Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities

Investment Securities

NOTE 5. Investment Securities

OneBeacon’s invested assets are comprised of securities and other investments held for general investment purposes. Refer to the Company’s 2010 Annual Report on Form 10-K for a complete discussion.

In accordance with ASC 825, OneBeacon classifies its portfolio of fixed maturity investments and common equity securities, including convertible bonds, held for general investment purposes as trading securities. Trading securities are reported at fair value as of the balance sheet date as determined by quoted market prices when available. Realized and unrealized investment gains and losses on trading securities are reported in net realized and unrealized investment gains and losses in revenues on a pre-tax basis.

Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized cost, which approximated fair value as of September 30, 2011 and December 31, 2010.

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

OneBeacon’s net investment income is comprised primarily of interest income associated with OneBeacon’s fixed maturity investments, dividend income from its equity investments and interest income from its short-term investments. Net investment income for the three and nine months ended September 30, 2011 and 2010 consisted of the following:

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	($ in millions)
Investment income:
Fixed maturity investments	$	15.4		$	21.3		$	54.8		$	73.3
Short-term investments	—			0.2			0.1			0.7
Common equity securities	1.5			1.1			3.9			3.0
Convertible bonds	0.8			1.2			2.6			4.2
Other investments	0.1			(0.1		)	(0.3		)	0.5
Gross investment income	17.8			23.7			61.1			81.7
Less investment expenses	(1.7		)	(2.1		)	(5.3		)	(6.8		)
Net investment income, pre-tax	$	16.1		$	21.6		$	55.8		$	74.9

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

	Three months ended September 30,					Nine months ended September 30,
	2011		2010			2011		2010
	($ in millions)
Fixed maturity investments	$	6.7	$	16.1		$	25.3	$	46.1
Short-term investments	—		—			—		—
Common equity securities	14.5		(0.3		)	18.7		1.3
Convertible bonds	0.3		3.9			4.8		14.4
Other investments (1)	0.8		2.6			8.4		(0.3		)
Net realized investment gains (losses), pre-tax	$	22.3	$	22.3		$	57.2	$	61.5

(1) The nine months ended September 30, 2010 includes $1.3 million of realized losses related to the impairment of a receivable related to an outstanding hedge fund redemption.

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

	Three months ended September 30, 2011 (1)									Nine months ended September 30, 2011 (1)
	Changes in net unrealized gains and losses			Changes in net foreign currency translation gains and losses			Total net changes in fair value reflected in revenues			Changes in net unrealized gains and losses			Changes in net foreign currency translation gains and losses			Total net changes in fair value reflected in revenues
	($ in millions)
Fixed maturity investments	$	(14.7	)	$	(0.3	)	$	(15.0	)	$	(15.1	)	$	(0.2	)	$	(15.3	)
Short-term investments	—			(0.1		)	(0.1		)	—			—			—
Common equity securities	(47.0		)	—			(47.0		)	(44.1		)	(0.1		)	(44.2		)
Convertible bonds	(7.1		)	—			(7.1		)	(13.4		)	—			(13.4		)
Other investments	(0.5		)	—			(0.5		)	2.4			—			2.4
Total	$	(69.3	)	$	(0.4	)	$	(69.7	)	$	(70.2	)	$	(0.3	)	$	(70.5	)

(1) Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(0.1) million and $(1.5) million, pre-tax, for the three and nine months ended September 30, 2011, respectively.

The net changes in fair value for the three and nine months ended September 30, 2010 are as follows:

	Three months ended September 30, 2010 (1)							Nine months ended September 30, 2010 (1)
	Changes in net unrealized gains and losses		Changes in net foreign currency translation gains and losses			Total net changes in fair value reflected in revenues		Changes in net unrealized gains and losses			Changes in net foreign currency translation gains and losses			Total net changes in fair value reflected in revenues
	($ in millions)
Fixed maturity investments	$	5.2	$	(1.8	)	$	3.4	$	4.3		$	(1.9	)	$	2.4
Short-term investments	—		0.1			0.1		—			(0.8		)	(0.8		)
Common equity securities	23.4		—			23.4		18.8			—			18.8
Convertible bonds	2.2		—			2.2		(6.2		)	—			(6.2		)
Other investments	0.2		—			0.2		3.9			—			3.9
Total	$	31.0	$	(1.7	)	$	29.3	$	20.8		$	(2.7	)	$	18.1

(1) Includes changes in net deferred gains and losses on sales of investments between OneBeacon and entities under White Mountains’ common control of $(0.2) million and $(1.4) million, pre-tax, for the three and nine months ended September 30, 2010, respectively.

The components of OneBeacon’s ending net unrealized investment gains and losses, excluding the impact of net unrealized foreign currency translation gains and losses, on its trading investment portfolio as of September 30, 2011 and December 31, 2010 were as follows:

	September 30,			December 31,
	2011			2010
	($ in millions)
Investment securities:
Gross unrealized investment gains	$	110.1		$	162.8
Gross unrealized investment losses	(36.0		)	(20.0		)
Net unrealized gains from investment securities	74.1			142.8
Income taxes	(25.9		)	(50.0		)
Total net unrealized investment gains, after tax	$	48.2		$	92.8

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency losses and carrying values of OneBeacon’s fixed maturity investments as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011 (1)
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency losses			Carrying value
	($ in millions)
U.S. Government and agency obligations	$	221.9	$	2.1	$	(0.1	)	$	—		$	223.9
Debt securities issued by corporations	756.2		36.3		(2.8		)	—			789.7
Municipal obligations	1.8		—		—			—			1.8
Asset-backed securities	1,014.6		14.4		(1.4		)	—			1,027.6
Foreign government obligations	7.7		0.6		—			(0.2		)	8.1
Preferred stocks	78.3		3.3		(10.5		)	—			71.1
Total fixed maturity investments	$	2,080.5	$	56.7	$	(14.8	)	$	(0.2	)	$	2,122.2

(1) Carrying value includes $102.9 million of fixed maturity investments reclassified to assets held for sale in the consolidated balance sheet as part of the AutoOne Transaction.

	December 31, 2010
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
	($ in millions)
U.S. Government and agency obligations	$	241.7	$	9.0	$	—		$	—	$	250.7
Debt securities issued by corporations	908.5		46.5		(6.4		)	—		948.6
Municipal obligations	2.1		—		—			—		2.1
Asset-backed securities	1,117.2		9.1		(8.9		)	—		1,117.4
Foreign government obligations	12.7		0.6		—			—		13.3
Preferred stocks	77.5		5.9		—			—		83.4
Total fixed maturity investments	$	2,359.7	$	71.1	$	(15.3	)	$	—	$	2,415.5

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and carrying values of OneBeacon’s common equity securities, convertible bonds and other investments as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
	($ in millions)
Common equity securities	$	240.6	$	16.9	$	(13.0	)	$	—	$	244.5
Convertible bonds	82.4		3.2		(4.7		)	—		80.9
Other investments	127.3		33.3		(3.5		)	—		157.1

	December 31, 2010
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
	($ in millions)
Common equity securities	$	237.2	$	48.4	$	(0.4	)	$	0.1	$	285.3
Convertible bonds	82.2		11.6		—			—		93.8
Other investments	144.0		31.7		(4.3		)	—		171.4

Fair value measurements

OneBeacon records its investments in accordance with ASC 820 which provides a revised definition of 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”). ASC 820 establishes a fair value 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”). The fair value hierarchy prioritizes fair value measurements into three levels based on the nature of the 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 both September 30, 2011 and December 31, 2010, approximately 91% of the investment portfolio recorded at fair value was priced based upon observable inputs.

OneBeacon uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, OneBeacon uses the quoted market prices provided by the outside pricing services to determine fair value. The outside pricing services OneBeacon uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable, OneBeacon utilizes fair value estimates based upon reference to other observable inputs other than quoted prices, including matrix pricing, benchmark interest rates, market comparables, broker quotes and other relevant observable inputs. In circumstances where observable inputs are adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

Other investments, which are primarily comprised of hedge funds and private equity funds for which the fair value option has been elected, are carried at fair value based upon OneBeacon’s proportionate interest in the underlying fund’s net asset value, which is deemed to approximate fair value. The fair value of OneBeacon’s investments in hedge funds and private equity funds has been estimated using net asset value because it reflects the fair value of the funds’ underlying investments in accordance with ASC 820. OneBeacon employs a number of procedures to assess the reasonableness of the fair value measurements, including obtaining and reviewing each fund’s audited financial statements and discussing each fund’s pricing with the fund’s manager. However, since the fund managers do not provide sufficient information to independently evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of OneBeacon’s investment in hedge funds and private equity funds have been classified as Level 3 under the fair value hierarchy.

In circumstances where the underlying investments are publicly traded, such as the investments made by hedge funds, the fair value of the underlying investments is determined using current market prices. In circumstances where the underlying investments are not publicly traded, such as the investments made by private equity funds, the private equity fund managers have considered the need for a liquidity discount on each of the underlying investments when determining the fund’s net asset value in accordance with ASC 820. In circumstances where OneBeacon’s portion of a fund’s net asset value is deemed to differ from fair value due to illiquidity or other factors associated with OneBeacon’s investment in the fund, including counterparty credit risk, the net asset value is adjusted accordingly. At September 30, 2011 and December 31, 2010, OneBeacon did not record a liquidity adjustment to the net asset value related to its investments in hedge funds or private equity funds.

As of both September 30, 2011 and December 31, 2010, 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, 2011 and December 31, 2010 were comprised of $51.2 million and $63.4 million, respectively, in hedge funds, $70.1 million and $72.7 million, respectively, in private equity funds and $14.1 million for both periods of an investment in a community reinvestment vehicle. At September 30, 2011 and December 31, 2010, OneBeacon held investments in 9 and 10 hedge funds, respectively, and 14 and 15 private equity funds, respectively. The largest investment in a single fund was $16.0 million and $24.6 million, respectively, at September 30, 2011 and December 31, 2010.

As of September 30, 2011 and December 31, 2010, other investments also included $21.7 million and $21.2 million, respectively, of an investment in a tax advantaged federal affordable housing development fund which is accounted for using the equity method.

The fair value measurements at September 30, 2011 and December 31, 2010 and their related inputs are as follows:

	Fair value at September 30, 2011 (2)		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	223.9	$	223.9	$	—	$	—
Debt securities issued by corporations:
Consumer	289.8		—		289.8		—
Industrial	174.1		—		174.1		—
Financial	75.4		—		75.4		—
Communications	65.7		—		65.7		—
Energy	49.7		—		49.7		—
Basic materials	63.7		—		63.7		—
Utilities	56.6		—		56.6		—
Technology	14.7		—		14.7		—
Debt securities issued by corporations	789.7		—		789.7		—
Municipal obligations	1.8		—		1.8		—
Asset-backed securities	1,027.6		—		967.6		60.0
Foreign government obligations	8.1		7.3		0.8		—
Preferred stocks	71.1		—		11.6		59.5
Fixed maturity investments	2,122.2		231.2		1,771.5		119.5
Short-term investments	185.8		185.8		—		—
Common equity securities:
Financials	63.6		62.8		—		0.8
Basic Materials	53.0		53.0		—		—
Consumer	65.7		65.7		—		—
Energy	28.0		28.0		—		—
Utilities	19.1		19.1		—		—
Other	15.1		15.0		0.1		—
Common equity securities	244.5		243.6		0.1		0.8
Convertible bonds	80.9		—		80.9		—
Other investments(1)	135.4		—		—		135.4
Total(1)	$	2,768.8	$	660.6	$	1,852.5	$	255.7

	Fair value at December 31, 2010		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	250.7	$	250.7	$	—	$	—
Debt securities issued by corporations:
Consumer	330.4		—		330.4		—
Industrial	227.9		—		227.9		—
Financial	90.5		—		90.5		—
Communications	84.7		—		84.7		—
Energy	60.7		—		60.7		—
Basic materials	78.9		—		78.9		—
Utilities	61.0		—		61.0		—
Technology	14.5		—		14.5		—
Debt securities issued by corporations	948.6		—		948.6		—
Municipal obligations	2.1		—		2.1		—
Asset-backed securities	1,117.4		—		1,089.7		27.7
Foreign government obligations	13.3		12.6		0.7		—
Preferred stocks	83.4		—		12.0		71.4
Fixed maturity investments	2,415.5		263.3		2,053.1		99.1
Short-term investments	300.0		300.0		—		—
Common equity securities:
Financials	104.1		66.7		—		37.4
Basic Materials	57.0		57.0		—		—
Consumer	50.0		49.9		0.1		—
Energy	36.0		33.7		—		2.3
Utilities	22.4		22.4		—		—
Other	15.8		15.7		0.1		—
Common equity securities	285.3		245.4		0.2		39.7
Convertible bonds	93.8		—		93.8		—
Other investments(1)	150.2		—		—		150.2
Total(1)	$	3,244.8	$	808.7	$	2,147.1	$	289.0

(1)	Excludes the carrying value of $21.7 million and $21.2 million, respectively, associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of September 30, 2011 and December 31, 2010.
(2)	Carrying value includes $102.9 million of fixed maturity investments reclassified to assets held for sale in the September 30, 2011 consolidated balance sheet as part of the AutoOne Transaction.

At September 30, 2011 and December 31, 2010, OneBeacon held one private preferred stock that represented approximately 84% and 86%, respectively, of its preferred stock portfolio. OneBeacon used quoted market prices for similar securities that were adjusted to reflect management’s best estimate of fair value; this security is classified as a Level 3 measurement.

In addition to the investment portfolio described above, OneBeacon had $35.2 million and $41.3 million, respectively, of liabilities recorded at fair value and included in other liabilities as of September 30, 2011 and December 31, 2010. These liabilities relate to securities that have been sold short by a limited partnership that OneBeacon invests in and is required to consolidate in accordance with GAAP. As of September 30, 2011 and December 31, 2010, all of the liabilities included in the $35.2 million and $41.3 million, respectively, have been classified as Level 1 measurements.

The following table summarizes the ratings of OneBeacon’s corporate debt securities as of September 30, 2011 and December 31, 2010:

	September 30,2011		December 31, 2010
	($ in millions)
AA	$	71.6	$	88.6
A	300.5		387.7
BBB	413.7		463.1
BB	—		8.8
Other	3.9		0.4
Debt securities issued by corporations	$	789.7	$	948.6

Rollforwards of Fair Value Measurements by Level

The changes in Level 1 fair value measurements for the three and nine months ended September 30, 2011 are as follows:

	Fixed maturity investments			Common equity securities			Convertible bonds		Other investments		Total(1)
	($ in millions)
Balance at January 1, 2011	$	263.3		$	245.4		$	—	$	—	$	508.7
Amortization/accretion	0.8			—			—		—		0.8
Total net realized and unrealized gains (losses)	1.9			12.5			—		—		14.4
Purchases	130.7			35.2			—		—		165.9
Sales	(133.9		)	(25.6		)	—		—		(159.5		)
Transfers in	—			—			—		—		—
Transfers out	—			—			—		—		—
Balance at March 31, 2011	$	262.8		$	267.5		$	—	$	—	$	530.3
Amortization/accretion	0.6			—			—		—		0.6
Total net realized and unrealized gains (losses)	0.5			(4.7		)	—		—		(4.2		)
Purchases	39.5			12.7			—		—		52.2
Sales	(73.7		)	(13.4		)	—		—		(87.1		)
Transfers in	—			—			—		—		—
Transfers out	—			—			—		—		—
Balance at June 30, 2011	$	229.7		$	262.1		$	—	$	—	$	491.8
Amortization/accretion	—			—			—		—		—
Total net realized and unrealized gains (losses)	(0.5		)	(31.7		)	—		—		(32.2		)
Purchases	15.8			32.2			—		—		48.0
Sales	(13.8		)	(19.0		)	—		—		(32.8		)
Transfers in	—			—			—		—		—
Transfers out	—			—			—		—		—
Balance at September 30, 2011	$	231.2		$	243.6		$	—	$	—	$	474.8

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

The changes in Level 2 fair value measurements for the three and nine months ended September 30, 2011 are as follows:

	Fixed maturity investments			Common equity securities			Convertible bonds			Other investments		Total
	($ in millions)
Balance at January 1, 2011	$	2,053.1		$	0.2		$	93.8		$	—	$	2,147.1
Amortization/accretion	(5.1		)	—			0.3			—		(4.8		)
Total net realized and unrealized gains (losses)	0.7			—			1.1			—		1.8
Purchases	576.2			—			17.4			—		593.6
Sales	(565.5		)	—			(21.7		)	—		(587.2		)
Transfers in	27.7			—			1.4			—		29.1
Transfers out	(1.4		)	—			—			—		(1.4		)
Balance at March 31, 2011	$	2,085.7		$	0.2		$	92.3		$	—	$	2,178.2
Amortization/accretion	(4.0		)	—			0.3			—		(3.7		)
Total net realized and unrealized gains (losses)	16.9			(0.1		)	(2.9		)	—		13.9
Purchases	356.1			—			6.3			—		362.4
Sales	(548.2		)	—			(16.2		)	—		(564.4		)
Transfers in	—			—			—			—		—
Transfers out	—			—			—			—		—
Balance at June 30, 2011	$	1,906.5		$	0.1		$	79.8		$	—	$	1,986.4
Amortization/accretion	(3.9		)	—			0.3			—		(3.6		)
Total net realized and unrealized gains (losses)	3.1			—			(6.8		)	—		(3.7		)
Purchases	211.7			—			12.5			—		224.2
Sales	(367.9		)	—			(4.9		)	—		(372.8		)
Transfers in	22.0			—			—			—		22.0
Transfers out	—			—			—			—		—
Balance at September 30, 2011	$	1,771.5		$	0.1		$	80.9		$	—	$	1,852.5

The changes in Level 3 fair value measurements for the three and nine months ended September 30, 2011 are as follows:

	Fixed maturity investments			Common equity securities			Convertible bonds		Other investments(1)			Total(1)
	($ in millions)
Balance at January 1, 2011	$	99.1		$	39.7		$	—	$	150.2		$	289.0
Amortization/accretion	—			—			—		—			—
Total net realized and unrealized gains (losses)	1.8			(1.3		)	—		6.4			6.9
Purchases	0.3			3.9			—		1.8			6.0
Sales	—			(0.1		)	—		(17.0		)	(17.1		)
Transfers in	—			—			—		—			—
Transfers out	(27.7		)	—			—		—			(27.7		)
Balance at March 31, 2011	$	73.5		$	42.2		$	—	$	141.4		$	257.1
Amortization/accretion	—			—			—		—			—
Total net realized and unrealized gains (losses)	(3.4		)	0.3			—		4.2			1.1
Purchases	22.2			—			—		0.8			23.0
Sales	—			—			—		(9.8		)	(9.8		)
Transfers in	—			—			—		—			—
Transfers out	—			—			—		—			—
Balance at June 30, 2011	$	92.3		$	42.5		$	—	$	136.6		$	271.4
Amortization/accretion	—			—			—		—			—
Total net realized and unrealized gains (losses)	(11.0		)	(2.5		)	—		0.3			(13.2		)
Purchases	60.2			—			—		1.2			61.4
Sales	—			(39.2		)	—		(2.7		)	(41.9		)
Transfers in	—			—			—		—			—
Transfers out	(22.0		)	—			—		—			(22.0		)
Balance at September 30, 2011	$	119.5		$	0.8		$	—	$	135.4		$	255.7

(1) Excludes the carrying value of $21.7 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method.

“Transfers out” of Level 3 fixed maturity investments of $22.0 million and $27.7 million for the three months ended September 30, 2011 and March 31, 2011, respectively, were comprised of securities which had been previously classified as a Level 3 measurement and were recategorized as a Level 2 measurement when quoted market prices for similar securities that were considered reliable and could be validated against an alternative source became available.

The following table summarizes the change in net unrealized gains or losses for assets designated as Level 3 for the three and nine months ended September 30, 2011 and 2010:

	Three months ended September 30,					Nine months ended September 30,
	2011			2010		2011			2010
	($ in millions)
Fixed maturity investments	$	(11.0	)	$	3.4	$	(12.1	)	$	0.6
Short-term investments	—			—		—			—
Common equity securities	—			2.0		(0.1		)	5.8
Convertible bonds	—			—		—			—
Other investments	(0.5		)	0.2		2.4			3.9
Total	$	(11.5	)	$	5.6	$	(9.8	)	$	10.3

Asset-backed Securities

OneBeacon purchases commercial and residential mortgage-backed securities with the goal of maximizing its risk adjusted returns in the context of a diversified portfolio. OneBeacon’s non-agency commercial mortgage-backed portfolio (“CMBS”) is generally short tenor and structurally senior, with more than 20 points of subordination on average for fixed rate CMBS and approximately 70 points of subordination on average for floating rate CMBS as of September 30, 2011. In general, subordination represents the percentage of principal loss on the underlying collateral that would have to occur before the security incurs a loss.  These collateral losses, instead, are first absorbed by other securities lower in the capital structure. OneBeacon believes this structural protection mitigates the risk of loss tied to refinancing challenges facing the commercial real estate market. As of September 30, 2011, on average approximately 2% of the underlying loans were reported as non-performing for all CMBS held by OneBeacon. OneBeacon is not an originator of residential mortgage loans and did not hold any residential mortgage-backed securities (“RMBS”) categorized as sub-prime as of September 30, 2011. OneBeacon’s investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage-backed securities as of September 30, 2011. OneBeacon considers sub-prime mortgage-backed securities to be those that have underlying loan pools that exhibit weak credit characteristics or are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., OneBeacon considers investments backed primarily by second-liens to be a sub-prime risk regardless of credit scores or other metrics).

There are also mortgage-backed securities that OneBeacon categorizes as “non-prime” (also called “Alt A” or “A-”) that are backed by collateral that has overall credit quality between prime and sub-prime, as determined based on OneBeacon’s review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. As of September 30, 2011, OneBeacon did not hold any mortgage-backed securities that were classified as non-prime.  OneBeacon’s non-agency residential mortgage-backed portfolio is generally of moderate average life, fixed rate and structurally senior. OneBeacon does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.

The following table summarizes the carrying value of OneBeacon’s asset-backed securities as of September 30, 2011 and December 31, 2010:

	September 30, 2011						December 31, 2010
	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
	($ in millions)
Mortgage-backed securities:
Agency:
GNMA	$	670.8	$	610.8	$	60.0	$	684.7	$	663.4	$	21.3
FNMA	133.4		133.4		—		143.0		143.0		—
FHLMC	12.7		12.7		—		19.0		19.0		—
Total agency(1)	816.9		756.9		60.0		846.7		825.4		21.3
Non-agency:
Residential	8.2		8.2		—		6.4		—		6.4
Commercial	81.0		81.0		—		36.3		36.3		—
Total Non-agency	89.2		89.2		—		42.7		36.3		6.4
Total mortgage-backed securities	906.1		846.1		60.0		889.4		861.7		27.7
Other asset-backed securities:
Credit card receivables	31.4		31.4		—		97.5		97.5		—
Vehicle receivables	90.1		90.1		—		130.5		130.5		—
Total other asset-backed securities	121.5		121.5		—		228.0		228.0		—
Total asset-backed securities	$	1,027.6	$	967.6	$	60.0	$	1,117.4	$	1,089.7	$	27.7

(1) Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).

Non-agency Mortgage-backed Securities

The security issuance years of OneBeacon’s investments in non-agency RMBS and non-agency CMBS securities as of September 30, 2011 are as follows:

	Fair Value		2003		2005		2007		2009		2010		2011
	($ in millions)
Non-agency RMBS	$	8.2	$	—	$	—	$	—	$	—	$	8.2	$	—
Non-agency CMBS	81.0		0.8		10.9		4.3		3.9		—		61.1
Total	$	89.2	$	0.8	$	10.9	$	4.3	$	3.9	$	8.2	$	61.1

Non-agency Residential Mortgage-backed Securities

The classification of the underlying collateral quality and the tranche levels of OneBeacon’s non-agency RMBS securities are as follows as of September 30, 2011:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Prime	$	8.2	$	—	$	8.2	$	—
Sub-prime	—		—		—		—
Total	$	8.2	$	—	$	8.2	$	—

(1) At issuance, Super Senior were rated AAA by Standard & Poor’s Rating Service (“Standard & Poor’s”) or Aaa by Moody’s Investors Service, Inc. (“Moody’s”) and were senior to other AAA or Aaa bonds.

(2) At issuance, Senior were rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to non-AAA or non-Aaa bonds.

(3) At issuance, Subordinate were not rated AAA by Standard & Poor’s or Aaa by Moody’s and were junior to other bonds.

Non-agency Commercial Mortgage-backed Securities

The amount of fixed and floating rate securities and their tranche levels are as follows as of September 30, 2011:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Fixed rate CMBS	$	65.8	$	10.0	$	55.8	$	—
Floating rate CMBS	15.2		15.2		—		—
Total	$	81.0	$	25.2	$	55.8	$	—

(1) At issuance, Super Senior were rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to other AAA or Aaa bonds.

(2) At issuance, Senior were rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to non-AAA or non-Aaa bonds.

(3) At issuance, Subordinate were not rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to other bonds.

Other Investments

OneBeacon holds investments in hedge funds and private equity funds which are included in other investments. The fair value of these investments has been estimated using the net asset value of the funds. The decrease in the fair value of hedge funds and private equity funds is due to net redemptions during the period. The following tables summarize investments in hedge funds and private equity funds at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	Fair Value		Unfunded Commitments		Fair Value		Unfunded Commitments
	($ in millions)
Hedge funds
Long/short credit and distressed	$	15.2	$	—	$	15.1	$	—
Long bank loan	0.2		—		2.0		—
Long/short equity	33.8		—		39.8		—
Long/short equity activist	2.0		—		6.5		—
Total hedge funds	$	51.2	$	—	$	63.4	$	—
Private equity funds
Insurance	$	3.4	$	0.1	$	3.5	$	0.1
Distressed residential real estate	16.0		—		24.6		—
Energy infrastructure and services	17.1		4.6		13.6		5.2
Healthcare	1.2		3.5		0.8		4.0
Multi-sector	20.3		5.2		19.1		6.3
Private equity secondaries	7.6		2.6		6.9		2.9
Real estate	4.5		0.1		4.2		0.7
Total private equity funds	$	70.1	$	16.1	$	72.7	$	19.2
Total hedge funds and private equity funds(1)	$	121.3	$	16.1	$	136.1	$	19.2

(1) Other investments also includes $14.1 million of an investment in a community reinvestment vehicle as of September 30, 2011 and December 31, 2010 and $21.7 million and $21.2 million, respectively, of an investment in a tax advantaged federal affordable housing development fund as of September 30, 2011 and December 31, 2010.

Redemptions of investments in certain funds are subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period. The following summarizes the September 30, 2011 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:

	Hedge Funds—Active Funds
	30 - 59 days notice		60 - 89 days notice		90 - 119 days notice		120+ days notice		Total
	($ in millions)
Redemption frequency
Monthly	$	—	$	—	$	—	$	6.0	$	6.0
Quarterly	23.7		8.0		11.3		—		43.0
Annual	—		—		2.0		0.2		2.2
Total	$	23.7	$	8.0	$	13.3	$	6.2	$	51.2

Certain of the hedge fund investments are no longer active and are in the process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated. At September 30, 2011, $1.6 million of hedge funds were in liquidation. The actual amount of the final distribution is subject to market fluctuations. The date at which such distributions will be received is not determinable at September 30, 2011.

OneBeacon has also submitted redemption requests for certain of its investments in active hedge funds. At September 30, 2011, redemptions of $2.0 million were outstanding. The date at which such redemptions will be received is not determinable at September 30, 2011. Redemptions are recorded as receivables when approved by the hedge funds and when no longer subject to market fluctuations.

Investments in private equity funds are generally subject to “lock-up” periods during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investment. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors. At September 30, 2011, investments in private equity funds were subject to lock-up periods as follows:

	1 - 3 years		3 - 5 years		5 - 10 years		>10 years		Total
	($ in millions)
Private Equity Funds—expected lock up period remaining	$	19.4	$	—	$	50.7	$	—	$	70.1