10-Q 1 a12-19944_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period ended September 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 333-73012-04

 

ONEBEACON U.S. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

52-2272489

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

601 Carlson Parkway

 

 

Minnetonka, Minnesota

 

55305

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (952) 852-2431

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.  Yes x  No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated Filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of November 2, 2012, there were 505 outstanding shares of Common Stock, $1.00 par value per share, of the Registrant.

 

The Registrant meets the conditions set forth in General Instruction (H)(1)(a) and (b) for Form 10-Q and is therefore filing this Form with reduced disclosure format.

 

 

 



Table of Contents

 

ONEBEACON U.S. HOLDINGS, INC.

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income:
Three and nine months ended September 30, 2012 and 2011

 

4

 

 

 

 

 

Consolidated Statements of Common Shareholder’s Equity:
Nine months ended September 30, 2012 and 2011

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows:
Nine months ended September 30, 2012 and 2011

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

ITEM 2.

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

 

40

 

 

 

 

 

Results of Operations —For the three and nine months ended September 30, 2012 and 2011

 

41

 

 

 

 

 

Liquidity and Capital Resources

 

58

 

 

 

 

 

Critical Accounting Estimates

 

61

 

 

 

 

 

Forward-Looking Statements

 

62

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

63

 

 

 

 

ITEM 4.

Controls and Procedures

 

63

 

 

 

 

PART II

OTHER INFORMATION

 

63

 

 

 

 

ITEM 1.

Legal Proceedings

 

63

 

 

 

 

ITEM 1A.

Risk Factors

 

64

 

 

 

 

ITEM 4.

Mine Safety Disclosure

 

66

 

 

 

 

ITEM 6.

Exhibits

 

66

 

 

 

 

SIGNATURES

 

67

 

2



Table of Contents

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

(in millions, except

 

 

 

share and per share

 

 

 

amounts)

 

Assets

 

 

 

 

 

Investment securities:

 

 

 

 

 

Fixed maturity investments, at fair value

 

$

1,334.9

 

$

1,745.8

 

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

 

227.5

 

291.8

 

Common equity securities, at fair value

 

269.6

 

243.5

 

Convertible fixed maturity investments, at fair value

 

65.4

 

72.5

 

Other investments

 

156.9

 

155.1

 

Total investments

 

2,054.3

 

2,508.7

 

Cash

 

31.9

 

49.0

 

Reinsurance recoverable on unpaid losses

 

41.3

 

2,167.5

 

Reinsurance recoverable on paid losses

 

2.0

 

16.5

 

Premiums receivable

 

256.6

 

230.9

 

Deferred acquisition costs

 

132.5

 

123.5

 

Ceded unearned premiums

 

11.3

 

10.7

 

Net deferred tax asset

 

179.3

 

145.0

 

Investment income accrued

 

9.3

 

12.8

 

Accounts receivable on unsettled investment sales

 

54.7

 

0.4

 

Other assets

 

255.9

 

255.2

 

Assets held for sale

 

2,388.2

 

132.6

 

Total assets

 

$

5,417.3

 

$

5,652.8

 

Liabilities

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

911.6

 

$

3,358.6

 

Unearned premiums

 

610.7

 

528.0

 

Debt

 

269.8

 

269.7

 

Ceded reinsurance payable

 

2.9

 

23.4

 

Accounts payable on unsettled investment purchases

 

15.1

 

22.7

 

Other liabilities

 

330.8

 

396.2

 

Liabilities held for sale

 

2,388.2

 

107.6

 

Total liabilities

 

4,529.1

 

4,706.2

 

OB Holdings’ common shareholder’s equity and noncontrolling interests

 

 

 

 

 

OB Holdings’ common shareholder’s equity:

 

 

 

 

 

Common shares and paid-in surplus (par value $1.00, issued and outstanding, 505 shares)

 

936.4

 

950.9

 

Accumulated deficit

 

(50.7

)

(7.5

)

Accumulated other comprehensive loss, after tax:

 

 

 

 

 

Other comprehensive income and loss items

 

(12.6

)

(10.9

)

Total OB Holdings’ common shareholder’s equity

 

873.1

 

932.5

 

Total noncontrolling interests

 

15.1

 

14.1

 

Total OB Holdings’ common shareholder’s equity and noncontrolling interests

 

888.2

 

946.6

 

Total liabilities, OB Holdings’ common shareholder’s equity and noncontrolling interests

 

$

5,417.3

 

$

5,652.8

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Revenues

 

 

 

 

 

 

 

 

 

Earned premiums

 

$

293.9

 

$

259.1

 

$

846.0

 

$

748.0

 

Net investment income

 

11.7

 

15.2

 

38.2

 

52.7

 

Net realized and unrealized investment (losses) gains

 

36.2

 

(44.4

)

53.7

 

(12.6

)

Net other revenues (expenses)

 

(0.4

)

(0.1

)

(0.1

)

(12.2

)

Total revenues

 

341.4

 

229.8

 

937.8

 

775.9

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

164.7

 

149.7

 

452.5

 

421.3

 

Policy acquisition expenses

 

66.6

 

58.6

 

185.6

 

161.5

 

Other underwriting expenses

 

47.4

 

36.0

 

146.2

 

124.5

 

General and administrative expenses

 

3.0

 

1.1

 

5.2

 

3.1

 

Interest expense on debt

 

4.0

 

4.1

 

12.1

 

16.6

 

Total expenses

 

285.7

 

249.5

 

801.6

 

727.0

 

Pre-tax income (loss) from continuing operations

 

55.7

 

(19.7

)

136.2

 

48.9

 

Income tax (expense) benefit

 

(20.4

)

8.0

 

(46.9

)

(16.4

)

Net income (loss) from continuing operations

 

35.3

 

(11.7

)

89.3

 

32.5

 

Loss from discontinued operations, net of tax

 

(15.8

)

(2.5

)

(24.8

)

(1.5

)

Loss from sale of discontinued operations, net of tax

 

(91.0

)

(18.2

)

(91.0

)

(18.2

)

Net (loss) income including noncontrolling interests

 

(71.5

)

(32.4

)

(26.5

)

12.8

 

Less: Net income attributable to noncontrolling interests

 

(0.4

)

(0.2

)

(1.2

)

(1.1

)

Net (loss) income attributable to OB Holdings’ common shareholder

 

(71.9

)

(32.6

)

(27.7

)

11.7

 

Change in other comprehensive income and loss items

 

(2.0

)

0.2

 

(1.7

)

0.3

 

Comprehensive (loss) income attributable to OB Holdings’ common shareholder

 

$

(73.9

)

$

(32.4

)

$

(29.4

)

$

12.0

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER’S EQUITY

(Unaudited)

 

 

 

OB Holdings’ Common Shareholder’s Equity

 

 

 

 

 

 

 

Common

 

 

 

Accum. other

 

 

 

 

 

Common

 

shares and

 

Retained

 

comprehensive

 

Noncontrolling

 

 

 

shareholder’s

 

paid-in

 

(deficit)

 

(loss) income

 

interests,

 

 

 

equity

 

surplus

 

earnings

 

after tax

 

after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2012

 

$

932.5

 

$

950.9

 

$

(7.5

)

$

(10.9

)

$

14.1

 

Net (loss) income

 

(27.7

)

 

(27.7

)

 

1.2

 

Issuance of common shares

 

 

 

 

 

0.2

 

Dividends to OneBeacon U.S. Enterprises Holdings, Inc.

 

(15.5

)

 

(15.5

)

 

 

Return of capital to OneBeacon U.S. Enterprises Holdings, Inc.

 

(14.5

)

(14.5

)

 

 

 

Dividends

 

 

 

 

 

(0.6

)

Contributions

 

 

 

 

 

0.2

 

Other comprehensive loss, after tax

 

(1.7

)

 

 

(1.7

)

 

Balances at September 30, 2012

 

$

873.1

 

$

936.4

 

$

(50.7

)

$

(12.6

)

$

15.1

 

 

 

 

OB Holdings’ Common Shareholder’s Equity

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

Common

 

shares and

 

Retained

 

Accum. other

 

Noncontrolling

 

 

 

shareholder’s

 

paid-in

 

(deficit)

 

comprehensive

 

interests,

 

 

 

equity

 

surplus

 

earnings

 

income, after tax

 

after tax

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2011

 

$

960.5

 

$

961.5

 

$

(1.3

)

$

0.3

 

$

19.9

 

Net income

 

11.7

 

 

11.7

 

 

1.1

 

Issuance of common shares

 

 

 

 

 

0.3

 

Repurchases and retirements of common shares

 

 

 

 

 

(1.3

)

Dividends to OneBeacon U.S. Enterprises Holdings, Inc.

 

(19.4

)

 

(19.4

)

 

 

Return of capital to OneBeacon U.S. Enterprises Holdings, Inc.

 

(10.6

)

(10.6

)

 

 

 

Dividends

 

 

 

 

 

(0.9

)

Contributions

 

 

 

 

 

0.1

 

Distributions

 

 

 

 

 

(5.0

)

Other comprehensive income, after tax

 

0.3

 

 

 

0.3

 

 

Balances at September 30, 2011

 

$

942.5

 

$

950.9

 

$

(9.0

)

$

0.6

 

$

14.2

 

 

See Notes to Consolidated Financial Statements.

 

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

Cash flows from operations:

 

 

 

 

 

Net (loss) income including noncontrolling interests

 

$

(26.5

)

$

12.8

 

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

 

 

 

 

 

Net loss from discontinued operations

 

24.8

 

1.5

 

Net loss from sale of discontinued operations

 

91.0

 

18.2

 

Net realized and unrealized investment (gains) losses

 

(53.7

)

12.6

 

Net other realized losses

 

 

11.7

 

Deferred income tax expense (benefit)

 

9.7

 

(17.9

)

Other operating items:

 

 

 

 

 

Net change in loss and LAE reserves

 

(0.9

)

33.4

 

Net change in unearned premiums

 

85.2

 

73.2

 

Net change in ceded reinsurance payable

 

(0.8

)

(4.7

)

Net change in ceded unearned premiums

 

(0.7

)

0.5

 

Net change in premiums receivable

 

(45.7

)

(61.3

)

Net change in reinsurance recoverable on paid and unpaid losses

 

64.4

 

(3.0

)

Net change in other assets and liabilities

 

(48.3

)

(43.2

)

Net cash provided from operations — continuing operations

 

98.5

 

33.8

 

Net cash used for operations — discontinued operations

 

(155.6

)

(150.6

)

Net cash used for operations

 

(57.1

)

(116.8

)

Cash flows from investing activities:

 

 

 

 

 

Net maturities, purchases and sales of short-term investments

 

(4.2

)

(2.5

)

Maturities of fixed maturity investments

 

824.3

 

389.8

 

Sales of fixed maturity investments

 

523.9

 

885.6

 

Sales of common equity securities

 

33.6

 

87.3

 

Sales of convertible fixed maturity investments

 

14.8

 

32.7

 

Distributions and redemptions of other investments

 

6.9

 

34.9

 

Purchases of fixed maturity investments

 

(1,214.7

)

(1,017.0

)

Purchases of common equity securities

 

(44.4

)

(52.0

)

Purchases of convertible fixed maturity investments

 

(5.9

)

(20.2

)

Contributions for other investments

 

(3.1

)

(9.8

)

Net change in unsettled investment purchases and sales

 

(62.0

)

(9.8

)

Net acquisitions of property and equipment

 

(1.2

)

(3.2

)

Net cash provided from investing activities — continuing operations

 

68.0

 

315.8

 

Net cash provided from investing activities — discontinued operations

 

 

 

Net cash provided from investing activities

 

68.0

 

315.8

 

Cash flows from financing activities:

 

 

 

 

 

Repurchases of debt

 

 

(161.6

)

Cash dividends paid to OneBeacon U.S. Enterprises Holdings, Inc.

 

(15.5

)

(19.4

)

Return of capital to OneBeacon U.S. Enterprises Holdings, Inc.

 

(14.5

)

(10.6

)

Net cash used for financing activities — continuing operations

 

(30.0

)

(191.6

)

Net cash used for financing activities — discontinued operations

 

 

 

Net cash used for financing activities

 

(30.0

)

(191.6

)

Net (decrease) increase in cash during period

 

(19.1

)

7.4

 

Cash reclassified from (to) assets held for sale as part of the AutoOne Transaction

 

5.5

 

(5.5

)

Cash transferred as part of the AutoOne Transaction

 

(3.5

)

 

Net (decrease) increase excluding cash relating to the AutoOne Transaction

 

(17.1

)

1.9

 

Cash balance at beginning of period

 

49.0

 

33.2

 

Cash balance at end of period

 

$

31.9

 

$

35.1

 

 

 

 

 

 

 

Supplemental cash flows information:

 

 

 

 

 

Interest paid

 

$

8.2

 

$

12.6

 

Net tax payments to state and national governments

 

31.2

 

21.6

 

 

See Notes to Consolidated Financial Statements.

 

6


 


Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. Nature of Operations and Summary of Significant Accounting Policies

 

Basis of presentation

 

These interim consolidated financial statements include the accounts of OneBeacon U.S. Holdings, Inc. (the “Company” or “OBH”) and its subsidiaries (collectively, “OB Holdings”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The OB Holdings operating companies are U.S.-based property and casualty insurance writers, most of which operate under various intercompany reinsurance agreements. OB Holdings offers a wide range of specialty insurance products and services through independent agencies, regional and national brokers, wholesalers and managing general agencies.

 

OBH was created in 2000 by White Mountains Insurance Group, Ltd. (“White Mountains”) to acquire and subsequently be the holding company for OneBeacon Insurance Group LLC (together with its subsidiaries, “OneBeacon”). On June 1, 2001, OBH acquired OneBeacon from Aviva plc (“Aviva”), (the “OneBeacon Acquisition”). During 2006, White Mountains undertook an internal reorganization and formed OneBeacon Insurance Group, Ltd. (“OBIG”) for the purpose of holding certain of its property and casualty insurance businesses. As part of this reorganization, certain of White Mountains’ businesses that were historically indirect wholly-owned subsidiaries of White Mountains, including OBH, became indirect wholly-owned subsidiaries of OBIG. White Mountains is a holding company whose businesses provide property and casualty insurance, reinsurance and certain other products. As of September 30, 2012, White Mountains owned 75.2% of OBIG’s common shares. Within this report, the term “OB Holdings” is used to refer to one or more entities within the consolidated organization, as the context requires. The Company is a U.S.-based company with its corporate headquarters located at 601 Carlson Parkway, Minnetonka, Minnesota 55305.

 

OB Holdings’ reportable segments are Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations. The Specialty Insurance Operations segment is comprised of a number of underwriting units that are aggregated into three major underwriting units for financial reporting: Managing General Agency (“MGA”) Business, Specialty Industries and Specialty Products. OB Holdings’ Other Insurance Operations segment, as further described below, has historically included the results of the non-specialty commercial lines business, to which OneBeacon sold the renewal rights, other run-off business, which includes asbestos and environmental reserves, and certain purchase accounting adjustments relating to the OneBeacon Acquisition. The Other Insurance Operations segment also includes the results of a reciprocal insurance exchange that is not actively writing any business. Investing, Financing and Corporate Operations includes the investing and financing activities for OB Holdings on a consolidated basis, and certain other activities conducted through the Company.

 

On October 17, 2012, the Company’s wholly-owned subsidiary, OneBeacon Insurance Group LLC, entered into a definitive agreement (the “Stock Purchase Agreement”) with Trebuchet US Holdings, Inc. (“Trebuchet”), a wholly-owned subsidiary of Armour Group Holdings Limited (together with Trebuchet, “Armour”), to sell its runoff business. See Note 2, Note 12 and Note 13. OB Holdings’ runoff business includes the results of OB Holdings’ remaining non-specialty commercial lines business and certain other run-off business, including asbestos and environmental reserves, as well as certain purchase accounting adjustments related to the OneBeacon Acquisition (the “Runoff Business”, the sale of which is referred to as the “Runoff Transaction”).  The Runoff Business had been included within the Other Insurance Operations segment; however, based on management’s intent as of September 30, 2012 to execute the Stock Purchase Agreement, the Runoff Business has been presented as held for sale in the consolidated balance sheet as of September 30, 2012. The prior year balance sheet has not been reclassified to conform to the current period’s presentation. The Runoff Business has been presented as discontinued operations in the consolidated statements of operations and cash flows, with the prior periods reclassified to conform to the current period’s presentation. The Runoff Business disposal group excludes investing and financing activities from amounts classified as discontinued operations. OB Holdings’ investing and financing operations are conducted on an overall consolidated level and, accordingly, there are no separately identifiable investing or financing cash flows associated with the Runoff Business. Pursuant to the terms of the Stock Purchase Agreement, the legal entities included in the sale and expected to be transferred to Armour will hold an agreed upon level of invested assets and capital at closing. The assets and liabilities associated with the Runoff Business as of September 30, 2012 have been presented in the balance sheet as held for sale assuming the investing and financing steps required to effect the sale were completed as of the current balance sheet date. The prior year balance sheet has not been reclassified.

 

On February 22, 2012, OBIG and certain of its subsidiaries completed the sale of its AutoOne Insurance business (“AutoOne”) to Interboro Holdings, Inc. (“Interboro”) (the “AutoOne Transaction”). See Note 2. AutoOne has offered products and services to assigned risk markets primarily in New York and New Jersey. AutoOne had been included within the Other Insurance Operations segment, however, as a result of the sale, AutoOne has been presented as discontinued operations in the statements of operations and cash flows with the prior periods reclassified to conform to the current presentation. The AutoOne disposal group excludes investing and financing activities from amounts classified as discontinued operations. OB Holdings’ investing and financing

 

7



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operations are conducted on an overall consolidated level and accordingly, there are no separately identifiable investing or financing cash flows associated with AutoOne. Pursuant to the terms of the AutoOne Transaction, at closing, the legal entities included in the sale held an agreed upon level of invested assets and capital. The assets and liabilities associated with the AutoOne business as of December 31, 2011 have been presented in the balance sheet as held for sale assuming the investing and financing steps required to effect the sale were completed as of December 31, 2011.

 

All significant intercompany transactions have been eliminated in consolidation. These interim financial statements include all adjustments, consisting of a normal recurring nature, considered necessary by management to fairly state the financial position, results of operations and cash flows of OB Holdings. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Refer to the Company’s 2011 Annual Report on Form 10-K for a complete discussion regarding OB Holdings’ significant accounting policies. As described above, certain amounts in the prior period financial statements have been reclassified to conform to the current presentation.

 

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Table of Contents

 

Recently Adopted Changes in Accounting Principles

 

Policy Acquisition Costs

 

On January 1, 2012, OB Holdings adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, codified within Accounting Standards Codification (“ASC”) 944. ASU 2010-26 changes the types of policy acquisition costs that are eligible for deferral. Specifically, ASU 2010-26 limits deferrable costs to those that are incremental direct costs of contract acquisition and certain costs related to acquisition activities performed by the insurer, such as underwriting, policy issuance and processing, medical and inspection costs and sales force contract selling. ASU 2010-26 defines incremental direct costs as those costs that result directly from and were essential to the contract acquisition and would not have been incurred absent the acquisition. Accordingly, under ASC 2010-26, deferrable acquisition costs are limited to costs related to successful contract acquisitions. Acquisition costs that are not eligible for deferral are to be charged to expense in the period incurred.

 

OB Holdings adopted ASU 2010-26 prospectively. As a result of adopting ASU 2010-26, $5.6 million of unamortized deferred acquisition costs as of January 1, 2012, primarily relating to a portion of profit sharing commission that had been deferred under prior guidance, have been determined to no longer be deferrable and will be recognized in expense over the original amortization period. During the three and nine months ended September 30, 2012, $0.9 million and $5.3 million, respectively, of the $5.6 million of unamortized acquisitions costs as of January 1, 2012 were recognized in expense. If OB Holdings had followed ASU 2010-26 in 2011, $1.4 million and $5.7 million, respectively, of acquisition costs that had been deferred would have been recognized in expense during the three and nine months ended September 30, 2011.

 

Fair Value Measurements and Disclosures

 

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

 

Comprehensive Income

 

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

 

Goodwill Impairment

 

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

 

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Recently Issued Accounting Pronouncements

 

Offsetting Assets and Liabilities

 

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

 

NOTE 2. Acquisitions and Dispositions

 

As described in Note 1, on October 17, 2012, OB Holdings entered into the Stock Purchase Agreement with respect to the sale of its Runoff Business to Armour. Pursuant to the terms of the Stock Purchase Agreement, at closing, OB Holdings will transfer to Armour all of the issued and outstanding shares of common stock of certain legal entities that will contain the assets, liabilities (including gross and ceded loss reserves) and capital supporting the business as well as certain elements of the Runoff Business infrastructure, including staff and office space. Additionally, as part of the Runoff Transaction, OB Holdings may provide, under certain scenarios, financing in the form of surplus notes. The Runoff Transaction is expected to close in the second half of 2013.

 

The Runoff Transaction is subject to closing conditions, including but not limited to the receipt of regulatory approvals and the completion of certain internal restructuring actions by OB Holdings (the “Internal Restructuring”). Upon completion of the Internal Restructuring, the Runoff Business will be contained in certain legal entities to be transferred to Armour at closing.

 

At closing, Armour and/or OneBeacon Insurance Company and certain legal entities within the ongoing OB Holdings structure will enter into various ancillary agreements, including reinsurance agreements and administrative services agreements, to support the separation and transfer to Armour of the Runoff Business. Specifically, OneBeacon Insurance Company (“OBIC”) and Atlantic Specialty Insurance Company (“ASIC”) will enter into new reinsurance agreements pursuant to which (i) ASIC will cede, on a 100% quota share basis, Runoff Business not directly written by OBIC or the other legal entities that will be transferred to Armour, and (ii) OBIC will cede, on a 100% quota share basis, ongoing business not directly written by ASIC or the other legal entities that OB Holdings will continue to own post-closing. Also as part of the Runoff Transaction, at closing, OB Holdings and Armour will enter into a Transition Services Agreement (“TSA”), pursuant to which OB Holdings will provide certain transition services to Armour during the term of the TSA. The TSA has an initial term of one year.

 

As described in Note 1, the Runoff Business is now presented as held for sale and discontinued operations. See Note 12 for further information regarding discontinued operations. During the third quarter of 2012, OB Holdings recorded an after tax net charge of $107.0 million in discontinued operations reflecting a $91.5 million after tax estimated loss on sale of the Runoff Business and $9.0 million of after tax incurred loss and loss adjustment expenses relating to an adjustment to the workers compensation discount rate applied to the loss reserves being transferred.  In addition, OB Holdings also recorded $6.5 million of after tax underwriting losses primarily related to adverse prior year loss reserve development related to a legacy assumed reinsurance treaty which were included in discontinued operations during the third quarter of 2012.

 

On February 22, 2012, OBIG and certain of its subsidiaries completed the sale of the AutoOne business to Interboro. Pursuant to the terms of the sale, at closing, OB Holdings transferred to Interboro all of the issued and outstanding shares of common stock of AutoOne Insurance Company (“AOIC”) and AutoOne Select Insurance Company (“AOSIC”), through which substantially all of the AutoOne business was written on a direct basis. At closing, OB Holdings also transferred the assets, liabilities (including loss reserves and unearned premiums) and capital of the business as well as substantially all of the AutoOne infrastructure including systems and office space as well as certain staff. The AutoOne Transaction also included the execution of a reinsurance agreement with certain subsidiaries of the Company pursuant to which OneBeacon cedes, on a 100% quota share basis, AutoOne business not directly written by AOIC and AOSIC. As described in Note 1, the assets and liabilities associated with the AutoOne business as of December 31, 2011 have been presented as held for sale and underwriting results for AutoOne, net of tax, have been reported as discontinued operations for all periods presented. See Note 12 for further information regarding balances classified as held for sale and activity reported as discontinued operations.  During the third quarter of 2012, OB Holdings and Interboro reached conclusion on post-closing adjustments to the closing balance sheet, resulting in OBIG recording an after tax net charge of $0.3 million relating to underwriting activity and an after tax net gain of $0.5 million to true up the estimated loss on sale.

 

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

 

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

 

NOTE 3. Reserves for Unpaid Losses and Loss Adjustment Expenses

 

The following table summarizes the loss and LAE reserve activities of OB Holdings’ insurance subsidiaries for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Gross beginning balance

 

$

3,175.3

 

$

3,131.5

 

$

3,358.6

 

$

3,295.5

 

Less beginning reinsurance recoverable on unpaid losses

 

(2,040.7

)

(1,825.9

)

(2,167.5

)

(1,893.2

)

Net loss and LAE reserves

 

1,134.6

 

1,305.6

 

1,191.1

 

1,402.3

 

Loss and LAE incurred relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

167.0

 

155.7

 

460.1

 

435.7

 

Prior year losses

 

(2.3

)

(6.0

)

(7.6

)

(14.4

)

Total incurred loss and LAE from continuing Operations

 

164.7

 

149.7

 

452.5

 

421.3

 

Loss and LAE paid relating to:

 

 

 

 

 

 

 

 

 

Current year losses

 

(59.6

)

(62.2

)

(123.0

)

(132.9

)

Prior year losses

 

(73.4

)

(64.5

)

(266.2

)

(244.7

)

Total loss and LAE payments from continuing operations

 

(133.0

)

(126.7

)

(389.2

)

(377.6

)

Net loss and LAE reserves

 

1,166.3

 

1,328.6

 

1,254.4

 

1,446.0

 

Total incurred loss and LAE from discontinued operations

 

27.7

 

12.9

 

48.4

 

37.7

 

Total loss and LAE payments from discontinued operations

 

(67.4

)

(63.7

)

(177.1

)

(205.9

)

Net loss and LAE reserves

 

1,126.6

 

1,277.8

 

1,125.7

 

1,277.8

 

Net loss and LAE reserves reclassified to held for sale related to Runoff Business (1)

 

(256.3

)

 

(256.3

)

 

Net loss and LAE reserves reclassified (to) from held for sale related to AutoOne (2)

 

 

(58.0

)

64.7

 

(58.0

)

Net loss and LAE reserves sold as part of the AutoOne Transaction (3)

 

 

 

(63.8

)

 

Net ending balance

 

870.3

 

1,219.8

 

870.3

 

1,219.8

 

Plus ending reinsurance recoverable on unpaid Losses

 

41.3

 

1,939.3

 

41.3

 

1,939.3

 

Gross ending balance

 

$

911.6

 

$

3,159.1

 

$

911.6

 

$

3,159.1

 

 


(1)           In the three and nine months ended September 30, 2012, $256.3 million of net loss and LAE reserves related to the Runoff Business were reclassified to held for sale.

 

(2)           In the three and nine months ended September 30, 2011, $58.0 million of net loss and LAE reserves related to the AutoOne Transaction were reclassified to held for sale. In the nine months ended September 30, 2012, $64.7 million of net loss and

 

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LAE reserves related to the AutoOne Transaction were reclassified from held for sale immediately prior to the closing of the transaction which occurred on February 22, 2012.

 

(3)           In the nine months ended September 30, 2012, $63.8 million of net loss and LAE reserves related to the AutoOne Transaction were sold.

 

During the three months ended September 30, 2012, OB Holdings experienced $2.3 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and other general liability lines. During the three months ended September 30, 2011, OB Holdings recorded $6.0 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and other general liability lines.

 

During the nine months ended September 30, 2012, OB Holdings experienced $7.6 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and general liability lines. During the nine months ended September 30, 2011, OB Holdings experienced $14.4 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and other general liability lines.

 

In connection with purchase accounting for the OB Holdings Acquisition, OB Holdings was required to adjust to fair value the loss and LAE reserves and the related reinsurance recoverables on the balance sheet. As of September 30, 2012 and December 31, 2011, the remaining fair value reductions to both loss and LAE reserves and reinsurance recoverable on unpaid losses were $153.4 million and $163.3 million, respectively. As a result of the Runoff Transaction, this adjustment is reflected in the amounts held for sale on the September 30, 2012 balance sheet and the net reduction to loss and LAE reserves associated with this adjustment is being accreted through an income statement charge within discontinued operations ratably with and over the period the claims are settled.

 

NOTE 4. Reinsurance

 

In the normal course of business, OB Holdings’ insurance subsidiaries seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. OB Holdings remains liable for risks reinsured even if the reinsurer does not honor its obligations under reinsurance contracts.

 

Effective May 1, 2012, OB Holdings renewed its property catastrophe reinsurance program through April 30, 2013. The program provides coverage for OB Holdings’ property business as well as certain acts of terrorism. Under the program, the first $25.0 million of losses resulting from any single catastrophe are retained and the next $155.0 million of losses resulting from the catastrophe are reinsured in three layers, although OB Holdings retains a co-participation of 55% of losses from $25.0 million to $40.0 million, 15% of losses from $40.0 million to $80.0 million, and 10% of losses from $80.0 million to $180.0 million. Any loss above $180.0 million would be retained in full. In the event of a catastrophe, OB Holdings’ property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

 

At September 30, 2012, OB Holdings had reinsurance recoverables on paid and unpaid losses of $2.0 million and $41.3 million, respectively. Reinsurance contracts do not relieve OB Holdings of its obligations. Therefore, collectibility of balances due from its reinsurers is critical to OB Holdings’ financial strength. OB Holdings is selective in regard to its reinsurers, principally placing reinsurance with those reinsurers with strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis. As a result, uncollectible amounts have historically not been significant.  The following table provides a listing of OB Holdings’ top reinsurers, excluding industry pools and associations and those with affiliates within OB Holdings. The table shows the recoverable amounts, the percentage of total reinsurance recoverables and the reinsurers’ A.M. Best Company, Inc. (“A.M. Best”) ratings. The table excludes reinsurance balances that have been reclassified as held for sale; see note 12 for the reinsurance information related to those amounts.

 

 

 

Balance at

 

 

 

A.M. Best

 

($ in millions)

 

September 30, 2012

 

% of total

 

Rating (1)

 

Hannover Ruckversich

 

$

6.4

 

15

%

A

+

Hartford Steam Boiler

 

4.6

 

11

%

A

++

Munich Reinsurance America

 

4.5

 

10

%

A

+

Platinum Underwriters Re

 

4.1

 

9

%

A

 

Transatlantic Reinsurance

 

2.0

 

5

%

A

 

 

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Table of Contents

 


(1)        A.M. Best ratings as detailed above are: “A++” (Superior, which is the highest of fifteen financial strength ratings), “A+” (Superior, which is the second highest of fifteen financial strength ratings) and “A” (Excellent, which is the third highest of fifteen financial strength ratings).

 

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Table of Contents

 

NOTE 5. Investment Securities

 

OB Holdings’ invested assets are comprised of securities and other investments held for general investment purposes. Refer to the Company’s 2011 Annual Report on Form 10-K for a complete discussion.

 

OB Holdings classifies its portfolio of fixed maturity investments and common equity securities, including convertible fixed maturity investments, held for general investment purposes as trading securities. Trading securities are reported at fair value as of the balance sheet date as determined by quoted market prices when available. Realized and unrealized investment gains and losses on trading securities are reported in total revenues on a pre-tax basis as net realized and unrealized investment gains (losses).

 

Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized cost, which approximated fair value as of September 30, 2012 and December 31, 2011.

 

Other investments primarily include hedge funds and private equity funds. OB Holdings measures its investments in hedge funds and private equity funds at fair value with changes therein reported in total revenues on a pre-tax basis as net realized and unrealized investment gains (losses). Other investments also includes an investment in a community reinvestment vehicle which is accounted for at fair value and a tax advantaged federal affordable housing development fund which is accounted for under the equity method.

 

OB Holdings’ net investment income is comprised primarily of interest income associated with OB Holdings’ fixed maturity investments, dividend income from its equity investments and interest income from its short-term investments. Net investment income for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

11.1

 

$

14.5

 

$

35.8

 

$

51.7

 

Short-term investments

 

 

 

0.1

 

0.1

 

Common equity securities

 

1.4

 

1.4

 

4.4

 

3.7

 

Convertible fixed maturity investments

 

0.9

 

0.8

 

3.0

 

2.5

 

Other investments

 

(0.2

)

0.1

 

(0.4

)

(0.3

)

Gross investment income

 

13.2

 

16.8

 

42.9

 

57.7

 

Less investment expenses

 

(1.5

)

(1.6

)

(4.7

)

(5.0

)

Net investment income, pre-tax

 

$

11.7

 

$

15.2

 

$

38.2

 

$

52.7

 

 

The composition of net realized investment gain (losses), a component of net realized and unrealized investment gains (losses) for the three and nine months ended September 30, 2012 and 2011 are as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

9.5

 

$

6.8

 

$

25.0

 

$

28.7

 

Short-term investments

 

 

 

 

 

Common equity securities

 

2.8

 

14.5

 

0.1

 

18.3

 

Convertible fixed maturity investments

 

0.6

 

0.3

 

1.9

 

4.7

 

Other investments

 

(0.6

)

0.8

 

1.4

 

8.4

 

Net realized investment gains, pre-tax

 

$

12.3

 

$

22.4

 

$

28.4

 

$

60.1

 

 

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Table of Contents

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2012 (1)

 

September 30, 2012 (1)

 

 

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

foreign currency

 

changes in fair

 

Changes in net

 

foreign currency

 

changes in fair

 

 

 

unrealized gains

 

translation gains

 

value reflected

 

unrealized gains

 

translation gains

 

value reflected

 

 

 

and losses

 

and losses

 

in revenues

 

and losses

 

and losses

 

in revenues

 

 

 

($ in millions)

 

Fixed maturity investments

 

$

5.5

 

$

0.1

 

$

5.6

 

$

7.7

 

$

0.2

 

$

7.9

 

Short-term investments

 

 

 

 

 

 

 

Common equity securities

 

16.7

 

 

16.7

 

15.2

 

 

15.2

 

Convertible fixed maturity investments

 

(0.5

)

 

(0.5

)

(1.8

)

 

(1.8

)

Other investments

 

2.1

 

 

2.1

 

4.0

 

 

4.0

 

Total

 

$

23.8

 

$

0.1

 

$

23.9

 

$

25.1

 

$

0.2

 

$

25.3

 

 


(1)        Includes changes in net deferred gains and losses on sales of investments between OB Holdings and entities under White Mountains’ common control of $0.2 million, pre-tax, for the nine months ended September 30, 2012 and none for the three months ended September 30, 2012.

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2011 (1)

 

September 30, 2011 (1)

 

 

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

Total net

 

 

 

Changes in net

 

foreign currency

 

changes in fair

 

Changes in net

 

foreign currency

 

changes in fair

 

 

 

unrealized gains

 

translation gains

 

value reflected

 

unrealized gains

 

translation gains

 

value reflected

 

 

 

and losses

 

and losses

 

in revenues

 

and losses

 

and losses

 

in revenues

 

 

 

($ in millions)

 

Fixed maturity Investments

 

$

(14.8

)

$

(0.3

)

$

(15.1

)

$

(17.7

)

$

(0.2

)

$

(17.9

)

Short-term investments

 

 

(0.1

)

(0.1

)

 

 

 

Common equity securities

 

(44.4

)

 

(44.4

)

(43.8

)

(0.1

)

(43.9

)

Convertible fixed maturity investments

 

(6.7

)

 

(6.7

)

(13.3

)

 

(13.3

)

Other investments

 

(0.5

)

 

(0.5

)

2.4

 

 

2.4

 

Total

 

$

(66.4

)

$

(0.4

)

$

(66.8

)

$

(72.4

)

$

(0.3

)

$

(72.7

)

 


(1)        Includes changes in net deferred gains and losses on sales of investments between OB Holdings and entities under White Mountains’ common control of $(0.2) million and $(1.5) million, pre-tax, for the three and nine months ended September 30, 2011, respectively.

 

15


 


Table of Contents

 

The components of OB Holdings’ ending net unrealized investment gains and losses, excluding the impact of net unrealized foreign currency translation gains and losses, on its trading investment portfolio as of September 30, 2012 and December 31, 2011 were as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

Investment securities:

 

 

 

 

 

Gross unrealized investment gains

 

$

129.8

 

$

118.0

 

Gross unrealized investment losses

 

(7.6

)

(21.2

)

Net unrealized gains from trading portfolio

 

122.2

 

96.8

 

Income taxes

 

(42.7

)

(33.9

)

Total net unrealized investment gains, after tax

 

$

79.5

 

$

62.9

 

 

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

 

 

 

September 30, 2012 (1)

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

losses

 

value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

204.4

 

$

0.8

 

$

 

$

 

$

205.2

 

Debt securities issued by corporations

 

539.3

 

30.0

 

(1.1

)

 

568.2

 

Municipal obligations

 

3.3

 

 

 

 

3.3

 

Asset-backed securities

 

833.8

 

11.1

 

(0.3

)

 

844.6

 

Foreign government obligations

 

6.0

 

0.6

 

 

 

6.6

 

Preferred stocks

 

78.3

 

6.0

 

 

 

84.3

 

Total fixed maturity investments

 

$

1,665.1

 

$

48.5

 

$

(1.4

)

$

 

$

1,712.2

 

 


(1)       Carrying value includes $377.3 million of fixed maturity investments reclassified to assets held for sale in the September 30, 2012 consolidated balance sheet as part of the Runoff Transaction.

 

 

 

December 31, 2011 (1)

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

losses

 

value

 

 

 

($ in millions)

 

U.S. Government and agency obligations

 

$

213.6

 

$

1.8

 

$

 

$

 

$

215.4

 

Debt securities issued by corporations

 

654.8

 

32.7

 

(1.9

)

(0.1

)

685.5

 

Municipal obligations

 

2.2

 

 

 

 

2.2

 

Asset-backed securities

 

862.1

 

9.8

 

(0.8

)

 

871.1

 

Foreign government obligations

 

7.7

 

0.5

 

(0.1

)

 

8.1

 

Preferred stocks

 

78.3

 

3.2

 

(6.2

)

 

75.3

 

Total fixed maturity investments

 

$

1,818.7

 

$

48.0

 

$

(9.0

)

$

(0.1

)

$

1,857.6

 

 


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

 

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

 

 

 

September 30, 2012

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

gains

 

value

 

 

 

($ in millions)

 

Common equity securities

 

$

230.4

 

$

40.3

 

$

(1.1

)

$

 

$

269.6

 

Convertible fixed maturity investments

 

64.0

 

4.0

 

(2.6

)

 

65.4

 

Other investments

 

122.4

 

37.0

 

(2.5

)

 

156.9

 

 

 

 

December 31, 2011

 

 

 

Cost or

 

Gross

 

Gross

 

Net foreign

 

 

 

 

 

amortized

 

unrealized

 

unrealized

 

currency

 

Carrying

 

 

 

cost

 

gains

 

losses

 

gains

 

value

 

 

 

($ in millions)

 

Common equity securities

 

$

219.5

 

$

28.1

 

$

(4.1

)

$

 

$

243.5

 

Convertible fixed maturity investments

 

69.2

 

4.1

 

(0.8

)

 

72.5

 

Other investments

 

124.6

 

37.8

 

(7.3

)

 

155.1

 

 

Fair value measurements

 

OB Holdings records its investments in accordance with ASC 820 which defines fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including quoted prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).

 

As of September 30, 2012 and December 31, 2011, approximately 91% and 92%, respectively, of the investment portfolio recorded at fair value was priced based upon observable inputs.

 

OB Holdings uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, OB Holdings uses the quoted market prices provided by the outside pricing services to determine fair value. The outside pricing services OB Holdings uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable or are not considered reasonable, OB Holdings estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating prepayment speeds and other relevant inputs. In those circumstances, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

 

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

 

Other investments, which are primarily comprised of hedge funds and private equity funds for which the fair value option has been elected, are carried at fair value based upon OB Holdings’ proportionate interest in the underlying fund’s net asset value, which is deemed to approximate fair value. The fair value of OB Holdings’ investments in hedge funds and private equity funds has been estimated using net asset value because it reflects the fair value of the funds’ underlying investments in accordance with ASC 820. OB Holdings employs a number of procedures to assess the reasonableness of the fair value measurements, including obtaining and reviewing each fund’s audited financial statements and discussing each fund’s pricing with the fund’s manager.

 

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Table of Contents

 

In circumstances where the underlying investments are publicly traded, such as the investments made by hedge funds, the fair value of the underlying investments is determined using current market prices. In circumstances where the underlying investments are not publicly traded, such as the investments made by private equity funds, the private equity fund managers have considered the need for a liquidity discount on each of the underlying investments when determining the fund’s net asset value in accordance with ASC 820. In circumstances where OB Holdings’ portion of a fund’s net asset value is deemed to differ from fair value due to illiquidity or other factors associated with OB Holdings’ investment in the fund, including counterparty credit risk, the net asset value is adjusted accordingly. At September 30, 2012 and December 31, 2011, OB Holdings did not record a liquidity adjustment to the net asset value related to its investments in hedge funds or private equity funds.

 

As of both September 30, 2012 and December 31, 2011, other investments reported at fair value represented approximately 5% of the investment portfolio recorded at fair value. Other investments accounted for at fair value as of September 30, 2012 and December 31, 2011 were comprised of $53.8 million and $53.5 million, respectively, in hedge funds, $67.8 million and $65.7 million, respectively, in private equity funds, $14.1 million for both periods of an investment in a community reinvestment vehicle. At September 30, 2012 and December 31, 2011, OB Holdings held investments in 9 hedge funds and 16 and 14 private equity funds, respectively. The largest investment in a single fund was $12.8 million and $13.7 million, respectively, at September 30, 2012 and December 31, 2011. As of September 30, 2012 and December 31, 2011, other investments also included $21.2 million and $21.8 million, respectively, of an investment in a tax advantaged federal affordable housing development fund which is accounted for using the equity method.

 

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Table of Contents

 

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

 

 

 

Fair value at

 

 

 

 

 

 

 

 

 

September 30, 2012 (2)

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

205.2

 

$

205.2

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

174.5

 

 

174.5

 

 

Industrial

 

86.8

 

 

86.8

 

 

Financial

 

91.6

 

 

91.6

 

 

Communications

 

38.3

 

 

38.3

 

 

Energy

 

49.1

 

 

49.1

 

 

Basic materials

 

74.1

 

 

74.1

 

 

Utilities

 

38.6

 

 

38.6

 

 

Technology

 

15.1

 

 

15.1

 

 

Debt securities issued by corporations

 

568.1

 

 

568.1

 

 

Municipal obligations

 

3.3

 

 

3.3

 

 

Asset-backed securities

 

844.6

 

 

843.2

 

1.4

 

Foreign government obligations

 

6.7

 

5.9

 

0.8

 

 

Preferred stocks

 

84.3

 

 

13.8

 

70.5

 

Fixed maturity investments

 

1,712.2

 

211.1

 

1,429.2

 

71.9

 

Short-term investments

 

227.5

 

227.5

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

76.0

 

75.2

 

0.7

 

0.1

 

Basic Materials

 

47.9

 

47.9

 

 

 

Consumer

 

62.6

 

62.6

 

 

 

Energy

 

34.2

 

34.2

 

 

 

Utilities

 

17.5

 

17.5

 

 

 

Other

 

31.4

 

31.4

 

 

 

Common equity securities

 

269.6

 

268.8

 

0.7

 

0.1

 

Convertible fixed maturity investments

 

65.4

 

 

65.4

 

 

Other investments(1)

 

135.7

 

 

 

135.7

 

Total(1)

 

$

2,410.4

 

$

707.4

 

$

1,495.3

 

$

207.7

 

 

19



Table of Contents

 

 

 

Fair value at

 

 

 

 

 

 

 

 

 

December 31, 2011 (3)

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

($ in millions)

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

215.4

 

$

215.4

 

$

 

$

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

261.9

 

 

261.9

 

 

Industrial

 

126.0

 

 

126.0

 

 

Financial

 

56.4

 

 

56.4

 

 

Communications

 

46.1

 

 

46.1

 

 

Energy

 

60.5

 

 

60.5

 

 

Basic materials

 

77.9

 

 

77.9

 

 

Utilities

 

42.0

 

 

42.0

 

 

Technology

 

14.7

 

 

14.7

 

 

Debt securities issued by corporations

 

685.5

 

 

685.5

 

 

Municipal obligations

 

2.2

 

 

2.2

 

 

Asset-backed securities

 

871.1

 

 

868.8

 

2.3

 

Foreign government obligations

 

8.1

 

7.4

 

0.7

 

 

Preferred stocks

 

75.3

 

 

11.5

 

63.8

 

Fixed maturity investments

 

1,857.6

 

222.8

 

1,568.7

 

66.1

 

Short-term investments

 

291.8

 

291.8

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

65.8

 

65.0

 

 

0.8

 

Basic Materials

 

50.5

 

50.5

 

 

 

Consumer

 

64.3

 

64.2

 

0.1

 

 

Energy

 

29.3

 

29.3

 

 

 

Utilities

 

16.3

 

16.3

 

 

 

Other

 

17.3

 

17.3

 

 

 

Common equity securities

 

243.5

 

242.6

 

0.1

 

0.8

 

Convertible fixed maturity investments

 

72.5

 

 

72.5

 

 

Other investments(1) 

 

133.3

 

 

 

133.3

 

Total(1)

 

$

2,598.7

 

$

757.2

 

$

1,641.3

 

$

200.2

 

 


(1)        Excludes the carrying value of $21.2 million and $21.8 million, respectively, associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of September 30, 2012 and December 31, 2011.

 

(2)        Fair value includes $377.3 million of fixed maturity investments reclassified to assets held for sale in the September 30, 2012 consolidated balance sheet as part of the Runoff Transaction.

 

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

 

At September 30, 2012 and December 31, 2011, OB Holdings held one private preferred stock that represented approximately 84% and 85%, respectively, of its preferred stock portfolio. OB Holdings used quoted market prices for similar securities that were adjusted to reflect management’s best estimate of fair value; this security is classified as a Level 3 measurement.

 

In addition to the investment portfolio described above, OB Holdings had $41.1 million and $36.9 million, respectively, of liabilities recorded at fair value and included in other liabilities as of September 30, 2012 and December 31, 2011. These liabilities relate to securities that have been sold short by a limited partnership that OB Holdings invests in and is required to consolidate in accordance with GAAP. As of September 30, 2012 and December 31, 2011, all of the liabilities included in the $41.1 million and $36.9 million, respectively, have been classified as Level 1 measurements.

 

20



Table of Contents

 

The following table summarizes the ratings of OB Holdings’ corporate debt securities as of September 30, 2012 and December 31, 2011:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

($ in millions)

 

AA

 

$

24.9

 

$

59.2

 

A

 

267.5

 

272.9

 

BBB

 

264.9

 

342.7

 

BB

 

7.6

 

6.1

 

Other

 

3.2

 

4.6

 

Debt securities issued by corporations

 

$

568.1

 

$

685.5

 

 

Rollforwards of Fair Value Measurements by Level

 

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

 

 

 

Fixed

 

Common

 

Convertible

 

 

 

 

 

 

 

maturity

 

equity

 

fixed maturity

 

Other

 

 

 

 

 

investments

 

securities

 

investments

 

investments

 

Total(1)

 

 

 

($ in millions)

 

Balance at January 1, 2012

 

$

222.8

 

$

242.6

 

$

 

$

 

$

465.4

 

Amortization/accretion

 

(0.1

)

 

 

 

(0.1

)

Total net realized and unrealized gains (losses)

 

0.1

 

7.7

 

 

 

7.8

 

Purchases

 

17.8

 

14.9

 

 

 

32.7

 

Sales

 

(28.8

)

(8.9

)

 

 

(37.7

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at March 31, 2012

 

$

211.8

 

$

256.3

 

$

 

$

 

$

468.1

 

Amortization/accretion

 

0.2

 

 

 

 

0.2

 

Total net realized and unrealized gains (losses)

 

(0.7

)

(11.0

)

 

 

(11.7

)

Purchases

 

6.6

 

13.5

 

 

 

20.1

 

Sales

 

(13.2

)

(16.3

)

 

 

(29.5

)

Transfers in

 

 

 

 

 

 

Transfers out

 

 

 

 

 

 

Balance at June 30, 2012

 

$

204.7

 

$

242.5