Discontinued Operations

9 Months Ended

Sep. 30, 2011

Discontinued Operations

Discontinued Operations

NOTE 15. Discontinued Operations

On August 30, 2011, OneBeacon entered into the AutoOne Purchase Agreement to sell the AutoOne business to Interboro. The AutoOne Transaction includes the sale of two insurance entities, AOIC and AOSIC, through which substantially all of the AutoOne business is written on a direct basis. The AutoOne Transaction requires the completion of various steps, including amendment of the OneBeacon Amended and Restated Reinsurance (Pooling) Agreement to remove AOIC and AOSIC as parties to the agreement in order for them to retain 100% of their respective direct business, the contribution of specified assets supporting the AutoOne operations, and the sale, transfer or exchange of all of AOIC’s and AOSIC’s investment assets, other than those on deposit with governmental authorities. The AutoOne Transaction also includes the execution of a reinsurance agreement with certain subsidiaries of the Company pursuant to which OneBeacon will cede, on a 100% quota share basis, AutoOne business not directly written by AOIC and AOSIC. The transaction is expected to close in the fourth quarter of 2011, subject to regulatory approvals.

As of September 30, 2011, the transaction met the criteria for held for sale accounting. As a result, the assets and liabilities associated with the business being sold, after effecting the various steps contemplated by the AutoOne Purchase Agreement, are presented separately as single line items in the asset and liability sections of the consolidated balance sheet as of September 30, 2011. The following summarizes the major categories of assets and liabilities associated with the business classified as held for sale:

	September 30, 2011
	($ in millions)
Investments	$	102.9
Cash	5.5
Premiums receivable	8.5
Deferred acquisition costs	2.2
Net deferred tax asset	1.5
Other assets	2.6
Total assets held for sale	$	123.2
Loss and LAE reserves	$	58.0
Unearned premiums	30.8
Other liabilities	9.4
Total liabilities held for sale	$	98.2
Net assets held for sale	$	25.0

As a result of entering into the AutoOne Purchase Agreement, the results of operations for the AutoOne division have been classified as discontinued operations and are presented, net of related income taxes, as such in the statements of comprehensive (loss) income for all periods. Amounts reflected within discontinued operations are consistent with amounts previously reported within the Other Insurance Operations segment for the AutoOne division, with the inclusion of the tax effects which previously were not separately calculated. Investing and financing activities for OneBeacon are managed on a consolidated basis and currently reported within the Investing, Financing and Corporate Operations segment. Therefore, no investment or financing activity is included in discontinued operations. During the three months ended September 30, 2011, OneBeacon recorded a net charge of $28.0 million pre-tax, $18.2 million after tax, reflecting the estimated loss on sale of the AutoOne business. This after tax net charge is included in Loss from sale of discontinued operations, net of tax, in the statements of comprehensive (loss) income. The following summarizes the results of operations, including related income taxes associated with the business classified as discontinued operations:

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	($ in millions)
Net written premiums	$	13.2		$	18.9		$	46.4		$	60.1
Revenues
Earned premiums	$	16.2		$	24.3		$	52.1		$	64.7
Total revenues	16.2			24.3			52.1			64.7
Expenses
Loss and LAE	16.0			24.7			44.1			56.2
Policy acquisition expenses	1.9			2.1			5.8			6.9
Other underwriting expenses	2.5			3.3			9.0			9.9
Total expenses	20.4			30.1			58.9			73.0
Pre-tax loss	(4.2		)	(5.8		)	(6.8		)	(8.3		)
Income tax benefit	1.7			2.0			2.4			2.9
Loss from discontinued operations, net of tax	$	(2.5	)	$	(3.8	)	$	(4.4	)	$	(5.4	)
Loss from sale of discontinued operations, net of tax	$	(18.2	)	$	—		$	(18.2	)	$	—

During 2010, OneBeacon determined that unearned Limited Assignment Distribution fees, which are included in unearned premiums, had been overstated in years prior to 2010. In order to correct this error, OneBeacon recorded an adjustment in the three months ended September 30, 2010 of $5.5 million which increased earned premiums.

Basic loss per share amounts are based on the weighted average number of common shares outstanding including unvested restricted shares that are considered participating securities. Diluted earnings per share amounts are based on the weighted average number of common shares including unvested restricted shares and the net effect of potentially dilutive common shares outstanding. The following table outlines the computation of loss per share for discontinued operations 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
Loss attributable to OneBeacon’s common shareholders — basic and diluted (in millions):
Loss from discontinued operations, net of tax	$	(2.5	)	$	(3.8	)	$	(4.4	)	$	(5.4	)
Loss from sale of discontinued operations, net of tax	(18.2		)	—			(18.2		)	—
Weighted average common shares outstanding	94.5			94.5			94.4			94.9
Weighted average unvested restricted shares(1)	0.6			—			0.3			—
Total(2)	95.1			94.5			94.7			94.9
Loss per share attributable to OneBeacon’s common shareholders — basic and diluted (in dollars):
Loss from discontinued operations, net of tax	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.06	)
Loss from sale of discontinued operations, net of tax	(0.19		)	—			(0.19		)	—

(1) Restricted shares outstanding vest in equal installments upon a stated date or upon the occurrence of a specified event (see Note 10).

(2) Common shares issuable upon exercise of the options (see Note 10) were not included as their inclusion would be anti-dilutive for the periods presented.