Employee Share-Based Incentive Compensation Plans

9 Months Ended

Sep. 30, 2012

Employee Share-Based Incentive Compensation Plans

Employee Share-Based Incentive Compensation Plans

NOTE 9.  Employee Share-Based Incentive Compensation Plans

OneBeacon’s share-based compensation plans consist of performance shares, stock options granted in connection with the initial public offering, restricted stock units and restricted shares. OneBeacon’s share-based compensation plans are designed to maximize shareholder value over long periods of time by aligning the financial interests of its management with those of its owners. Performance shares are payable only upon achievement of pre-defined business goals and are valued based on the market value of OneBeacon’s common shares at the time awards are earned. See “Performance Shares” below. Performance shares are typically paid in cash, though, in some instances, they may be paid in common shares or may be deferred in accordance with the terms of OneBeacon’s deferred compensation plan. OneBeacon expenses the full cost of all its share-based compensation.

OneBeacon records its share-based compensation in accordance with ASC 718. ASC 718 applies to new grants of share-based awards, award modifications and the remaining portion of the fair value of unvested awards. The unvested portion of OneBeacon performance share awards are subject to the fair value measurement and recognition requirements of ASC 718.

Performance Shares

The following summarizes performance share activity for performance shares whose value is based upon the market price of an underlying OneBeacon common share (“OB Performance Shares”) for the three and nine months ended September 30, 2012 and 2011:

	Three months ended September 30,
	2012					2011
	Target					Target
	OB					OB
	Performance					Performance
	Shares		Accrued			Shares		Accrued
	outstanding		expense			outstanding		expense
	($ in millions)
Beginning of period	560,577		$	3.1		671,727		$	10.0
Payments and deferrals (1)	—		—			—		—
New awards	—		—			—		—
Forfeitures and net change in assumed forfeitures	(3,354	)	—			(19,583	)	0.1
Expense recognized	—		(2.2		)	—		(0.5		)
End of period	557,223		$	0.9		652,144		$	9.6

	Nine months ended September 30,
	2012					2011
	Target					Target
	OB					OB
	Performance					Performance
	Shares		Accrued			Shares		Accrued
	outstanding		expense			outstanding		expense
	($ in millions)
Beginning of period	642,667		$	9.7		1,464,295		$	18.5
Payments and deferrals (1) (2) (3)	(258,901	)	(7.8		)	(936,150	)	(10.5		)
New awards	181,290		—			194,900		—
Forfeitures and net change in assumed forfeitures	(7,833	)	—			(70,901	)	(0.2		)
Expense recognized	—		(1.0		)	—		1.8
End of period	557,223		$	0.9		652,144		$	9.6

(1)Performance share payments in 2012 for the 2009-2011 performance cycle were based upon a performance factor of 138.6%.

(2)Performance share payments in 2011 for the 2008-2010 performance cycle were based upon a performance factor of 68.5%.

(3)As a result of certain dispositions, payments were made to certain former employees of OneBeacon prior to the end of the performance cycle (2009-2011 and 2010-2012 performance cycles) on a pro rata basis based upon a performance factor of 100%.

The following summarizes performance shares outstanding and accrued performance expense at September 30, 2012 for each performance cycle:

	Target
	OB
	Performance
	Shares		Accrued
	outstanding		expense
	($ in millions)
Performance cycle:
2010—2012	238,658		$	—
2011—2013	151,563		0.4
2012—2014	181,290		0.5
Sub-total	571,511		0.9
Assumed forfeitures	(14,288	)	—
Total at September 30, 2012	557,223		$	0.9

If 100% of the outstanding performance shares had been vested at September 30, 2012, the total additional compensation cost to be recognized would have been $1.7 million, based on current accrual factors at September 30, 2012 (common share price and payout assumptions).

All performance shares earned and paid for the 2009-2011 and 2008-2010 performance cycles were settled in cash or by deferral into OneBeacon’s deferred compensation plan.

Stock Options

As described in the Company’s 2011 Annual Report on Form 10-K, in November 2006, in connection with the initial public offering, OneBeacon issued to its key employees 1,420,000 options to acquire common shares of the Company at an above-market fixed exercise price. The options vested in equal installments on each of the third, fourth and fifth anniversaries of their issuance. These options expired five and a half years from the anniversary of issuance. The fair value of each option award at grant date was estimated using a Black-Scholes option pricing model using an expected volatility assumption of 30%, a risk-free interest rate assumption of 4.6%, a forfeiture assumption of 5%, an expected dividend rate assumption of 3.4% and an expected term assumption of 5.5 years. The options originally had a per share exercise price of $30.00. On May 27, 2008, the Compensation Committee of the Board (the “Compensation Committee”) amended the exercise price to $27.97 as a result of the $2.03 per share special dividend paid in the first quarter of 2008. On November 16, 2010, the Compensation Committee adjusted the exercise price to $25.47 as a result of the $2.50 per share special dividend paid in the third quarter of 2010. The compensation expense associated with the options and the incremental fair value of the award modifications were recognized ratably over the vesting period.

In May 2012, the remaining options held by active employees expired. No expense was recognized during the three and nine months ended September 30, 2012 as the options had fully vested. The Company recognized expense of $0.1 million and $0.4 million for the three and nine months ended September 30, 2011, respectively. The following summarizes option activity for the three and nine months ended September 30, 2012 and 2011:

	Three months ended September 30,
	2012	2011
	Target	Target
	options	options
	outstanding	outstanding
	($ in millions)
Beginning of period	—	750,130
Forfeitures	—	(9,260	)
Vested and expired	—	—
Expense recognized	—	—
End of period	—	740,870

	Nine months ended September 30,
	2012		2011
	Target		Target
	options		options
	outstanding		outstanding
	($ in millions)
Beginning of period	740,870		768,652
Forfeitures	—		(27,782	)
Vested and expired	(740,870	)	—
Expense recognized	—		—
End of period	—		740,870

Restricted Stock Units

The options granted in connection with OneBeacon’s initial public offering did not include a mechanism in the options to reflect the contribution to total return from the regular quarterly dividend. As a result, on February 26, 2008, OneBeacon granted 116,270 Restricted Stock Units (“RSUs”) to actively employed option holders. The options were scheduled to vest one-third on each of November 9, 2009, 2010 and 2011 subject to, for each vesting tranche of units, the attainment of 4% growth in adjusted book value per share from January 1, 2008 through the end of the calendar year immediately following the applicable vesting date.

Consistent with the terms of the RSU plan, all three tranches of RSUs vested and were deferred into the non-qualified deferred compensation plan in 2011.

Restricted Shares

On March 1, 2012, OneBeacon issued 300,000 shares of restricted stock to certain employees that vest in equal installments on February 28, 2014 and 2015. On May 25, 2011, OneBeacon issued 630,000 shares of restricted stock to its CEO that vest in equal installments on February 22, 2014, 2015, 2016 and 2017. Concurrently with the grant of the restricted stock to the CEO, 35,000 performance shares issued to the CEO for the 2011-2013 performance share cycle were forfeited. Performance share awards to the CEO for each of the subsequent five years will be reduced by 35,000 shares. The restricted shares contain dividend participation features, and therefore, are considered participating securities.

The following summarizes the recognized and unrecognized compensation expense associated with the outstanding restricted share awards for the three and nine months ended September 30, 2012 and 2011.

	Three months ended September 30,
	2012				2011
		Unamortized				Unamortized
		grant date				grant date
	Restricted shares	fair value			Restricted shares	fair value
	($ in millions)
Non-vested at beginning of period	930,000	$	11.2		630,000	$	8.5
New awards	—	—			—	—
Forfeitures	—	—			—	—
Vested	—	—			—	—
Expense recognized	—	(0.8		)	—	(0.4		)
Non-vested at end of period	930,000	$	10.4		630,000	$	8.1

	Nine months ended September 30,
	2012				2011
		Unamortized				Unamortized
		grant date				grant date
	Restricted shares	fair value			Restricted shares	fair value
	($ in millions)
Non-vested at beginning of period	630,000	$	7.7		—	$	—
New awards	300,000	4.6			630,000	8.6
Forfeitures	—	—			—	—
Vested	—	—			—	—
Expense recognized	—	(1.9		)	—	(0.5		)
Non-vested at end of period	930,000	$	10.4		630,000	$	8.1