, any of which could affect our business and results of operations. In addition, a data breach that involves the compromise of PII or PHI could subject us to legal liability or regulatory action under data protection and privacy laws and regulations enacted by federal, state and foreign governments, or other regulatory bodies. As a result, our ability to conduct our business and our results of operations might be materially and adversely affected.
We may suffer losses from unfavorable outcomes from litigation and other legal proceedings.
In the ordinary course of business, we are subject to litigation and other legal proceedings as part of the claims process, the outcomes of which are uncertain. We maintain reserves for claims-related legal proceedings as part of our loss and LAE reserves. Adverse outcomes are possible and could negatively impact our financial condition. Furthermore, as industry practices and legal, judicial, social and other conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our results of operations and financial condition by either extending coverage beyond our underwriting intent or by increasing the number and size of claims. In some instances, these changes may not become apparent until sometime after we have issued the affected insurance contracts. Examples of emerging claims and coverage issues include, but are not limited to:
New theories of liability and disputes regarding medical causation with respect to certain diseases;
Claims related to data security breaches, information system failures or cyber-attacks; and
Claims caused by national and global political and social unrest.
In addition, from time to time, we are subject to legal proceedings that are not related to the claims process. In the event of an unfavorable outcome in one or more non-claims legal matters, our ultimate liability may be in excess of amounts we have reserved and such additional amounts may be material to our results of operations and financial condition. Furthermore, it is possible that these non-claims legal proceedings could result in equitable remedies or other unexpected outcomes that may materially impact our business or operations.
Our debt and related service obligations could adversely affect our business.
As of December 31, 2016, we had $275.0 million face value of indebtedness. See "Item 1. Business—Investing, Financing and Corporate—Financing—2012 Senior Notes." Our ability to meet our debt and related service obligations will

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depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which are beyond our control. If the Company or OBH defaults under a separate credit agreement, mortgage, or similar debt agreement with a principal amount greater than $75 million, and such default results in the acceleration of such debt, there will be a default under the 2012 Senior Notes which would permit the holders of 25% or more of the 2012 Senior Notes to declare an event of default under the indenture documents resulting in a required repayment of the 2012 Senior Notes. We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations, or to repay any accelerated indebtedness as a result of the trigger of the cross acceleration provisions in the indentures of the 2012 Senior Notes. If we do not have enough cash, we may be required to refinance all or part of our existing debt, sell assets, borrow more cash or issue equity. We cannot make assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, if at all. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financing."
We recently entered into a Credit Agreement with lenders providing an unsecured revolving credit facility of $65.0 million. To date, we have not incurred any indebtedness under the Credit Agreement.
We could incur additional indebtedness or issue preferred stock, or other hybrid instruments, in the future. To the extent new debt, preferred stock, hybrid instruments, or other obligations are added to our current debt levels, or we incur indebtedness under the revolving credit facility discussed above, the risks described in the previous paragraph would increase.
We may not be successful in developing our specialty businesses which could cause us to underprice our policies, underestimate reserves, incur additional expenses and fail to fully realize our investments in these businesses, which could materially affect our business and results of operations.
We recently entered into new specialty business lines, including financial institutions and programs. We intend to continue to look for appropriate opportunities to diversify our business portfolio by adding new specialty lines. We also intend to continue to grow our existing specialty lines. Due to our limited experience in new business lines, there could be limited expertise and financial information available to us to help estimate sufficient prices, estimate likely ultimate loss and LAE and expenses, and evaluate whether a given line can be managed and developed successfully. Also, these lines may not meet our performance expectations. Although we have a conservative approach to adding new lines, including stringent management oversight of underwriting, product and pricing development, and financial performance, there is no assurance that some or all of these new specialty businesses will be profitable, which could materially adversely affect our results of operations and financial condition.
Regulation may restrict our ability to operate.
The insurance industry is subject to extensive regulation under federal, state and Bermuda law. The primary goal of the regulation is protection of policyholders rather than shareholders. For example, in order to protect insurer solvency, state insurance regulations impose restrictions on the amount and type of investments, detail minimum capital standards, and require the maintenance of reserves. Also, laws that protect policyholders from premium rate increases may make it difficult for us to increase premiums to adequately reflect the cost of providing coverage. Our underwriting is heavily dependent on information gathered from third parties such as insurance rating bureaus, highly regulated credit report agencies and other data aggregators. Regulatory changes related to the availability or use of this information could materially affect how we underwrite and price premiums.
Changes in federal, state or Bermuda laws and regulations may restrict our ability to operate and/or have an adverse effect upon the profitability of our business within a given jurisdiction, and could have an effect on our business, results of operations and financial condition. For example, as a result of various state, federal and international regulatory efforts to modernize and harmonize insurer solvency regulations in the wake of the recent financial crisis, the states or Bermuda could further restrict allowable investments or increase our capital requirements, both of which could materially impact our results of operations.
We may not maintain favorable financial strength or creditworthiness ratings, which could adversely affect our ability to conduct business.
Third-party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers and reinsurers. These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of the criteria relate to general economic conditions and other circumstances outside the rated company's control. These financial strength ratings are: (1) an important tool that policyholders, agents and brokers use to assess the suitability of insurers as business counterparties; and (2) an important factor in establishing the competitive position of insurance companies. A downgrade, withdrawal or negative watch/outlook of our financial strength ratings could severely limit or prevent our insurance subsidiaries from writing new insurance policies or renewing existing insurance policies, which could have a material adverse effect on our results of operations and financial condition.

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General creditworthiness ratings are used by existing and potential investors to assess the likelihood of repayment on a particular debt issue. Strong creditworthiness ratings also provide better financial flexibility when issuing new debt or restructuring existing debt. A downgrade, withdrawal or negative watch/outlook of our creditworthiness ratings could limit our ability to raise new debt or make new debt more costly and/or have more restrictive conditions.
We depend on our key personnel to manage our business effectively and they may be difficult to replace.
Our performance substantially depends on the efforts and abilities of our management team and other executive officers and key employees, including our experienced teams of specialty underwriters. Furthermore, much of our competitive advantage is based on the expertise, experience and know-how of our key management personnel and underwriting teams. We do not have fixed term employment agreements with any of our key employees or key man life insurance, and the loss of one or more of these key employees, or a substantial portion of an underwriting team, could adversely affect our business, results of operations and financial condition. Our success also depends on the ability to hire and retain additional key personnel, including underwriting and claims teams. Difficulty in hiring or retaining key personnel could adversely affect our results of operation.
Mandated market mechanisms may require us to underwrite policies with a higher risk of loss, and assessments and other surcharges for guaranty funds and second-injury funds may reduce our profitability.
We are often required to participate directly or indirectly in mandatory shared market mechanisms as a condition of writing insurance in certain states. These markets, which are commonly referred to as "residual" or "involuntary" markets, generally consist of risks considered to be undesirable from a standard underwriting perspective. Because underwriting performance related to assigned risk plans, which are a form of mandated market mechanism, is typically adverse, we are required to underwrite policies with a higher risk of loss than we would normally accept. Our participation in assigned risk plans may result in greater than expected liabilities and could materially adversely affect our results of operations and financial condition.
In addition, virtually all states require their licensed insurers to bear a portion of loss suffered by some insureds as the result of impaired or insolvent insurance companies. These guaranty funds are funded by assessments that follow insurer insolvencies, which are difficult to predict. Many states have also established second-injury funds that compensate injured employees for aggravation of a prior condition or injury. Because these second injury funds are funded by insurer assessment or premium surcharge mechanisms, they could reduce our profitability or limit our ability to grow.
We may not be able to maintain effective operating procedures and manage operational risk.
Our business operations depend on our ability to execute a large number of underwriting, claim processing, analytical, information technology and investment processes. If we are unable to do so, we may be unable to comply with regulatory requirements, accurately collect and analyze underwriting and claims data, or successfully develop new insurance products, among other things.
We implement procedures and internal controls designed to support our business processes and to mitigate these risks. However, a control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Failure of internal controls may result from, among other things, employee error or misconduct, failure to properly document transactions, failure to obtain necessary authorization, and failure to comply with regulatory requirements. Failure of controls may also result from failure to adequately supervise third party vendors we rely upon to support some of our business operations. If controls are not effective, it could lead to financial loss, unanticipated risk exposure, regulatory action or damage to our reputation. An example of ineffective controls leading to litigation can be seen in claims handling, where failure to properly handle a claim could increase our exposure by supporting policyholder theories that a claim was settled by us in bad faith.
There is no guaranty that the Board of Directors will maintain current dividend levels, which may reduce the return on an investment in our common shares.
Our current shareholder dividend practices are subject to change for reasons that may include decisions on whether, when and in what amounts to make any future distributions. These decisions remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or suspend our dividend practices at any time and for any reason. Our common shareholders should be aware that they have no contractual or other legal right to dividends. Our ability to pay dividends also depends on our future performance, which may be affected by factors beyond our control.

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The Company is a holding company with no direct operations, and our insurance subsidiaries' ability to pay dividends to us is restricted by law.
As a holding company with no direct operations, the Company relies in large part on dividends and other permitted payments, including distributions, from our subsidiaries to pay our expenses, interest on debt and dividends to shareholders, or otherwise distribute capital to shareholders. Our subsidiaries may not be able to generate cash flow sufficient to pay a dividend or distribute funds to us. In addition, under the insurance laws of the jurisdictions in which our insurance subsidiaries are domiciled, insurers are restricted with respect to the timing or the amount of dividends or distributions it may pay, and, in some cases, the prior approval of regulatory authorities may be required. ASIC, a New York insurance company, is our lead domestic insurance company. Dividends and distributions from ASIC may require prior approval by the NY DFS. Split Rock, our Bermuda reinsurance company, is regulated by the BMA and may require prior approval for dividends and other permitted payments.
If our insurance subsidiaries cannot pay dividends and other permitted payments in future periods, we may have difficulty servicing our debt, paying dividends on our common shares, continuing our current share repurchase program or repurchasing shares in the future, and paying our holding company expenses. For additional information relating to insurance regulations governing our operations, see "Item 1. Business—Regulatory Matters."
We are exposed to credit risk in certain of our business operations.
In addition to exposure to credit risk related to our investment portfolio and reinsurance recoverables, we are exposed to credit risk in other areas of our business operations.
In accordance with industry practice, when policyholders purchase insurance policies from us through independent agents and brokers, the premiums are often first received by the independent agents and brokers, who then route premiums to us. In most jurisdictions, the premiums are deemed paid to us whether or not we receive them. Consequently, we assume a degree of credit risk associated with due amounts from independent agents and brokers.
Under many of our policies, our customers are responsible to reimburse us for an agreed-upon amount per claim. Because we are typically required under these policies to pay covered claims first and then seek reimbursement from our customers, we are exposed to credit risk.
We are exposed to credit risk in our surety business, where we guarantee to a third party that our customer will satisfy certain performance obligations. We sometimes mitigate the surety customer credit risk by requiring customers to post collateral for some or all of their performance obligations, often in the form of pledged securities such as money market funds or letters of credit provided by banks. However, there is credit risk associated with any collateral — if we are holding collateral other than cash and our customer is unable to honor his or her obligations, we may be exposed to credit risks associated with pledged securities or the banks that issued the letter of credit.
Economic downturns generally increase these credit risks. If credit risks materialize and control mechanisms like underwriting guidelines and collateral requirements are unsuccessful, we could be left with collateral that has little or no value. As a result, our exposure to the above credit risks could materially and adversely affect our results of operations.
Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.
We are organized under the laws of Bermuda, and a portion of our assets are located outside the United States. As a result, it may not be possible for our shareholders to enforce court judgments obtained in the United States against us based on the civil liability provisions of the federal or state securities laws of the United States, either in Bermuda or in countries other than the United States where we have assets. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the federal or state securities laws of the United States or would hear actions against us or those persons based on those laws.
Our corporate affairs are governed by the Companies Act. The Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore,

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consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against non-controlling shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.
When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the United States.
Risks Relating to Our Relationship with White Mountains
Control of us by White Mountains, and the holding of White Mountains shares by some of our directors and officers, may result in conflicts of interest.
White Mountains beneficially owns all of our Class B common shares, representing 96.9% of the voting power of our voting securities and 76.1% of our total equity as of December 31, 2016. As long as White Mountains owns our common shares representing more than 50% of the voting power of our outstanding voting securities, White Mountains will generally be able to determine the outcome of all corporate actions requiring shareholder approval, including the election of directors. Furthermore, we are relying on the "controlled company" exemption under the rules of the New York Stock Exchange, and are therefore not required to have a majority of independent directors on our Board. Of the ten directors on our Board, five are current or former employees, directors or officers of White Mountains, or the Company. White Mountains also has control over the adoption or amendment of provisions in our memorandum of association or bye-laws and the approval of amalgamations, mergers, and other significant corporate transactions. Furthermore, White Mountains will continue to be able to exercise this control as long as its economic equity ownership in us is at least 20%. These factors also may delay or prevent a change in the management or voting control of us.
Also, at some time in the future, White Mountains may sell all or a portion of its ownership interest in us or may make a tax-free distribution to its shareholders of all or a portion of that interest. There is no guaranty that such a transaction would be in the best interests of our other shareholders.
Questions relating to conflicts of interest may arise between us and White Mountains in a number of areas relating to our past and ongoing relationships. Certain of our directors and executive officers may own substantial amounts of White Mountains stock and may also be directors or officers of White Mountains from time to time. Their ownership of White Mountains stock and these other relationships could create, or appear to create, potential conflicts of interest when these individuals are faced with decisions that could have different implications for us and White Mountains. These potential conflicts could arise, for example, over matters such as the desirability of an acquisition opportunity, employee retention or recruiting, or our dividend policy.
White Mountains may compete with us and the involvement of those individuals who are directors and officers of White Mountains and directors of ours in resolving matters relating to such competition will not constitute a breach of fiduciary duty to us.
Our bye-laws provide that White Mountains will have no obligation to refrain from:
engaging in the same or similar business activities or lines of business as we do; or
doing business with any of our clients or customers.
Because White Mountains may currently or in the future engage in the same activities in which we engage, we may be in direct competition with White Mountains. While White Mountains has indicated to us that its current expectation is to manage its activities such that opportunities to acquire specialty businesses will be pursued through OneBeacon, White Mountains is not legally obligated to do so and could in the future manage its activities in a different way. Under our bye-laws, it is not a breach of fiduciary duty on the part of any of our officers and directors by reason of their participation in any of the above described activities. Due to the resources of White Mountains, including financial resources, name recognition and knowledge of our strengths, weaknesses and business practices, White Mountains could have a competitive advantage over us should it decide to engage in the type of business we conduct, which may have a material adverse effect on our operations and financial condition.

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Agreements, or agreements we may enter into, with White Mountains may not be on arm's length terms.
In connection with the initial public offering, we entered into certain contractual arrangements with White Mountains and its affiliates. These agreements were made in the context of a parent-subsidiary relationship. For example, some of our investments are managed pursuant to an investment management agreement and on a discretionary basis by a registered investment advisor owned by White Mountains. While we are satisfied with the terms of such arrangement, we cannot confirm that such terms are as favorable to us as they might have been had we contracted with an independent advisor. On the other hand, if our investment management agreement should terminate, we may not be able to replace these investment services in a timely manner or on terms and conditions, including cost, that are comparable to those we receive from White Mountains, and we may have to pay higher prices for similar services from unaffiliated third parties. For more information on these and other arrangements with White Mountains, see Note 15—"Related Party Disclosures" of the accompanying consolidated financial statements.
Risks That Relate to Taxes
Changes in tax laws or tax treaties may adversely affect the Company.
The taxable income of our U.S. subsidiaries is subject to U.S. federal, state and local income tax and other taxes. Potential changes to these laws could adversely affect the company. For example, disallowing the deduction for reinsurance purchased from a reinsurer outside the U.S. or disallowing deductions for interest expense could adversely affect the Company.
The income of the non-U.S. companies in our group is generally subject to a rate of tax that is lower than the U.S. rate. Certain of our non-U.S. companies are eligible for the benefits of tax treaties between the United States and other countries. We believe our non-U.S. companies will continue to be eligible for treaty benefits. However, it is possible that factual changes or changes to U.S. tax laws or changes to tax treaties that presently apply to our non-U.S. companies could increase income, or the tax rate on income subject to tax in the United States. Similarly, changes to the applicable tax laws, treaties or regulations of other countries could subject the income of members of our group to higher rates of tax outside the United States. Additionally, the base erosion and profit shifting (“BEPS”) project currently being undertaken by the Organization for Economic Cooperation and Development (“OECD”) and the European Commission’s investigation into illegal state aid may result in changes to long-standing tax principles which could adversely affect the Company.
We have significant deferred tax assets, which we may be unable to utilize if we do not generate sufficient future taxable income.
We have a deferred tax asset related to net operating loss carryforwards and tax credit carryforwards at December 31, 2016 that are subject to carryforward limitations in the United States. Utilization of these assets and other assets included in our net deferred tax asset is dependent on generating sufficient future taxable income of the appropriate character (i.e. ordinary income or capital gains) in the appropriate jurisdiction. If it is determined that it is more likely than not that sufficient future taxable income will not be generated, we would be required to increase the valuation allowance (an offset to our deferred tax asset) in future periods, which could have an adverse effect on our results of operations. A reduction in the Federal income tax rate to between 15-20% would reduce the Company’s net deferred tax asset by $54 - $72 million.
OneBeacon Insurance Group, Ltd., our Bermuda-based parent company, and our non-U.S. subsidiaries may become subject to U.S. tax, which may have an adverse effect on our results of operations and our shareholders’ investments.
OneBeacon Insurance Group, Ltd. and our non-U.S. subsidiaries operate in a manner such that none of these companies should be subject to U.S. tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on some types of U.S. source investment income), because none of these companies should be treated as engaged in a trade or business within the United States. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States, we cannot be certain that the Internal Revenue Service (IRS) will not contend successfully that the Company or its non-U.S. subsidiaries are engaged in a trade or business in the United States. If the Company or any of its non-U.S. subsidiaries were considered to be engaged in a trade or business in the United States, such entity could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business, which could adversely affect our results of operations.
ITEM 1B. 
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.
PROPERTIES
Our headquarters are located at 26 Reid Street, Hamilton HM 11, Bermuda. Our U.S. corporate headquarters are located at 605 Highway 169 North, Plymouth, Minnesota, 55441, and our registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. We also maintain branch offices in various cities throughout the United States. Our headquarters, U.S. corporate headquarters and branch offices are leased. Management believes that our office facilities will be suitable and adequate for our current level of operations.
ITEM 3. 
LEGAL PROCEEDINGS
OneBeacon, and the insurance and reinsurance industry in general, is routinely subject to claims-related litigation and arbitration in the normal course of business, as well as litigation and arbitration that do not arise from, or directly relate to, claims activity. We believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition or results of operations.
Deutsche Bank Litigation
In June 2011, Deutsche Bank Trust Company Americas, Law Debenture Company of New York and Wilmington Trust Company (collectively referred to as “Plaintiffs”), in their capacity as trustees for certain senior notes issued by the Tribune Company (“Tribune”), filed lawsuits in various jurisdictions (the “Noteholder Actions”) against numerous defendants including OneBeacon, OneBeacon-sponsored benefit plans and other affiliates of White Mountains in their capacity as former shareholders of Tribune seeking recovery of the proceeds from the sale of common stock of Tribune in connection with Tribune's leveraged buyout in 2007 (the “LBO”). Tribune filed for bankruptcy in 2008 in the Delaware bankruptcy court (the “Bankruptcy Court”). The Bankruptcy Court granted Plaintiffs permission to commence these LBO-related actions, and in 2011, the Judicial Panel on Multidistrict Litigation granted a motion to consolidate the actions for pretrial matters and transferred all such proceedings to the United States District Court for the Southern District of New York (the SDNY). Plaintiffs seek recovery of the proceeds received by the former Tribune shareholders on a theory of constructive fraudulent transfer asserting that Tribune purchased or repurchased its common shares without receiving fair consideration at a time when it was, or as a result of the purchases of shares, was rendered, insolvent. OneBeacon has entered into a joint defense agreement with other affiliates of White Mountains that are defendants in the action. OneBeacon and OneBeacon-sponsored benefit plans received approximately $32 million for Tribune common stock tendered in connection with the LBO. The Court granted an omnibus motion to dismiss the Noteholders Action in September 2013 and plaintiffs appealed. On March 29, 2016, a three judge panel of the U.S Second Circuit Court of Appeals affirmed the dismissal of the Noteholders Action. On July 22, 2016, the Plaintiff's petition to the Second Circuit for reconsideration or for a rehearing en banc was denied in full. On September 9, 2016 the Plaintiffs filed for a writ of certiorari, seeking review in the United States Supreme Court.
In addition, OneBeacon, OneBeacon-sponsored benefit plans and other affiliates of White Mountains in their capacity as former shareholders of Tribune, along with thousands of former Tribune shareholders, have been named as defendants in an adversary proceeding brought by the Official Committee of Unsecured Creditors of the Tribune Company (the “Committee”), on behalf of the Tribune Company, which seeks to avoid the repurchase of shares by Tribune in the LBO on a theory of intentional fraudulent transfer (the “Committee Action”). Tribune emerged from bankruptcy in 2012, and a litigation trustee replaced the Committee as plaintiff in the Committee Action. This matter was consolidated for pretrial matters with the Noteholder Actions in the SDNY and was stayed pending the motion to dismiss in the Noteholder Action. An omnibus motion to dismiss the shareholder defendants in the Committee Action was filed in May 2014 and the motion was granted on January 6, 2017. The plaintiff has requested permission to move the SDNY to certify the decision as a final judgment capable of immediate appeal. No amount has been accrued in connection with this matter as of December 31, 2016, as the amount of loss, if any, cannot be reasonably estimated.
ITEM 4.
MINE SAFETY DISCLOSURES
None.

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Table of Contents

PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Class A common shares of OneBeacon are listed and traded on the New York Stock Exchange (Symbol: OB). Our Class A common shares began trading on November 9, 2006. Prior to such date, there was no established public trading market for our common shares. We also have Class B common shares that are not listed for trading, all of which are held by White Mountains. There is no public market for this class of securities. The closing price per share of the Class A common shares on the New York Stock Exchange on February 22, 2017 was $16.65. As of February 22, 2017, the 22,525,458 outstanding Class A common shares were held by 30 holders of record. During 2016, we paid a quarterly dividend of $0.21 per common share, or $79.2 million in total. See Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividend Capacity" and Note 11—"Statutory Capital and Surplus" of the accompanying consolidated financial statements for a description of restrictions on our ability to pay dividends.
The following table presents the range of share prices for our Class A common shares for the periods indicated, and the quarterly dividends declared per share:
 
 
Three months ended
 
 
March 31
 
June 30
 
September 30
 
December 31
2016
 
 
 
 
 
 
 
 
Common share price:
 
 
 
 
 
 
 
 
High
 
$
14.00

 
$
13.83

 
$
14.95

 
$
16.25

Low
 
$
11.68

 
$
12.04

 
$
13.56

 
$
13.63

Dividends declared
 
$
0.21

 
$
0.21

 
$
0.21

 
$
0.21

 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
Common share price:
 
 
 
 
 
 
 
 
High
 
$
16.80

 
$
16.29

 
$
15.71

 
$
14.74

Low
 
$
14.49

 
$
13.72

 
$
13.78

 
$
12.15

Dividends declared
 
$
0.21

 
$
0.21

 
$
0.21

 
$
0.21

White Mountains is a holding company whose businesses provide property and casualty insurance and certain other products. During the fourth quarter of 2006, White Mountains sold 27.6 million, or 27.6%, of our Class A common shares in an initial public offering. Prior to the initial public offering, we were a wholly-owned subsidiary of White Mountains. As of December 31, 2016, White Mountains owned 76.1% of our common shares.
Purchases of Equity Securities by the Issuer
On August 22, 2007, the Board authorized us to repurchase up to $200.0 million of our Class A common shares from time to time, subject to market conditions. Shares may be repurchased on the open market or through privately negotiated transactions. This program does not have a stated expiration date. During the year ended December 31, 2016, 850,349 shares were repurchased under the share repurchase authorization for $10.6 million at an average share price of $12.42. During the year ended December 31, 2015, 166,368 shares were repurchased under the share repurchase authorization for $2.1 million at an average price of $12.62. No shares were repurchased under the share repurchase authorization in the fourth quarter of 2016 or during the year ended December 31, 2014. The amount of authorization remaining is $75.0 million as of December 31, 2016.

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Table of Contents

Stock Performance Graph
The following chart compares the total return on a cumulative basis of $100 invested in our Class A common shares on December 31, 2011 to the Standard & Poor's 500 Stock Index and the Standard & Poor's Property and Casualty Insurance Index. The following chart includes reinvestment of dividends.
Comparison of Five Year Cumulative Total Return
ob12312015_chart-03828a04.jpg

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Table of Contents

ITEM 6.
SELECTED FINANCIAL DATA
The following tables set forth our selected consolidated financial information for the dates indicated. We have derived the selected consolidated financial information presented below as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 from our consolidated financial statements. See Note 2—"Acquisitions and Dispositions" and Note 18—"Discontinued Operations" of the accompanying consolidated financial statements.
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
Summary Income Statement Data:
 
(in millions, except per share amounts)
Net written premiums
 
$
1,100.7

 
$
1,136.6

 
$
1,216.9

 
$
1,088.6

 
$
1,179.2

Revenues
 
 
 
 
 
 
 
 
 
 
Earned premiums
 
$
1,100.6

 
$
1,176.2

 
$
1,177.1

 
$
1,120.4

 
$
1,132.0

Net investment income
 
50.6

 
45.9

 
43.4

 
43.0

 
55.4

Net realized and change in unrealized investment gains
 
37.7

 
(35.1
)
 
40.4

 
49.4

 
55.7

Net other revenues (expenses)
 
5.5

 
(0.6
)
 
5.8

 
31.2

 
(0.5
)
Total revenues
 
1,194.4

 
1,186.4

 
1,266.7

 
1,244.0

 
1,242.6

Expenses
 
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
 
656.0

 
700.7

 
815.1

 
622.1

 
650.0

Policy acquisition and other underwriting expenses
 
415.0

 
432.0

 
382.5

 
413.7

 
454.6

General and administrative expenses
 
14.2

 
15.4

 
13.8

 
12.0

 
13.4

Interest expense
 
13.1

 
13.0

 
13.0

 
13.0

 
16.9

Total expenses
 
1,098.3

 
1,161.1

 
1,224.4

 
1,060.8

 
1,134.9

Pre-tax income from continuing operations
 
96.1

 
25.3

 
42.3

 
183.2

 
107.7

Income tax (expense) benefit
 
12.5

 
12.9

 
12.3

 
(36.5
)
 
(10.3
)
Net income from continuing operations
 
108.6

 
38.2

 
54.6

 
146.7

 
97.4

Loss from discontinued operations, net of tax
 

 
(0.5
)
 
(1.8
)
 
(46.6
)
 
(24.3
)
(Loss) gain from sale of discontinued operations, net of tax
 

 
0.3

 
(18.8
)
 
46.6

 
(91.0
)
Net income (loss) including noncontrolling interests
 
108.6

 
38.0

 
34.0

 
146.7

 
(17.9
)
Less: Net income attributable to noncontrolling interests
 
(1.2
)
 
(1.2
)
 
(1.1
)
 
(1.0
)
 
(1.4
)
Net income (loss) attributable to OneBeacon's common shareholders
 
107.4

 
36.8

 
32.9

 
145.7

 
(19.3
)
Net change in benefit plan assets and obligations, net of tax
 
1.0

 

 
(12.0
)
 
20.6

 
(2.9
)
Comprehensive income (loss) attributable to OneBeacon's common shareholders
 
$
108.4

 
$
36.8

 
$
20.9

 
$
166.3

 
$
(22.2
)
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share attributable to OneBeacon's common shareholders:
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations per share
 
$
1.13

 
$
0.38

 
$
0.55

 
$
1.52

 
$
1.00

Loss from discontinued operations, net of tax, per share
 

 

 
(0.02
)
 
(0.49
)
 
(0.25
)
(Loss) gain from sale of discontinued operations, net of tax, per share
 

 

 
(0.19
)
 
0.49

 
(0.96
)
Net income (loss) attributable to OneBeacon's common shareholders per share
 
$
1.13

 
$
0.38

 
$
0.34

 
$
1.52

 
$
(0.21
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding(1)
 
94.0

 
94.8

 
94.7

 
94.5

 
94.5

 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.84

 
$
0.84

 
$
0.84

 
$
0.84

 
$
0.84

_______________________________________________________________________________
(1) 
Weighted average common shares outstanding includes the impact of unvested restricted shares as well as the impact of repurchases of Class A common shares made under the Company's share repurchase authorization.

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Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(in millions)
Underwriting Ratios:(1)(2)
 
 
 
 
 
 
 
 
 
 
Consolidated Insurance Operations
 
 
 
 
 
 
 
 
 
 
Loss and LAE ratio
 
59.6
%
 
59.6
%
 
69.2
%
 
55.5
%
 
57.4
%
Expense ratio
 
37.7

 
36.7

 
32.5

 
36.9

 
40.1

Combined ratio
 
97.3
%
 
96.3
%
 
101.7
%
 
92.4
%
 
97.5
%
 
 
 
 
 
 
 
 
 
 
 
Specialty Products
 
 
 
 
 
 
 
 
 
 
Loss and LAE ratio
 
71.6
%
 
55.5
%
 
78.7
%
 
56.4
%
 
57.2
%
Expense ratio
 
35.9

 
35.3

 
30.0

 
36.8

 
40.7

Combined ratio
 
107.5
%
 
90.8
%
 
108.7
%
 
93.2
%
 
97.9
%
 
 
 
 
 
 
 
 
 
 
 
Specialty Industries
 
 
 
 
 
 
 
 
 
 
Loss and LAE ratio
 
48.7
%
 
63.3
%
 
60.1
%
 
54.7
%
 
57.7
%
Expense ratio
 
39.4

 
38.0

 
34.9

 
37.0

 
39.4

Combined ratio
 
88.1
%
 
101.3
%
 
95.0
%
 
91.7
%
 
97.1
%
 
 
 
 
 
 
 
 
 
 
 
Summary Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total cash and investments
 
$
2,690.0

 
$
2,686.6

 
$
2,612.8

 
$
2,532.4

 
$
2,335.1

Total assets
 
3,589.9

 
3,602.6

 
3,576.0

 
5,208.5

 
5,399.2

Loss and LAE reserves
 
1,365.6

 
1,389.8

 
1,342.2

 
1,054.3

 
1,000.0

Unearned premiums
 
575.1

 
560.3

 
588.3

 
544.9

 
573.8

Debt
 
273.2

 
272.9

 
272.5

 
272.2

 
272.0

OneBeacon's common shareholders' equity
 
1,021.3

 
1,000.9

 
1,045.8

 
1,103.7

 
1,014.2

OneBeacon's common shareholders' equity and noncontrolling interests
 
1,025.2

 
1,004.5

 
1,049.3

 
1,106.8

 
1,017.0

_______________________________________________________________________________
(1) 
Excludes the results of discontinued operations for all periods presented.
(2) 
Underwriting ratios are used to measure the components of underwriting profitability and include: The loss and LAE ratio, calculated by dividing loss and LAE by earned premiums; the expense ratio, calculated by dividing policy acquisition and other underwriting expenses by earned premiums; and the combined ratio, the sum of the loss and LAE ratio and the expense ratio.

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Table of Contents

ITEM 7. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains "forward-looking statements." Statements that are not historical in nature are forward-looking statements. OneBeacon cannot promise that its expectations as stated in such forward-looking statements will turn out to be correct. OneBeacon's actual results could be materially different from and worse than its expectations. See "Forward-Looking Statements" on page 63 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.
Overview—Year ended December 31, 2016 versus year ended December 31, 2015
We ended 2016 with a book value per share of $10.82, reflecting an 11.1% increase, including quarterly dividends of $0.21 per share, on an internal rate of return basis, for the year ended December 31, 2016.
Net income attributable to OneBeacon's common shareholders was $107.4 million for 2016, compared to $36.8 million in 2015. Pre-tax underwriting income was $29.6 million for 2016, reflecting a combined ratio of 97.3%, compared to pre-tax underwriting income of $43.5 million for 2015, reflecting a combined ratio of 96.3%. The decrease in pre-tax underwriting results was driven by the unfavorable performance of our Healthcare business, discussed below, and to a lesser extent, from our Programs business. This unfavorable performance partially offset the strong underwriting results from many of our other businesses, including Accident, and also significant improvement in Entertainment and Ocean Marine, both of which were negatively impacted by elevated loss activity in 2015. Pre-tax net investment results were $88.3 million in 2016, representing a 3.6% total return on average invested assets, compared to $10.8 million in 2015, representing a 0.6% total return on average invested assets, with the significant increase being driven by higher returns in all asset classes. Our other investments portfolio return included a favorable impact from the surplus notes driven by changes in credit spreads, as well as lower adverse impacts from energy exposed private equity funds in 2016 than in 2015. In addition, a higher return in the fixed maturity investments portfolio was driven by interest rate movements in 2016 compared to 2015, while the higher return from our common equity securities portfolio was driven by improved market conditions.
Our net income for 2016 included a $16.3 million tax benefit resulting from the settlements of IRS examinations for tax years 2007 through 2012.
During the year ended December 31, 2016 we recorded $15.4 million of adverse prior accident year development driven by Healthcare but offset in part by other businesses. Healthcare recorded $40.7 million of adverse prior accident year development (Healthcare Development Impact), including $10.0 million in the first quarter, $20.0 million in the second quarter, $1.1 million in the third quarter, and $9.6 million in the fourth quarter. The full year development was driven by the extended care and complex risks sub-lines, and to a lesser extent, two large claims developments within the managed care errors and omissions sub-line related to unexpected outcomes from mediation and extended costs associated with claim defense. Extended care provides medical malpractice and general liability insurance for extended care facilities, including assisted living, memory care and continuing care facilities. Complex risks provides professional liability coverage to hospitals, physicians, and physician groups as well as physicians' extended reporting period coverage. The complex risks development was heavily influenced by large claim activity.
As a result of the elevated loss activity experienced in the extended care sub-line, in-depth claim file and actuarial reviews were performed in the middle of the year. The claim file review confirmed that the increased case incurred activity was driven by increased frequency, especially in the more recent prior accident years, as opposed to other potential considerations such as significant changes in claims-handling practices. The actuarial review included analysis related to the  recent enhancements to the predictive model. Recent adverse financial results were primarily observed in high-risk categories of business and in difficult geographic venues identified by the predictive model data. As a result of these analyses, management increased its best estimate of prior accident year losses, and increased its loss provisions for the current accident year.
Despite the reserve actions taken through the first three quarters of 2016 case incurred loss activity continued to exceed expectations during the fourth quarter of 2016. The adverse development was driven by recent prior accident years spread across the complex risks, extended care, managed care errors and omissions, and medical excess sub-lines.
As a result of this loss activity, we have refocused our sales activity during 2016 to target more desirable risks. As a result primarily of these actions, as well as a large return premium on a single account, Healthcare premiums have decreased by $14.7 million in 2016. In addition, Programs net written premiums decreased by $32.3 million in 2016, as a result of exiting two larger Programs accounts which were experiencing higher than expected loss ratios.

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Table of Contents

Overview—Year ended December 31, 2015 versus year ended December 31, 2014
We ended 2015 with a book value per share of $10.53, reflecting a 3.8% increase, including quarterly dividends of $0.21 per share, on an internal rate of return basis for the year ended December 31, 2015.
Net income attributable to OneBeacon's common shareholders was $36.8 million for 2015, compared to $32.9 million in 2014. Pre-tax underwriting income was $43.5 million for 2015, reflecting a combined ratio of 96.3%, compared to a pre-tax underwriting loss of $20.5 million for 2014, reflecting a combined ratio of 101.7%. The increase in pre-tax underwriting results was driven by the significant impact of loss and LAE recorded in the fourth quarter of 2014 totaling $109.2 million, as noted below in "2014 Fourth Quarter Reserve Increase." The 2015 pre-tax underwriting results were driven by solid results in most of our underwriting operating segments, but were partially offset by unfavorable results in our Entertainment, Programs, Inland Marine and Ocean Marine businesses. Pre-tax net investment results were $10.8 million in 2015, representing a 0.6% total return on average invested assets, compared to $83.8 million in 2014, representing a 3.5% total return on average invested assets, with the decline from 2014 being driven by other investments generating significantly lower returns in energy exposed private equity funds in 2015 than in 2014 and negative valuation adjustments on surplus notes, lower equity returns, and decreased returns for the fixed maturity investment portfolio driven by interest rate movements. In addition, we had a tax benefit in 2015 of $12.9 million compared to a tax benefit of $12.3 million in 2014. The current year tax benefit was driven by the significant unfavorable change in unrealized investment gains in 2015.
2014 Fourth Quarter Reserve Increase
Through the first nine months of 2014, we recorded $14.3 million of unfavorable loss and LAE reserve development, driven by greater-than-expected large loss activity in several underwriting operating segments, primarily the Other Professional Lines and Management Liability underwriting operating segments. This large loss activity, which occurred mostly during the second and third quarters of 2014, also impacted the 2014 current accident year loss and LAE estimates. Additionally, we incurred higher-than-usual claim coverage determination costs, a component of LAE expenses, during the first nine months of 2014. Other underwriting operating segments also reported increased claim activity, including Entertainment, Government Risks, and Accident.
Since the increased level of loss and LAE activity continued into the early part of the fourth quarter of 2014, the high level of activity in the second and third quarters no longer seemed to be isolated occurrences. As such, during the fourth quarter of 2014, we enhanced our actuarial and claims review in several areas. We isolated the then-recent large loss activity in each of our underwriting operating segments and examined the emergence of large losses relative to the timing and amounts of expected large losses. We also conducted additional analyses in the lawyers' professional liability line within the Other Professional Lines underwriting operating segment. These new analyses included a claim level review and the application of additional actuarial methods and loss development assumptions. The results of these analyses indicated that the assumed tail risk included in the loss development patterns used to record IBNR reserves for this line were insufficient and needed to be increased for remaining long-tail exposures. Our claims and actuarial staff also conducted an in-depth review of coverage determination, litigation, and other claim-specific adjusting expenses as a result of an emerging trend of increased expenses in these areas over then-recent quarters, particularly coverage determination expenses. This review concluded that the ultimate costs of these loss adjustment expenses were larger than previously estimated, causing management to record an increase in estimated LAE, primarily in the Other Professional Lines, Management Liability and Financial Services underwriting operating units. Finally, we also recorded unfavorable prior year development in other underwriting units, including Entertainment and Government Risks. The unfavorable loss development in Entertainment and Government Risks resulted from heavier than expected claim activity during the fourth quarter of 2014, predominantly in the general liability and commercial auto liability lines.

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As a result of these enhanced actuarial and claim reviews conducted during the fourth quarter of 2014 and in order to fully reflect these then-recent trends, we recorded a $109.2 million increase in loss and LAE reserves, which included a $75.5 million increase in prior accident year loss and LAE reserves and a $33.7 million increase in the current accident year loss and LAE reserves which were previously recorded at September 30, 2014. The components of the 2014 fourth quarter reserve increase and the net loss and LAE development for the full year are provided below:
 
 
2014 Fourth Quarter Reserve Increase
 
Full Year 2014 Net Prior Year
Development
Underwriting Operating Segment
 
Current
Accident Year
 
Prior
Accident Years
 
Total
 
 
 
($ in millions)
Other Professional Lines
 
$
11.1

 
$
31.9

 
$
43.0

 
$
42.2

Management Liability
 
6.6

 
8.4

 
15.0

 
16.4

Financial Services
 
2.0

 
6.5

 
8.5

 
6.5

Healthcare
 
3.2

 
(0.4
)
 
2.8

 
(6.0
)
Specialty Property
 
(1.1
)
 
5.7

 
4.6

 
1.1

Crop
 
3.8

 

 
3.8

 

Other
 
2.8

 
(0.4
)
 
2.4

 
1.6

Specialty Products
 
28.4

 
51.7

 
80.1

 
61.8

 
 
 
 
 
 
 
 
 
Entertainment
 
1.5

 
11.6

 
13.1

 
13.5

Government Risks
 
1.2

 
7.1

 
8.3

 
8.5

Accident
 

 
3.5

 
3.5

 
6.0

Other
 
2.6

 
1.6

 
4.2

 

Specialty Industries
 
5.3

 
23.8

 
29.1

 
28.0

Total
 
$
33.7

 
$
75.5

 
$
109.2

 
$
89.8

As noted above, we increased our provision for 2014 current accident year losses and LAE by $33.7 million in the fourth quarter of 2014. In recording the change in estimate of our loss and LAE reserve provision for the 2014 accident year, we considered the results of the enhanced actuarial and claim review and the fact that reported large claims were approaching estimated ultimate large losses sooner than originally expected. Of the $33.7 million increase, $29.9 million reflects an increase in management's best estimate of current year loss and LAE as of December 31, 2014 from those amounts recorded in the first nine months of 2014. This increase primarily affected the Other Professional Lines and Management Liability underwriting operating segments, which represented $17.7 million of the total provision. The remaining increase was primarily related to a $3.8 million increase in estimated losses in the Crop underwriting operating segment from higher-than-expected reports of crop losses that emerged in the fourth quarter of 2014. We exited the Crop business in 2015.
Book Value Per Share
The following table presents our book value per share:
 
 
December 31,
 
 
2016
 
2015
 
2014
 
 
(in millions except per share amounts)
Numerator
 
 
 
 
 
 
OneBeacon's common shareholders' equity
 
$
1,021.3

 
$
1,000.9

 
$
1,045.8

Denominator
 
 
 
 
 
 
Common shares outstanding(1)
 
94.3

 
95.1

 
95.3

Book value per share
 
$
10.82

 
$
10.53

 
$
10.97

 
 
 
 
 
 
 
Dividends paid per share
 
$
0.84

 
$
0.84

 
$
0.84

_______________________________________________________________________________
(1) 
Common shares outstanding includes unvested restricted shares.

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Results of Operations
Review of Consolidated Results
A summary of our consolidated financial results is as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Gross written premiums
 
$
1,221.3

 
$
1,315.9

 
$
1,323.4

Net written premiums
 
$
1,100.7

 
$
1,136.6

 
$
1,216.9

Revenues
 
 
 
 
 
 
Earned premiums
 
$
1,100.6

 
$
1,176.2

 
$
1,177.1

Net investment income
 
50.6

 
45.9

 
43.4

Net realized and change in unrealized investment gains
 
37.7

 
(35.1
)
 
40.4

Net other revenues (expenses)
 
5.5

 
(0.6
)
 
5.8

Total revenues
 
1,194.4

 
1,186.4

 
1,266.7

Expenses
 
 
 
 
 
 
Loss and LAE
 
656.0

 
700.7

 
815.1

Policy acquisition expenses
 
206.0

 
213.8

 
203.3

Other underwriting expenses
 
209.0

 
218.2

 
179.2

General and administrative expenses
 
14.2

 
15.4

 
13.8

Interest expense
 
13.1

 
13.0

 
13.0

Total expenses
 
1,098.3

 
1,161.1

 
1,224.4

Pre-tax income from continuing operations
 
96.1

 
25.3

 
42.3

Income tax benefit
 
12.5

 
12.9

 
12.3

Net income from continuing operations
 
108.6

 
38.2

 
54.6

Net loss from discontinued operations, net of tax
 

 
(0.2
)
 
(20.6
)
Net income including noncontrolling interests
 
108.6

 
38.0

 
34.0

Less: Net income attributable to noncontrolling interests
 
(1.2
)
 
(1.2
)
 
(1.1
)
Net income attributable to OneBeacon's common shareholders
 
107.4

 
36.8

 
32.9

Net change in benefit plan assets and obligations, net of tax
 
1.0

 

 
(12.0
)
Comprehensive income attributable to OneBeacon's common shareholders
 
$
108.4

 
$
36.8

 
$
20.9


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A summary of our consolidated underwriting income and pre-tax income from continuing operations is as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Earned premiums
 
$
1,100.6

 
$
1,176.2

 
$
1,177.1

Loss and LAE
 
(656.0
)
 
(700.7
)
 
(815.1
)
Policy acquisition expenses
 
(206.0
)
 
(213.8
)
 
(203.3
)
Other underwriting expenses
 
(209.0
)
 
(218.2
)
 
(179.2
)
Total underwriting income (loss)
 
29.6

 
43.5

 
(20.5
)
Net investment income
 
50.6

 
45.9

 
43.4

Net realized and change in unrealized investment gains
 
37.7

 
(35.1
)
 
40.4

Net other revenues (expenses)
 
5.5

 
(0.6
)
 
5.8

General and administrative expenses
 
(14.2
)
 
(15.4
)
 
(13.8
)
Interest expense
 
(13.1
)
 
(13.0
)
 
(13.0
)
Pre-tax income from continuing operations
 
$
96.1

 
$
25.3

 
$
42.3

The following table provides our consolidated underwriting ratios for our continuing operations:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Underwriting ratios:
 
 
 
 
 
 
Loss and LAE
 
59.6
%
 
59.6
%
 
69.2
%
Expense
 
37.7

 
36.7

 
32.5

Total combined ratio
 
97.3
%
 
96.3
%
 
101.7
%
The impact of certain items to our underwriting ratios was as follows:
 
 
Unfavorable (favorable) impact
 
 
2016
 
2015
 
2014
Point impact on loss and LAE ratio and combined ratio:
 
 
 
 
 
 
Catastrophe losses, net of reinsurance
 
1.1 pts
 
1.4 pts

 
1.2 pts
Prior year loss reserve development
 
1.4 pts
 
(0.2) pts

 
7.6 pts
Consolidated Results—Year ended December 31, 2016 versus year ended December 31, 2015
Our 2016 comprehensive income attributable to OneBeacon's common shareholders was $108.4 million compared to $36.8 million for 2015, with the change driven primarily by a $77.5 million increase in pre-tax investment results due to higher returns in all asset classes as discussed below in "Investments," and to a lesser extent, a $16.3 million tax benefit resulting from the settlements of IRS examinations for tax years 2007 through 2012. Partially offsetting these increases was a $13.9 million decrease in pre-tax underwriting results driven by the factors discussed below in "Underwriting Results."
Our total revenues of $1,194.4 million for 2016 increased $8.0 million from $1,186.4 million for 2015, due to the $77.5 million increase in pre-tax investment results compared to 2015, which was mostly offset by a decrease in earned premiums of $75.6 million, or 6.4%, driven by decreases at Healthcare, and to a lesser extent, Entertainment and Other Professional Lines. Additionally, there was a $6.1 million favorable change in net other revenues (expenses), driven by the factors discussed below in "Net Other Revenues (Expenses)." Total expenses decreased to $1,098.3 million for 2016 from $1,161.1 million for 2015, resulting primarily from a decrease in loss and LAE of $44.7 million to $656.0 million in 2016, commensurate with the decline in earned premiums, which also resulted in a $9.2 million decrease in other underwriting expenses as well as a $7.8 million decrease of policy acquisition expenses.
Written Premiums
Consolidated net written premiums decreased $35.9 million, or 3.2%, to $1,100.7 million in 2016, resulting from decreases at Programs ($32.3 million), as we have exited two underperforming accounts, Entertainment ($26.5 million) due to a refinement of our underwriting appetite, and Healthcare ($14.7 million), reflecting the impact of refocusing our sales activity

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on more desirable risks, as well as a large return premium on a single account, and increased competition. These decreases were partially offset by increases at several other businesses, most notably our newer Financial Institutions business ($18.0 million).
Underwriting Results
Our pre-tax underwriting income was $29.6 million for 2016, reflecting a combined ratio of 97.3%, compared to pre-tax underwriting income of $43.5 million for 2015, reflecting a combined ratio of 96.3%.
Our combined ratio for 2016 of 97.3% reflected a 59.6% loss and LAE ratio and a 37.7% expense ratio, which compared to a combined ratio for 2015 of 96.3%, also reflecting a 59.6% loss and LAE ratio but a lower expense ratio of 36.7%.
The 2016 loss and LAE ratio of 59.6% was consistent with 2015 resulting from a 1.3 point decrease in current accident year non-catastrophe losses, a 1.6 point unfavorable change in prior year loss reserve development, and a 0.3 point decrease in catastrophe losses. Current accident year non-catastrophe losses for 2016 were $628.2 million, or 57.1 points, compared to $685.9 million, or 58.4 points for 2015, driven by the improved relative performance by many of our businesses in 2016, most notably Accident, Inland Marine and Ocean Marine which were partially offset by an increased current accident year provision within Healthcare, which was driven by heavy activity in the extended care subline, as well as the medical excess subline.
Net unfavorable prior year loss and LAE reserve development was $15.4 million, or 1.4 points for 2016 driven by Healthcare ($40.7 million), resulting from the Healthcare Development Impact, and to a lesser extent, unfavorable development in the architects and engineers sub-line within Other Professional Lines, and Programs, primarily as a result of two larger auto-related programs, in addition to smaller amounts of unfavorable development in several other businesses. This unfavorable development was partially offset by favorable development primarily in Accident, Entertainment, Technology and Financial Services. This compared with $1.8 million or 0.2 points for 2015, of net favorable loss reserve development primarily attributable to favorable development from several businesses, most notably Technology, and to a lesser extent, from the exited Collector Cars and Boats business, Specialty Property and Financial Services, along with certain other businesses. This favorable development was mostly offset by unfavorable development due to several large losses and an increase in small to mid-size claims in Entertainment, and to a lesser extent, unusually heavy loss activity of both large and small claims in Ocean Marine, as well as moderate unfavorable development from certain other businesses.
Catastrophe losses were $12.4 million, or 1.1 points, for 2016, primarily resulting from wind and thunderstorms in the southern United States impacting Inland Marine and Ocean Marine, compared to $16.6 million, or 1.4 points, for 2015, primarily resulting from wind and thunderstorms in the southern United States, particularly Texas, and winter storms in the northeastern United States.
The expense ratio increased 1.0 point to 37.7% for 2016, driven by the negative impact of lower earned premiums and increased commissions due to business mix in 2016 more than offsetting reduced salary and incentive compensation expense driven by headcount reductions and lower relative incentive compensation performance factors. Additionally, the 2015 ratio was negatively impacted by the exit of the Crop business, separation costs associated with senior management restructuring and severance costs.
Investments
Net investment income increased to $50.6 million in 2016, compared to $45.9 million in 2015 driven by a $2.4 million interest payment on the surplus notes, along with a higher asset allocation to fixed maturity investments. Net realized and change in unrealized investment gains increased significantly to positive $37.7 million in 2016, compared to negative $35.1 million in 2015, due to favorable 2016 results in the other investments portfolio driven by a valuation impact from the surplus notes of positive $20.4 million resulting primarily from changes in credit spreads compared to negative $13.6 million in 2015, and to a lesser extent, lower negative returns in energy sector exposed private equity funds in 2016 compared to 2015. The 2016 return was also significantly impacted by increased returns in the fixed maturity investments portfolio driven by interest rate movements in 2016 compared to 2015 and increased returns in the common equity securities portfolio due to improved market conditions.
Net Other Revenues (Expenses)
The $6.1 million favorable change in other revenues (expenses) compared to 2015, was driven by the prior year impact of a $3.7 million negative adjustment to the pre-tax gain on sale of Essentia and $3.0 million of income in 2016 from the excess invested assets remaining after the termination of the OneBeacon qualified pension plan. The prior year also included a $1.6 million pre-tax write-off of certain capitalized software and a $1.2 million loss on the sale of real estate, which were offset by a $3.0 million (pre-tax) payment received in connection with the early termination of our exclusive agreement with Climate Crop Insurance Agency (Crop Transaction Fee).
Income Taxes
Our income tax benefit related to pre-tax income from continuing operations for 2016 and 2015 represented net effective tax rates of (13.0)% and (51.0)%, respectively. The effective tax rate for 2016 and 2015 were lower than the U.S. statutory rate

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of 35% due to income generated in jurisdictions other than the United States, principally representing interest income and underwriting income taxed in a jurisdiction with a lower effective tax rate and, for the 2016 period, a $16.3 million favorable settlement of IRS examinations for the 2007 through 2012 tax years. The effective tax rate on non-U.S. income for 2016 and 2015 was 0.6% and 1.3%, respectively.
Net Change in Benefit Plan Assets and Liabilities
There was a $1.0 million net favorable after-tax change in benefit plan obligations impact to comprehensive income in 2016 compared to no net after-tax impact in 2015, which substantially relates to the amortization of the net periodic benefit cost for our defined benefit pension plan (Non-qualified Plan) as the previously sponsored OneBeacon qualified pension plan (Qualified Plan) was terminated during 2016. As of December 31, 2015, the projected benefit obligations of the terminated Qualified Plan were estimated using termination assumptions and the termination was completed in 2016 by purchasing a group annuity contract and making lump sum distributions to Qualified Plan participants electing such payments. We no longer have a benefit obligation related to the Qualified Plan after its settlement. See Note 8—"Retirement Plans."
Reinsurance Protection
We purchase reinsurance in order to minimize loss from large risks or catastrophic events. We also purchase individual property reinsurance coverage for certain risks to reduce large loss volatility through property-per-risk excess of loss reinsurance programs and individual risk facultative reinsurance. We also maintain excess of loss casualty reinsurance programs that provide protection for individual risk or catastrophe losses involving workers compensation, general liability, automobile liability, professional liability or umbrella liability. The availability and cost of reinsurance protection is subject to market conditions, which are outside of our control. Limiting our risk of loss through reinsurance arrangements serves to mitigate the impact of large losses; however, the cost of this protection in an individual period may exceed the benefit.
For 2016 and 2015, our net combined ratio was higher than our gross combined ratio by 3.6 points and 1.2 points, respectively, as a result of the cost of our reinsurance programs more than offsetting the benefits from ceded losses. 
Consolidated Results—Year ended December 31, 2015 versus year ended December 31, 2014
Our 2015 comprehensive income attributable to OneBeacon's common shareholders of $36.8 million increased $15.9 million compared to 2014, with the change driven primarily by an increase of $64.0 million in pre-tax underwriting results and favorable changes of $20.4 million related to discontinued operations (see "Results of Operations—Discontinued Operations Results") and $12.0 million in other comprehensive income related to our pension plans, which were significantly offset by a $73.0 million decrease in pre-tax investment results.
Our total revenues of $1,186.4 million for 2015 decreased $80.3 million from $1,266.7 million for 2014, substantially due to a $73.0 million decrease of pre-tax investment results compared to 2014 and, to a lesser extent, an unfavorable change in net other revenues (expenses) of $6.4 million, driven by the factors discussed below in "Net Other Revenues (Expenses)." Total expenses decreased to $1,161.1 million for 2015 from $1,224.4 million for 2014, resulting primarily from a decrease in loss and LAE of $114.4 million to $700.7 million for 2015, as 2014 was significantly impacted by the 2014 fourth quarter reserve increase. The decrease in loss and LAE was partially offset by a $39.0 million increase in other underwriting expenses as well as a $10.5 million increase of policy acquisition expenses driven by the factors discussed below in "Underwriting Results."
Written Premiums
Consolidated net written premiums decreased $80.3 million, or 6.6%, to $1,136.6 million in 2015, resulting from our exit of the Crop business ($44.4 million), a decrease at Other Professional Lines ($33.6 million) primarily from the exit of our lawyers liability business, a decrease at our Healthcare business ($33.3 million) and the termination of an affiliated reinsurance treaty ($20.1 million). These decreases were partially offset by increases at our newer Programs and Surety businesses of $66.8 million, in total. Excluding the $93.1 million impact of our exit from the Crop and lawyers liability businesses, as well as the affiliated reinsurance treaty termination, consolidated net written premiums increased $12.8 million, or 1.1%.
Underwriting Results
Our pre-tax underwriting income was $43.5 million for 2015, reflecting a combined ratio of 96.3%, compared to a pre-tax underwriting loss of $20.5 million for 2014, reflecting a combined ratio of 101.7%.
Our combined ratio for 2015 of 96.3% reflected a 59.6% loss and LAE ratio and a 36.7% expense ratio, which compared to a combined ratio for 2014 of 101.7%, consisting of a 69.2% loss and LAE ratio and a 32.5% expense ratio.
The 9.6 point decrease in the loss and LAE ratio was substantially a result of the impact of the 2014 fourth quarter reserve increase, which had a 9.3 point impact on the 2014 combined ratio. The 9.6 point decrease in the loss and LAE ratio was comprised of a 2.0 point decrease in current accident year non-catastrophe losses, a 7.8 point favorable change in prior year loss reserve development, and partially offset by a 0.2 point increase in catastrophe losses. Current accident year non-catastrophe

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losses for 2015 were $685.9 million, or 58.4 points, compared to $711.5 million, or 60.4 points for 2014, as an increase in the provision for 2015 was more than offset by the 2014 impact of the 2014 fourth quarter reserve increase.
Net favorable prior year loss and LAE reserve development was $1.8 million, or 0.2 points for 2015 primarily attributable to favorable development from several businesses, most notably Technology, and to a lesser extent, from the exited Collector Cars and Boats business, Specialty Property and Financial Services, along with certain other businesses. This favorable development was mostly offset by unfavorable development due to several large losses and an increase in small to mid-size claims in Entertainment, and to a lesser extent, unusually heavy loss activity of both large and small claims in Ocean Marine, as well as moderate unfavorable development from certain other businesses. This compared with $89.8 million or 7.6 points, of net unfavorable loss reserve development of which $75.5 million, or 6.4 points, related to the 2014 fourth quarter reserve increase. Of the net unfavorable loss and LAE reserve development resulting from the 2014 fourth quarter reserve increase, $31.9 million related to Other Professional Lines driven primarily by lawyers professional liability and $11.6 million related to Entertainment resulting from several large losses. The remaining net unfavorable prior year loss and LAE reserve development for 2014 primarily related to unfavorable development recognized prior to the 2014 fourth quarter also in our Other Professional Lines (including lawyers professional liability) and Management Liability businesses, offset in part by favorable development in our Healthcare business.
Catastrophe losses were $16.6 million, or 1.4 points, for 2015, primarily resulting from wind and thunderstorms in the southern United States, particularly Texas, and winter storms in the northeastern United States, compared to $13.8 million, or 1.2 points, for 2014, primarily resulting from wind and thunderstorms in the southern, central and eastern United States, as well as ice and snow storms in the midwestern and northeastern United States.
The expense ratio increased 4.2 points to 36.7% for 2015, which was primarily driven by 2014 benefiting from a 2.4 point reduction in the incentive compensation accrual resulting from the 2014 fourth quarter reserve increase and from a transition services agreement with the buyer of our legacy personal lines business, which was terminated on June 30, 2014. Additionally, 2015 was negatively impacted by the exit of the Crop business, separation costs associated with senior management restructuring, and severance costs.
Investments
Net investment income increased to $45.9 million in 2015, compared to $43.4 million in 2014. Net realized and change in unrealized investment gains decreased significantly to negative $35.1 million in 2015, compared to positive $40.4 million in 2014, due to unfavorable results in the other investments portfolio driven by lower returns in energy exposed sector private equity funds and a valuation impact from the surplus notes of negative $13.6 million recorded in 2015 resulting from increased credit spreads. The 2015 return was also significantly impacted by decreased returns in the common equity securities portfolio due to lower equity market performance as well as decreased returns in the fixed maturity portfolio driven by interest rate movements.
Net Other Revenues (Expenses)
The $6.4 million unfavorable change in other revenues (expenses) compared to 2014, was driven by a $3.7 million negative adjustment to the pre-tax gain on sale of Essentia. In addition, 2015 net other revenues (expenses) included a $1.6 million pre-tax write-off of certain capitalized software associated with senior management restructuring, as well as an additional loss on the sale of real estate of $1.2 million in 2015. These other expenses were partially offset by the $3.0 million Crop Transaction Fee in 2015.
Income Taxes
Our income tax benefit related to pre-tax income from continuing operations for 2015 and 2014 represented net effective tax rates of (51.0)% and (29.1)%, respectively. The effective tax rates for 2015 and 2014, were lower than the U.S. statutory rate of 35% due to income generated in jurisdictions other than the United States, principally representing interest income and underwriting income taxed in a jurisdiction with a lower effective tax rate and, for the 2014 period, a $5.0 million favorable settlement of the 2005-2006 IRS exam. The effective tax rate on non-U.S. income for both 2015 and 2014 was 1.3%.
Net Change in Benefit Plan Assets and Liabilities
There was no net after-tax change in benefit plan assets and obligations impact to comprehensive income in 2015. As of December 31, 2015, the projected benefit obligations of the terminated Qualified Plan was estimated using termination assumptions as the settlement was imminent and the likelihood that the Qualified Plan would return from termination was remote. This compared to a decrease in comprehensive income in 2014 of $12.0 million, primarily reflecting the impact of a decrease in the discount rate, as well a change in the mortality assumptions used to estimate our pension plan projected benefit obligation.

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Reinsurance Protection
For 2015 and 2014, our net combined ratio was higher than our gross combined ratio by 1.2 points and 1.5 points, respectively, as a result of the cost of our reinsurance programs more than offsetting the benefits from ceded losses.
Summary of Operations By Segment
Our reportable segments are Specialty Products, Specialty Industries, and Investing, Financing and Corporate.
The Specialty Products segment is comprised of ten active underwriting operating segments, as well as the Crop and Collector Cars and Boats underwriting operating segments that were exited in 2015 and 2013, respectively, representing an aggregation based on those that offer distinct products and tailored coverages and services to a broad customer base across the United States. See "Item 1. Business—Insurance Business—Specialty Products" for further discussion of the Specialty Products segment, including descriptions of its underwriting operating segments.
The Specialty Industries segment is comprised of six active underwriting operating segments representing an aggregation based on those that focus on solving the unique needs of a particular customer or industry group. See "Item 1. Business—Insurance Business—Specialty Industries" for further discussion of the Specialty Industries segment, including descriptions of its underwriting operating segments.
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 our intermediate subsidiaries.
Specialty Products
Financial results for our Specialty Products reportable segment were as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Gross written premiums
 
$
621.4

 
$
669.4

 
$
672.8

Net written premiums
 
$
540.9

 
$
533.0

 
$
606.9

 
 
 
 
 
 
 
Earned premiums
 
$
524.4

 
$
560.3

 
$
582.1

Loss and LAE
 
(375.4
)
 
(310.7
)
 
(457.9
)
Policy acquisition expenses
 
(99.5
)
 
(100.1
)
 
(96.2
)
Other underwriting expenses
 
(88.6
)
 
(97.9
)
 
(78.4
)
Total underwriting income (loss)
 
(39.1
)
 
51.6

 
(50.4
)
Net other revenues (expenses)
 
(0.1
)
 
(0.2
)
 
0.9

General and administrative expenses
 

 

 
0.2

Pre-tax income (loss) from continuing operations
 
$
(39.2
)
 
$
51.4

 
$
(49.3
)
The following table provides underwriting ratios for Specialty Products:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Underwriting ratios:
 
 
 
 
 
 
Loss and LAE
 
71.6
%
 
55.5
%
 
78.7
%
Expense
 
35.9

 
35.3

 
30.0

Total combined ratio
 
107.5
%
 
90.8
%
 
108.7
%

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The impact of certain items to our underwriting ratios was as follows:
 
 
Unfavorable (favorable) impact
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Point impact on loss and LAE ratio and combined ratio:
 
 
 
 
 
 
Catastrophe losses, net of reinsurance
 
0.5 pts
 
0.3 pts

 
1.0 pts
Prior year loss reserve development
 
8.9 pts
 
(4.2) pts

 
10.6 pts
Specialty Products—Year ended December 31, 2016 versus year ended December 31, 2015
Net written premiums for Specialty Products increased $7.9 million, or 1.5%, to $540.9 million for 2016 from $533.0 million for 2015, reflecting strong growth at our newer Financial Institutions business ($18.0 million), and across most of our other businesses ($27.4 million), in addition to the adverse impact of the Crop exit on the prior period ($9.5 million). These increases were partially offset by decreases at Programs ($32.3 million), as we have exited two large accounts as a result of poor underwriting results, and Healthcare ($14.7 million), reflecting the impact of refocusing our sales activity on more desirable risks, as well as a large return premium on a single account, and increased competition.
The Specialty Products combined ratio for 2016 increased to 107.5% from 90.8% for 2015, as the loss and LAE ratio increased by 16.1 points to 71.6% and the expense ratio increased by 0.6 points to 35.9%.
The 16.1 point increase in the loss and LAE ratio was comprised of a 2.8 point increase in current accident year non-catastrophe losses, a 13.1 point unfavorable change in net prior year loss reserve development, and a 0.2 point increase in catastrophe losses.
The current accident year non-catastrophe loss ratio for 2016 was 62.2% compared to 59.4% for 2015, driven primarily by Healthcare related to the extended care, and to a lesser extent, medical excess sub-lines, as well as higher accident year provisions in Programs due to continued elevated losses across several programs, and Other Professional Lines, primarily due to higher than expected losses in the architects and engineers sub-line, and were modestly offset by the improved performance of several other business.
The 2016 results included $46.7 million, or 8.9 points, of net unfavorable prior year loss reserve development driven by the Healthcare Development Impact ($40.7 million), and to a lesser extent, in the architects and engineers sub-line ($14.8 million) within Other Professional Lines and Programs ($13.3 million) relating to continued adverse results in auto-related programs, which was partially offset by favorable development primarily in Financial Services ($8.2 million), the media sub-line ($4.8 million) within Other Professional Lines and Specialty Property ($4.8 million). The 2015 results included $23.6 million, or 4.2 points, of net favorable prior year loss reserve development, primarily attributable to favorable development from the exited Collector Cars and Boats business, Specialty Property, Financial Services, Surety, Environmental, and Crop businesses. This favorable development was partially offset by unfavorable development in the Programs business.
The 2016 results also reflected catastrophe losses of 0.5 points primarily resulting from wind and thunderstorms in Texas impacting Financial Services compared with fairly benign catastrophe losses of 0.3 points in 2015.
The 0.6 point increase in the expense ratio for 2016, compared to 2015, was primarily driven by the negative impact of lower earned premium volumes and increased commissions due to business mix in 2016 more than offsetting reduced salary and incentive compensation expense driven by headcount reductions in 2016 and lower relative incentive compensation performance factors. Additionally, the 2015 ratio was adversely impacted by the impact from the exit of the Crop business, separation costs associated with senior management restructuring, and severance costs.
Specialty Products—Year ended December 31, 2015 versus year ended December 31, 2014
Net written premiums for Specialty Products decreased $73.9 million, or 12.2%, to $533.0 million for 2015 from $606.9 million for 2014, primarily due to the negative $44.4 million impact of the Crop business, a $33.6 million decrease at our Other Professional Lines business, reflecting our exit from the lawyers liability business that was sold in December of 2014, a $33.3 million decrease at our Healthcare business largely due to increased competition and change in underwriting appetite and a $20.1 million negative impact due to the termination of an affiliated reinsurance treaty. These decreases were partially offset by increases of $48.3 million and $18.5 million in our newer Programs and Surety businesses, respectively.
The Specialty Products combined ratio for 2015 decreased to 90.8% from 108.7% for 2014, as the loss and LAE ratio decreased by 23.2 points to 55.5% and the expense ratio increased by 5.3 points to 35.3%.
The 23.2 point decrease in the loss and LAE ratio, was primarily due to the impact of the 2014 fourth quarter reserve increase which had a 13.8 point unfavorable impact on the 2014 combined ratio as well as the solid results at most of our

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underwriting operating segments in 2015. The 23.2 point decrease in the loss and LAE ratio was comprised of a 7.7 point decrease in current accident year non-catastrophe losses, a 14.8 point favorable change in net prior year loss reserve development, and a 0.7 point decrease in catastrophe losses.
The current accident year non-catastrophe loss ratio for 2015 was 59.4% compared to 67.1% for 2014 as higher current accident year provisions made in the 2015 period in certain underwriting operating segments, most notably for the Programs business, were more than offset by the impact of the 2014 fourth quarter reserve increase as well as a large 2014 loss in Specialty Property and an elevated Crop ratio due to lower commodity prices in the 2014 period.
The 2015 results included 4.2 points of net favorable prior year loss reserve development primarily attributable to favorable development from the Collector Cars and Boats, Specialty Property, Financial Services, Surety, Environmental, and Crop businesses. This favorable development was partially offset by unfavorable development in the Company's Programs business. The 2014 results included 10.6 points of net unfavorable prior year loss reserve development, of which 8.9 points related to the 2014 fourth quarter reserve increase, primarily driven by Other Professional Lines (including lawyers professional liability) as well as Management Liability and Specialty Property. The remaining amount of net unfavorable prior year loss reserve development for 2014 was primarily driven by unfavorable development recorded prior to the 2014 fourth quarter also in our Other Professional Lines and Management Liability businesses, offset in part by favorable development in our Healthcare business.
The 2015 results also reflected fairly benign catastrophe losses of 0.3 points compared with 1.0 point of catastrophe losses in 2014, primarily related to wind and thunderstorms in the midwestern and southern United States impacting Financial Services and Programs, as well as ice and snow storms in the midwestern and northeastern United States primarily impacting Financial Services.
The 5.3 point increase in the expense ratio for 2015, compared to 2014, was primarily driven by lower incentive compensation expense in 2014 resulting from the 2014 fourth quarter reserve increase, the adverse impact from the exit of the Crop business, and 2014 benefiting from a transition services agreement with the buyer of our legacy personal lines business, which was terminated on June 30, 2014. Additionally, the 2015 ratio was adversely impacted by separation costs associated with senior management restructuring and severance costs.
Specialty Industries
Financial results for our Specialty Industries reportable segment were as follows:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
 
($ in millions)
Gross written premiums
 
$
599.9

 
$
646.5

 
$
650.6

Net written premiums
 
$
559.8

 
$
603.6

 
$
610.0

 
 
 
 
 
 
 
Earned premiums
 
$
576.2

 
$
615.9

 
$
595.0

Loss and LAE
 
(280.6
)
 
(390.0
)
 
(357.2
)
Policy acquisition expenses
 
(106.5
)
 
(113.7
)
 
(107.1
)
Other underwriting expenses
 
(120.4
)
 
(120.3
)
 
(100.8
)
Total underwriting income (loss)
 
68.7

 
(8.1
)
 
29.9

Net other revenues
 
1.5

 
1.4

 
1.1

General and administrative expenses
 
(2.4
)
 
(2.7
)
 
(2.3
)
Pre-tax income (loss) from continuing operations
 
$
67.8

 
$
(9.4
)
 
$
28.7

The following table provides underwriting ratios for Specialty Industries: