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 March 31, 2012

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 incorporation or organization)		(I.R.S. Employer 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 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 April 27, 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) of Form 10-Q and is therefore filing this Form with reduced disclosure format.

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ONEBEACON U.S. HOLDINGS, INC.

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PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets: March 31, 2012 and December 31, 2011	2

	Consolidated Statements of Operations and Comprehensive Income: Three months ended March 31, 2012 and 2011	3

	Consolidated Statements of Common Shareholder’s Equity: Three months ended March 31, 2012 and 2011	4

	Consolidated Statements of Cash Flows: Three months ended March 31, 2012 and 2011	5

	Notes to Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

	Results of Operations — For the three months ended March 31, 2012 and 2011	30

	Liquidity and Capital Resources	40

	Critical Accounting Estimates	44

	Forward-Looking Statements	45

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	46

ITEM 4.	Controls and Procedures	46

PART II	OTHER INFORMATION

ITEM 1.	Legal Proceedings	46

ITEM 1A.	Risk Factors	46

ITEM 4.	Mine Safety Disclosure	46

ITEM 6.	Exhibits	47

SIGNATURES		48

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PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(Unaudited)
	(in millions, except share and per share amounts)
Assets
Investment securities:
Fixed maturity investments, at fair value	$	1,684.8		$	1,745.8
Short-term investments, at amortized cost (which approximates fair value)	274.9			291.8
Common equity securities, at fair value	257.2			243.5
Convertible fixed maturity investments, at fair value	72.5			72.5
Other investments	155.9			155.1
Total investments	2,445.3			2,508.7
Cash	52.7			49.0
Reinsurance recoverable on unpaid losses	2,109.0			2,167.5
Reinsurance recoverable on paid losses	25.9			16.5
Premiums receivable	254.5			230.9
Deferred acquisition costs	117.9			123.5
Ceded unearned premiums	9.7			10.7
Net deferred tax asset	133.4			145.0
Investment income accrued	10.1			12.8
Accounts receivable on unsettled investment sales	1.7			0.4
Other assets	265.2			255.2
Assets held for sale	—			132.6
Total assets	$	5,425.4		$	5,652.8
Liabilities
Loss and LAE reserves	$	3,249.6		$	3,358.6
Unearned premiums	557.9			528.0
Debt	269.8			269.7
Ceded reinsurance payable	22.4			23.4
Accounts payable on unsettled investment purchases	60.9			22.7
Other liabilities	312.8			396.2
Liabilities held for sale	—			107.6
Total liabilities	4,473.4			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, issued and outstanding, 505 shares)	936.4			950.9
Retained earnings (deficit)	12.0			(7.5		)
Accumulated other comprehensive loss, after tax:
Other comprehensive income and loss items	(10.7		)	(10.9		)
Total OB Holdings’ common shareholder’s equity	937.7			932.5
Total noncontrolling interests	14.3			14.1
Total OB Holdings’ common shareholder’s equity and noncontrolling interests	952.0			946.6
Total liabilities, OB Holdings’ common shareholder’s equity and noncontrolling interests	$	5,425.4		$	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 March 31,
	2012			2011
	($ in millions)
Revenues
Earned premiums	$	272.8		$	245.1
Net investment income	13.6			19.7
Net realized and unrealized investment gains	28.1			21.9
Net other revenues	0.1			0.8
Total revenues	314.6			287.5
Expenses
Loss and LAE	149.3			130.4
Policy acquisition expenses	57.4			49.0
Other underwriting expenses	48.8			49.3
General and administrative expenses	1.0			1.2
Interest expense on debt	4.1			6.3
Total expenses	260.6			236.2
Pre-tax income from continuing operations	54.0			51.3
Income tax expense	(18.3		)	(17.7		)
Net income from continuing operations	35.7			33.6
Loss from discontinued operations, net of tax	(0.1		)	(0.7		)
Net income including noncontrolling interests	35.6			32.9
Less: Net income attributable to noncontrolling interests	(0.6		)	(0.4		)
Net income attributable to OB Holdings’ common shareholder	35.0			32.5
Change in other comprehensive income and loss items	0.2			0.1
Comprehensive income attributable to OB Holdings’ common shareholder	$	35.2		$	32.6

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 shareholder’s equity			Common shares and paid-in surplus			Retained (deficit) earnings			Accum. other comprehensive (loss) income, after tax			Noncontrolling interests, after tax
	($ in millions)

Balances at January 1, 2012	$	932.5		$	950.9		$	(7.5	)	$	(10.9	)	$	14.1
Net income	35.0			—			35.0			—			0.6
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		)
Other comprehensive income, after tax	0.2			—			—			0.2			—
Balances at March 31, 2012	$	937.7		$	936.4		$	12.0		$	(10.7	)	$	14.3

	OB Holdings’ Common Shareholder’s Equity
	Common shareholder’s equity			Common shares and paid-in surplus			Retained (deficit) earnings			Accum. other comprehensive income, after tax		Noncontrolling interests, after tax
	($ in millions)

Balances at January 1, 2011	$	960.5		$	961.5		$	(1.3	)	$	0.3	$	19.9
Net income	32.5			—			32.5			—		0.4
Issuance of common shares	—			—			—			—		0.3
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		)
Other comprehensive income, after tax	0.1			—			—			0.1		—
Balances at March 31, 2011	$	963.1		$	950.9		$	11.8		$	0.4	$	19.7

See Notes to Consolidated Financial Statements.

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2012			2011
	($ in millions)
Cash flows from operations:
Net income including noncontrolling interests	$	35.6		$	32.9
Charges (credits) to reconcile net income to cash flows used for operations:
Net loss from discontinued operations	0.1			0.7
Net realized and unrealized investment gains	(28.1		)	(21.9		)
Deferred income tax expense	12.0			13.7
Other operating items:
Net change in loss and LAE reserves	(109.0		)	(66.4		)
Net change in unearned premiums	29.9			(40.7		)
Net change in ceded reinsurance payable	(1.0		)	(58.9		)
Net change in ceded unearned premiums	1.0			55.5
Net change in premiums receivable	(23.6		)	12.5
Net change in reinsurance recoverable on paid and unpaid losses	49.1			55.4
Net change in other assets and liabilities	(63.8		)	(41.7		)
Net cash used for operations — continuing operations	(97.8		)	(58.9		)
Net cash used for operations — discontinued operations	(2.0		)	1.4
Net cash used for operations	(99.8		)	(57.5		)
Cash flows from investing activities:
Net maturities, purchases and sales of short-term investments	(51.7		)	(46.7		)
Maturities of fixed maturity investments	66.2			126.3
Sales of fixed maturity investments	611.7			356.2
Sales of common equity securities	11.2			17.6
Sales of convertible fixed maturity investments	4.9			16.6
Distributions of other investments	5.6			18.2
Purchases of fixed maturity investments	(532.7		)	(397.2		)
Purchases of common equity securities	(17.2		)	(17.8		)
Purchases of convertible fixed maturity investments	(1.4		)	(8.6		)
Contributions for other investments	(1.5		)	(3.5		)
Net change in unsettled investment purchases and sales	36.9			27.5
Net acquisitions of property and equipment	(0.5		)	(2.1		)
Net cash provided from investing activities — continuing operations	131.5			86.5
Net cash provided from investing activities — discontinued operations	—			—
Net cash provided from investing activities	131.5			86.5
Cash flows from financing activities:
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		)	(30.0		)
Net cash used for financing activities — discontinued operations	—			—
Net cash used for financing activities	(30.0		)	(30.0		)
Net increase (decrease) in cash during period	1.7			(1.0		)
Cash reclassified from assets held for sale	5.5			—
Cash transferred as part of the AutoOne Transaction	(3.5		)	—
Net increase (decrease) excluding cash relating to the AutoOne Transaction	3.7			(1.0		)
Cash balance at beginning of period	49.0			33.2
Cash balance at end of period	$	52.7		$	32.2

Supplemental cash flows information:
Interest paid	$	—		$	—
Tax payments (refunds), including payments made under tax sharing agreements	12.2			(4.2		)

See Notes to Consolidated Financial Statements.

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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 in a multi-company pool. OB Holdings offers a wide range of specialty insurance products and services sold 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. As of March 31, 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 includes the results of the non-specialty commercial lines business, to which OB Holdings sold the renewal rights, other run-off business and certain purchase accounting adjustments relating to the OneBeacon Acquisition. 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 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 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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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 months ended March 31, 2012, $2.4 million of the $5.6 million of unamortized acquisition costs as of January 1, 2012 was recognized in expense. If OB Holdings had followed ASU 2010-26 in 2011, $1.8 million of acquisition costs that had been deferred would have been recognized in expense during the three months ended March 31, 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

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, OneBeacon 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. See Note 12 for further information regarding balances classified as held for sale and activity reported as discontinued operations.

As part of the AutoOne Transaction, Interboro LLC, the parent company of Interboro, issued a $3.0 million promissory note to OneBeacon Insurance Company (“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. Interest will accrue and be payable quarterly at a rate of LIBOR plus 550 basis points.

Except as described above, during the three months ended March 31, 2012 and 2011, there were no acquisitions or dispositions.

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NOTE 3. Reserves for Unpaid Loss and LAE

The following table summarizes the loss and LAE reserve activities of OB Holdings’ insurance subsidiaries for the three months ended March 31, 2012 and 2011:

	Three months ended March 31,
	2012			2011
	($ in millions)
Gross beginning balance	$	3,358.6		$	3,295.5
Less beginning reinsurance recoverable on unpaid losses	(2,167.5		)	(1,893.2		)
Net loss and LAE reserves	1,191.1			1,402.3
Loss and LAE incurred relating to:
Current year losses	138.8			135.5
Prior year losses	10.5			(5.1		)
Total incurred loss and LAE from continuing operations	149.3			130.4
Loss and LAE paid relating to:
Current year losses	(22.3		)	(25.1		)
Prior year losses	(177.5		)	(142.3		)
Total loss and LAE payments from continuing operations	(199.8		)	(167.4		)
Total incurred loss and LAE from discontinued operations	6.7			14.2
Total loss and LAE payments from discontinued operations	(7.6		)	(18.8		)
Net loss and LAE reserves	1,139.7			1,360.7
Net loss and LAE reserves reclassified from held for sale	64.7			—
Net loss and LAE reserves sold as part of the AutoOne Transaction	(63.8		)	—
Net ending balance	1,140.6			1,360.7
Plus ending reinsurance recoverable on unpaid losses	2,109.0			1,864.0
Gross ending balance	$	3,249.6		$	3,224.7

During the three months ended March 31, 2012, OB Holdings experienced $10.5 million of unfavorable loss and LAE reserve development on prior accident year loss reserves, with $12.4 million in Other Insurance Operations, partially offset by $1.9 million of favorable loss and LAE reserve development on prior accident year loss reserves in Specialty Insurance Operations. The unfavorable loss reserve development in the run-off business was primarily driven by case incurred development on a small number of claims related to multiple peril liability lines and general liability lines and also the impact of an adverse court ruling in Mississippi regarding a disputed assessment from an involuntary pool for hurricane Katrina claims. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and general liability lines. During the three months ended March 31, 2011, OB Holdings experienced $5.1 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $1.2 million in Specialty Insurance Operations and $3.9 million in Other Insurance Operations. The favorable loss reserve development was primarily due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and general liability lines.

In connection with purchase accounting for the OneBeacon 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 March 31, 2012 and December 31, 2011, the remaining fair value reductions to both loss and LAE reserves and reinsurance recoverable on unpaid losses were $160.0 million and $163.3 million, respectively. The net reduction to loss and LAE reserves is being accreted through an income statement charge ratably with and over the period the claims are settled.

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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, 2011, OB Holdings renewed its property catastrophe reinsurance program through April 30, 2012. The program provides coverage for OB Holdings’ property business as well as certain acts of terrorism. Under the program, the first $50.0 million of losses resulting from any single catastrophe are retained and the next $175.0 million of losses resulting from the catastrophe are reinsured in three layers, although OB Holdings retains a co-participation of 26% of losses from $50.0 million to $100.0 million and 10% of losses from $100.0 million to $175.0 million. Losses from $175.0 million to $225.0 million are fully reinsured. Any loss above $225.0 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. OB Holdings expects to renew the property catastrophe reinsurance program on substantially similar terms.

At March 31, 2012, OB Holdings had $25.9 million of reinsurance recoverables on paid losses and $2,269.0 million (gross of $160.0 million in purchase accounting adjustments, as described in Note 3) that will become recoverable if claims are paid in accordance with current reserve estimates. Reinsurance contracts do not relieve OB Holdings of its obligations. Therefore, collectability of balances due from 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 for its insurance operations, excluding industry pools and associations and affiliates of OB Holdings, based upon recoverable amounts, the percentage of total reinsurance recoverables and the reinsurers’ A.M. Best Company, Inc. (“A.M. Best”) ratings.

($ in millions)	Balance at March 31, 2012		% of total		A.M. Best Rating(1)
National Indemnity Company and General Reinsurance Corporation(2)	$	1,504.9	66	%	A++
Hanover Insurance Company	79.9		3	%	A
Tokio Marine and Nichido Fire(3)	55.0		2	%	A++
Tower Insurance Company	29.9		1	%	A-
Munich Reinsurance America	24.0		1	%	A+

(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), “A” (Excellent, which is the third highest of fifteen financial strength ratings) and “A-” (Excellent, which is the fourth highest of fifteen financial strength ratings).

(2) Includes $198.3 million of Third-Party Recoverables (as defined below), which NICO (as defined below) would pay under the terms of the NICO Cover (as defined below) if they are unable to collect from third-party reinsurers.

(3) Includes $29.0 million of reinsurance recoverables from various reinsurers that are guaranteed by Tokio Marine and Nichido Fire under the terms of a 100% quota share reinsurance agreement between Houston General Insurance Company and Tokio Marine and Nichido Fire.

In connection with the OneBeacon Acquisition, Aviva caused OB Holdings to purchase two reinsurance contracts from subsidiaries of Berkshire Hathaway Inc.: a reinsurance contract with National Indemnity Company (“NICO”), for up to $2.5 billion in old asbestos and environmental (“A&E”) claims and certain other exposures (the “NICO Cover”) and an adverse loss reserve development cover from General Reinsurance Corporation (“GRC”) for up to $570.0 million, comprised of $400.0 million of adverse loss reserve development occurring in years 2000 and prior (the “GRC Cover”) in addition to $170.0 million of reserves ceded as of the date of the OneBeacon Acquisition. The NICO Cover and GRC Cover, which were contingent on and occurred contemporaneously with the OneBeacon Acquisition, were put in place in lieu of a seller guarantee of loss and LAE reserves and are therefore accounted for under GAAP as a seller guarantee.

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Under the terms of the NICO Cover, NICO receives the economic benefit of reinsurance recoverables from certain of OB Holdings’ third party reinsurers (“Third Party Reinsurers”) in existence at the time the NICO Cover was executed (“Third Party Recoverables”). As a result, the Third Party Recoverables serve to protect the $2.5 billion limit of NICO coverage for the benefit of OB Holdings. OB Holdings estimates that on an incurred basis it has used approximately $2.3 billion of the coverage provided by NICO at March 31, 2012. Net losses paid totaled approximately $1.4 billion as of March 31, 2012. To the extent that actual experience differs from OB Holdings’ estimate of ultimate A&E losses and Third Party Recoverables, future losses could exceed the $198.3 million of protection remaining under the NICO Cover at March 31, 2012.

Pursuant to the GRC Cover, OB Holdings is not entitled to recover losses to the full contract limit if such losses are reimbursed by GRC more quickly than anticipated at the time the contract was signed. OB Holdings intends to seek reimbursement from GRC only for claims which result in payment patterns similar to those supporting its recoverables recorded pursuant to the GRC Cover. The economic cost of not submitting certain other eligible claims to GRC is primarily the investment spread between the rate credited by GRC and the rate achieved by OB Holdings on its own investments. This cost, if any, is expected to be nominal. OB Holdings has ceded estimated incurred losses of $562.0 million to GRC under the GRC Cover. As of March 31, 2012, OB Holdings has $423.7 million of reinsurance recoverable on unpaid losses outstanding under the GRC Cover.

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.

In accordance with ASC 825, 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 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 March 31, 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 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 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 months ended March 31, 2012 and 2011 consisted of the following:

	Three months ended March 31,
	2012			2011
	($ in millions)
Investment income:
Fixed maturity investments	$	12.6		$	19.1
Short-term investments	—			—
Common equity securities	1.6			1.3
Convertible fixed maturity investments	1.1			1.0
Other investments	(0.1		)	—
Gross investment income	15.2			21.4
Less investment expenses	(1.6		)	(1.7		)
Net investment income, pre-tax	$	13.6		$	19.7

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

	Three months ended March 31,
	2012		2011
	($ in millions)
Fixed maturity investments	$	14.5	$	10.6
Short-term investments	—		—
Common equity securities	3.4		2.5
Convertible fixed maturity investments	0.8		3.3
Other investments	1.1		4.8
Net realized investment gains, pre-tax	$	19.8	$	21.2

The net changes in fair value for the three months ended March 31, 2012 and 2011 are as follows:

	Three months ended March 31, 2012
	Changes in net unrealized gains and losses (1)			Changes in net foreign currency translation gains and losses (1)		Total net changes in fair value reflected in revenues (1)
	($ in millions)
Fixed maturity investments	$	(2.1	)	$	0.1	$	(2.0	)
Short-term investments	—			—		—
Common equity securities	4.3			—		4.3
Convertible fixed maturity investments	2.2			—		2.2
Other investments	3.8			—		3.8
Total	$	8.2		$	0.1	$	8.3

	Three months ended March 31, 2011
	Changes in net unrealized gains and losses (1)			Changes in net foreign currency translation gains and losses (1)		Total net changes in fair value reflected in revenues (1)
	($ in millions)
Fixed maturity investments	$	(3.9	)	$	0.1	$	(3.8	)
Short-term investments	—			—		—
Common equity securities	5.7			—		5.7
Convertible fixed maturity investments	(2.8		)	—		(2.8		)
Other investments	1.6			—		1.6
Total	$	0.6		$	0.1	$	0.7

(1) Includes changes in net deferred gains and losses on sales of investments between OB Holdings and entities under White Mountains’ common control of $(0.1) million and $(0.4) million, pre-tax, for the three months ended March 31, 2012 and 2011, respectively.

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 March 31, 2012 and December 31, 2011 were as follows:

	March 31,			December 31,
	2012			2011
	($ in millions)
Investment securities:
Gross unrealized investment gains	$	115.2		$	118.0
Gross unrealized investment losses	(10.1		)	(21.2		)
Net unrealized gains from investment securities	105.1			96.8
Income taxes	(36.7		)	(33.9		)
Total net unrealized investment gains, after tax	$	68.4		$	62.9

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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’ fixed maturity investments as of March 31, 2012 and December 31, 2011 were as follows:

	March 31, 2012
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
	($ in millions)
U.S. Government and agency obligations	$	203.1	$	1.3	$	—		$	—	$	204.4
Debt securities issued by industrial corporations	588.0		28.5		(0.6		)	—		615.9
Municipal obligations	2.2		—		—			—		2.2
Asset-backed securities	768.6		4.5		(1.3		)	—		771.8
Foreign government obligations	7.6		0.5		—			—		8.1
Preferred stocks	78.3		4.4		(0.3		)	—		82.4
Total fixed maturity investments	$	1,647.8	$	39.2	$	(2.2	)	$	—	$	1,684.8

	December 31, 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	$	213.6	$	1.8	$	—		$	—		$	215.4
Debt securities issued by industrial 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.

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 March 31, 2012 and December 31, 2011 were as follows:

	March 31, 2012
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
	($ in millions)
Common equity securities	$	228.9	$	33.2	$	(4.9	)	$	—	$	257.2
Convertible fixed maturity investments	67.0		5.6		(0.1		)	—		72.5
Other investments	121.6		37.2		(2.9		)	—		155.9

	December 31, 2011
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying 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

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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 March 31, 2012 and December 31, 2011, approximately 90% 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.

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 March 31, 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 March 31, 2012 and December 31, 2011, other investments reported at fair value represented approximately 6% and 5%, respectively, of the investment portfolio recorded at fair value. Other investments accounted for at fair value as of March 31, 2012 and December 31, 2011 were comprised of $54.2 million and $53.5 million, respectively, in hedge funds, $66.1 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 both March 31, 2012 and December 31, 2011, OneBeacon held investments in 9 hedge funds and 14 private equity funds. The largest investment in a single fund was $12.6 million and $13.7 million, respectively, at March 31, 2012 and December 31, 2011. As of March 31, 2012 and December 31, 2011, other investments also included $21.5 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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The fair value measurements at March 31, 2012 and December 31, 2011 and their related inputs are as follows:

	Fair value at March 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	204.4	$	204.4	$	—	$	—
Debt securities issued by corporations:
Consumer	212.6		—		212.6		—
Industrial	118.0		—		118.0		—
Financial	67.7		—		67.7		—
Communications	37.9		—		37.9		—
Energy	48.0		—		48.0		—
Basic materials	77.8		—		77.8		—
Utilities	38.7		—		38.7		—
Technology	15.2		—		15.2		—
Debt securities issued by corporations	615.9		—		615.9		—
Municipal obligations	2.2		—		2.2		—
Asset-backed securities	771.8		—		735.9		35.9
Foreign government obligations	8.1		7.4		0.7		—
Preferred stocks	82.4		—		12.6		69.8
Fixed maturity investments	1,684.8		211.8		1,367.3		105.7
Short-term investments	274.9		274.9		—		—
Common equity securities:
Financials	71.4		70.6		—		0.8
Basic Materials	50.5		50.5		—		—
Consumer	66.8		66.7		0.1		—
Energy	31.2		31.2		—		—
Utilities	17.0		17.0		—		—
Other	20.3		20.3		—		—
Common equity securities	257.2		256.3		0.1		0.8
Convertible fixed maturity investments	72.5		—		72.5		—
Other investments(1)	134.4		—		—		134.4
Total(1)	$	2,423.8	$	743.0	$	1,439.9	$	240.9

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	Fair value at December 31, 2011(2)		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 $21.5 million and $21.8 million, respectively, associated with a tax advantaged federal affordable housing development fund accounted for using the equity method as of March 31, 2012 and December 31, 2011.

(2) 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 both March 31, 2012 and December 31, 2011, OB Holdings held one private preferred stock that represented 85% 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 $40.1 million and $36.9 million, respectively, of liabilities recorded at fair value and included in other liabilities as of March 31, 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 March 31, 2012 and December 31, 2011, all of the liabilities included in the $40.1 million and $36.9 million, respectively, have been classified as Level 1 measurements.

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

	March 31, 2012		December 31, 2011
	($ in millions)
AA	$	45.1	$	59.2
A	277.2		272.9
BBB	281.6		342.7
BB	7.4		6.1
Other	4.6		4.6
Debt securities issued by corporations	$	615.9	$	685.5

Rollforwards of Fair Value Measurements by Level

The changes in Level 1 fair value measurements for the three months ended March 31, 2012 are as follows:

	Fixed maturity investments			Common equity securities			Convertible bonds		Other 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

(1) Excludes short-term investments which have been classified as Level 1 measurements.

The changes in Level 2 fair value measurements for the three months ended March 31, 2012 are as follows:

	Fixed maturity investments			Common equity securities		Convertible bonds			Other investments		Total
	($ in millions)
Balance at January 1, 2012	$	1,568.7		$	0.1	$	72.5		$	—	$	1,641.3
Amortization/accretion	(2.6		)	—		0.6			—		(2.0		)
Total net realized and unrealized gains (losses)	6.6			—		3.0			—		9.6
Purchases	519.0			—		1.4			—		520.4
Sales	(724.4		)	—		(5.0		)	—		(729.4		)
Transfers in	—			—		—			—		—
Transfers out	—			—		—			—		—
Balance at March 31, 2012	$	1,367.3		$	0.1	$	72.5		$	—	$	1,439.9

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The changes in Level 3 fair value measurements for the three months ended March 31, 2012 are as follows:

	Fixed maturity investments			Common equity securities		Convertible bonds		Other investments(1)			Total(1)
	($ in millions)
Balance at January 1, 2012	$	66.1		$	0.8	$	—	$	133.3		$	200.2
Amortization/accretion	0.1			—		—		—			0.1
Total net realized and unrealized gains (losses)	5.8			—		—		4.9			10.7
Purchases	34.1			—		—		1.2			35.3
Sales	(0.4		)	—		—		(5.0		)	(5.4		)
Transfers in	—			—		—		—			—
Transfers out	—			—		—		—			—
Balance at March 31, 2012	$	105.7		$	0.8	$	—	$	134.4		$	240.9

(1) Excludes the carrying value of $21.5 million associated with a tax advantaged federal affordable housing development fund accounted for using the equity method.

The changes in Level 3 fair value measurements for the three months ended March 31, 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		)	—		6.2			6.7
Purchases	0.3			3.7			—		1.8			5.8
Sales	—			(0.1		)	—		(16.8		)	(16.9		)
Transfers in	—			—			—		—			—
Transfers out	(27.7		)	—			—		—			(27.7		)
Balance at March 31, 2011	$	73.5		$	42.0		$	—	$	141.4		$	256.9

(1) Excludes the carrying value of $21.6 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 $27.7 million for the three months ended March 31, 2011 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.

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Significant Unobservable Inputs

As described above, in certain circumstances, OneBeacon estimates the fair value of investments using industry standard pricing models and both observable and unobservable inputs.

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3 at March 31, 2012:

Description	Fair Value		Ratings Range(1)	Valuation Techniques	Unobservable Inputs	Input Range(1)
($ in millions)
Agency residential mortgage-backed securities	$	33.6	AA+	Discounted cash flow	Prepayment rate Discount yield	15 CPR (2) 2.1%

Non-agency residential mortgage-backed securities	$	2.3	CCC	Discounted cash flow	Prepayment rate Probability of default Loss severity Discount yield	10 CPR CDR Vector (3) 40.0% 8.0%

Preferred stock	$	69.8	NR	Discounted cash flow	Discount yield	8.8%

(1) As of March 31, 2012, each asset type consists of one security.

(2) CPR refers to “Constant Prepayment Rate”.

(3) CDR refers to “Constant Default Rate”.

The assumed prepayment rate is a significant unobservable input used to estimate the fair value of investments in agency residential mortgage-backed securities (“RMBS”). Generally for bonds priced at a premium, increases in prepayment speeds will result in a lower fair value, while decreases in prepayment speeds may result in a higher fair value. Unobservable inputs used to estimate the fair value of investments in non-agency RMBS are the assumed prepayment rate, probability of default and loss severity. These three items can have material, yet varying impacts (either positive or negative) on the value of non-agency RMBS, the direction and severity of which are dependent on the deal structure and collateral performance.

The following table summarizes the change in net unrealized gains or losses for assets designated as Level 3 for the three months ended March 31, 2012 and 2011:

	Three months ended March 31,
	2012		2011
	($ in millions)
Fixed maturity investments	$	5.7	$	1.8
Short-term investments	—		—
Common equity securities	—		(1.3		)
Convertible fixed maturity investments	—		—
Other investments	3.8		1.5
Total	$	9.5	$	2.0

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Asset-backed Securities

OB Holdings purchases commercial and residential mortgage-backed securities to maximize its risk adjusted returns in the context of a diversified portfolio. OB Holdings’ 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 50 points of subordination on average for floating rate CMBS as of March 31, 2012. 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. OB Holdings believes this structural protection mitigates the risk of loss tied to refinancing challenges facing the commercial real estate market. As of March 31, 2012, on average approximately 1% of the underlying loans were reported as non-performing for all CMBS held by OB Holdings. OB Holdings is not an originator of residential mortgage loans and did not hold any RMBS categorized as sub-prime as of March 31, 2012. OB Holdings’ investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage-backed securities as of March 31, 2012. OB Holdings 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., OB Holdings considers investments backed primarily by second-liens to be sub-prime risks regardless of credit scores or other metrics).

There are also mortgage-backed securities that OB Holdings 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 OB Holdings’ review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. As of March 31, 2012, OB Holdings held $2.3 million of mortgage-backed securities that were classified as non-prime. OB Holdings’ non-agency residential mortgage-backed portfolio is generally of moderate average life, fixed rate and structurally senior. OB Holdings does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.

The following table summarizes the carrying value of OB Holdings’ asset-backed securities as of March 31, 2012 and December 31, 2011:

	March 31, 2012						December 31, 2011
	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
	($ in millions )
Mortgage-backed securities:
Agency:
GNMA	$	498.9	$	498.9	$	—	$	588.4	$	588.4	$	—
FNMA	130.6		130.6		—		156.4		156.4		—
FHLMC	37.6		4.0		33.6		4.9		4.9		—
Total agency(1)	667.1		633.5		33.6		749.7		749.7		—
Non-agency:
Residential	13.6		11.3		2.3		13.7		11.4		2.3
Commercial	75.3		75.3		—		58.4		58.4		—
Total Non-agency	88.9		86.6		2.3		72.1		69.8		2.3
Total mortgage-backed securities	756.0		720.1		35.9		821.8		819.5		2.3
Other asset-backed securities:
Credit card receivables	5.2		5.2		—		46.0		46.0		—
Vehicle receivables	10.6		10.6		—		3.3		3.3		—
Total other asset-backed securities	15.8		15.8		—		49.3		49.3		—
Total asset-backed securities	$	771.8	$	735.9	$	35.9	$	871.1	$	868.8	$	2.3

(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).

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Non-agency Mortgage-backed Securities

The security issuance years of OB Holdings’ investments in non-agency RMBS and non-agency CMBS securities as of March 31, 2012 are as follows:

	Security Issuance Year
	Fair Value		2007		2009		2010		2011		2012
	($ in millions)
Non-agency RMBS	$	13.6	$	2.3	$	—	$	8.1	$	3.2	$	—
Non-agency CMBS	75.3		4.5		3.9		4.1		61.8		1.0
Total	$	88.9	$	6.8	$	3.9	$	12.2	$	65.0	$	1.0

Non-agency Residential Mortgage-backed Securities

The classification of the underlying collateral quality and the tranche levels of OB Holdings’ non-agency RMBS securities are as follows as of March 31, 2012:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Prime	$	11.3	$	—	$	11.3	$	—
Non-prime	2.3		2.3		—		—
Total	$	13.6	$	2.3	$	11.3	$	—

(1) At issuance, Super Senior were rated AAA by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) or Aaa by Moody’s Investors Service, Inc. 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 March 31, 2012:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Fixed rate CMBS	$	70.8	$	25.1	$	45.7	$	—
Floating rate CMBS	4.5		4.5		—		—
Total	$	75.3	$	29.6	$	45.7	$	—

(1) At issuance, Super Senior were rated AAA by Standard & Poor’s, Aaa by Moody’s or AAA by Fitch Ratings 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.

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Other Investments

OB Holdings 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 table summarizes investments in hedge funds and private equity funds at March 31, 2012 and December 31, 2011:

	March 31, 2012				December 31, 2011
	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		—		0.2		—
Long/short equity	36.3		—		36.1		—
Long/short equity activist	2.5		—		2.1		—
Total hedge funds	$	54.2	$	—	$	53.5	$	—
Private equity funds
Insurance	$	3.2	$	0.1	$	3.3	$	0.1
Distressed residential real estate	12.2		—		13.7		—
Energy infrastructure and services	15.6		4.4		16.3		4.6
Healthcare	1.8		3.2		1.1		3.5
Multi-sector	20.1		5.1		19.3		5.2
Private equity secondaries	7.3		2.4		7.6		2.6
Real estate	5.9		0.1		4.4		0.1
Total private equity funds	$	66.1	$	15.3	$	65.7	$	16.1
Total hedge funds and private equity funds(1)	$	120.3	$	15.3	$	119.2	$	16.1

(1) Other investments also includes $14.1 million of an investment in a community reinvestment vehicle as of March 31, 2012 and December 31, 2011 and $21.5 million and $21.8 million, respectively, of an investment in a tax advantaged federal affordable housing development fund as of March 31, 2012 and December 31, 2011.

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 March 31, 2012 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	$	—	$	—	$	—	$	6.6	$	6.6
Quarterly	25.2		8.1		11.7		—		45.0
Annual	—		—		2.4		0.2		2.6
Total	$	25.2	$	8.1	$	14.1	$	6.8	$	54.2

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 March 31, 2012, $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 March 31, 2012.

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OB Holdings has also submitted redemption requests for certain of its investments in active hedge funds. At March 31, 2012, redemptions of $2.5 million were outstanding. The date at which such redemptions will be received is not determinable at March 31, 2012. 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 March 31, 2012, 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	$	15.4	$	12.0	$	38.7	$	—	$	66.1

NOTE 6. Debt

OB Holdings’ debt outstanding as of March 31, 2012 and December 31, 2011 consisted of the following:

	March 31, 2012			December 31, 2011
	($ in millions)
Senior unsecured notes, at face value	$	269.9		$	269.9
Unamortized original issue discount	(0.1		)	(0.2		)
Senior unsecured notes, carrying value	$	269.8		$	269.7

Senior Notes

In May 2003, the Company issued $700.0 million face value of senior unsecured debt through a public offering, at an issue price of 99.7% (the “Senior Notes”) and received $693.4 million of proceeds. The Senior Notes bear an annual interest rate of 5.875%, payable semi-annually in arrears on May 15 and November 15, until maturity on May 15, 2013, and are fully and unconditionally guaranteed as to the payment of principal and interest by White Mountains. Refer to “Note 15. Related Party Disclosures” of the Company’s 2011 Annual Report on Form 10-K. The Company incurred $7.3 million in expenses related to the issuance of the Senior Notes (including the $4.5 million underwriting discount), which have been deferred and are being recognized into interest expense over the life of the Senior Notes. Taking into effect the amortization of the original issue discount and all underwriting and issuance expenses, the Senior Notes have an effective yield to maturity of approximately 6.0% per annum. At March 31, 2012, White Mountains and the Company were in compliance with all of the covenants under the Senior Notes.

NOTE 7. Segment Information

OB Holdings’ reportable segments are: (1) Specialty Insurance Operations, (2) Other Insurance Operations and (3) Investing, Financing and Corporate Operations. OB Holdings has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each of the Company’s subsidiaries and affiliates; (ii) the manner in which the Company’s subsidiaries and affiliates are organized; (iii) the existence of primary managers responsible for specific subsidiaries and affiliates; and (iv) the organization of information provided to the chief operating decision makers and OBIG’s Board of Directors (the “Board”).

The Specialty Insurance Operations segment is comprised of a number of underwriting units that are aggregated into three major underwriting units for financial reporting: MGA Business, Specialty Industries and Specialty Products, representing an aggregation of OB Holdings’ specialty businesses based on those that are distributed through MGAs, those that are targeted to specific industries and those that offer targeted products. Currently, OB Holdings’ specialty lines products relate to professional liability, marine, collector cars and boats, technology, property and inland marine, excess property, group accident, entertainment, sports and leisure, environmental, public entities, energy and tuition refund. In addition, in April 2012, OB Holdings announced the formation of its newest specialty business, OneBeacon Program Group which is included in MGA Business. In determining the aggregation of OB Holdings’ specialty businesses, management considered many factors, including the nature of its insurance products and services and the production processes, the types or classes of customers, methods of distribution and the regulatory environment.

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The Other Insurance Operations segment includes the results of the non-specialty commercial lines business which was transferred, the traditional personal lines business which was sold, other run-off business which consists of national accounts and programs and regional agency business transferred to Liberty Mutual Insurance Group effective November 1, 2001, and certain purchase accounting adjustments relating to the OneBeacon Acquisition.

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 and its intermediate holding company subsidiaries. Invested assets are not allocated to Specialty Insurance Operations or Other Insurance Operations since OB Holdings does not manage its assets by segment. Invested assets, net investment income and net realized and unrealized investment gains (losses) related to OB Holdings’ Specialty Insurance Operations and Other Insurance Operations segments are included in the Investing, Financing and Corporate Operations segment since these assets are available for payment of losses and expenses for all segments. Debt and the related interest expense on debt also are not allocated to or managed by segment and are included in the Investing, Financing and Corporate Operations segment.

Financial information for OB Holdings’ segments follows:

	Specialty Insurance Operations			Other Insurance Operations			Investing, Financing and Corporate Operations			Total
	($ in millions)
Three months ended March 31, 2012
Earned premiums	$	271.8		$	1.0		$	—		$	272.8
Loss and LAE	(136.5		)	(12.8		)	—			(149.3		)
Policy acquisition expenses	(58.2		)	0.8			—			(57.4		)
Other underwriting expenses	(47.4		)	(1.4		)	—			(48.8		)
Total underwriting income	29.7			(12.4		)	—			17.3
Net investment income	—			—			13.6			13.6
Net realized and unrealized investment gains	—			—			28.1			28.1
Net other revenues (expenses)	0.1			0.2			(0.2		)	0.1
General and administrative expenses	(0.3		)	—			(0.7		)	(1.0		)
Interest expense on debt	—			—			(4.1		)	(4.1		)
Pre-tax income (loss) from continuing operations	$	29.5		$	(12.2	)	$	36.7		$	54.0
Three months ended March 31, 2011
Earned premiums	$	241.9		$	3.2		$	—		$	245.1
Loss and LAE	(132.6		)	2.2			—			(130.4		)
Policy acquisition expenses	(49.2		)	0.2			—			(49.0		)
Other underwriting expenses	(46.4		)	(2.9		)	—			(49.3		)
Total underwriting income	13.7			2.7			—			16.4
Net investment income	—			—			19.7			19.7
Net realized and unrealized investment gains	—			—			21.9			21.9
Net other revenues (expenses)	0.1			0.9			(0.2		)	0.8
General and administrative expenses	(0.5		)	—			(0.7		)	(1.2		)
Interest expense on debt	—			—			(6.3		)	(6.3		)
Pre-tax income from continuing operations	$	13.3		$	3.6		$	34.4		$	51.3

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	Specialty Insurance Operations		Other Insurance Operations		Investing, Financing and Corporate Operations		Total
	($ in millions)
March 31, 2012
Total investments	$	—	$	—	$	2,445.3	$	2,445.3
Reinsurance recoverable on paid and unpaid losses	54.9		2,080.0		—		2,134.9
Deferred acquisition costs	117.9		—		—		117.9
Ceded unearned premiums	9.6		0.1		—		9.7
Loss and LAE reserves	858.1		2,391.5		—		3,249.6
Unearned premiums	555.9		2.0		—		557.9
Debt	—		—		269.8		269.8
December 31, 2011
Total investments	$	—	$	—	$	2,508.7	$	2,508.7
Reinsurance recoverable on paid and unpaid losses	62.7		2,121.3		—		2,184.0
Deferred acquisition costs	123.3		0.2		—		123.5
Ceded unearned premiums	10.5		0.2		—		10.7
Loss and LAE reserves	868.6		2,490.0		—		3,358.6
Unearned premiums	525.6		2.4		—		528.0
Debt	—		—		269.7		269.7

The following tables provide net written premiums, earned premiums and ratios for OB Holdings’ insurance operations by segment and in total, as well as for the three major underwriting units within Specialty Insurance Operations, for the three months ended March 31, 2012 and 2011:

($ in millions)	MGA Business			Specialty Industries			Specialty Products			Specialty Insurance Operations(1)			Other Insurance Operations(2)		Total
Three months ended March 31, 2012
Net written premiums	$	55.7		$	110.3		$	137.1		$	303.1		$	0.5	$	303.6
Earned premiums	72.9			98.7			100.2			271.8			1.0		272.8
Ratios:
Loss and LAE	42.5		%	50.2		%	55.9		%	50.2		%	n/m		54.7		%
Expense	44.3			38.2			35.5			38.9			n/m		38.9
Total GAAP combined	86.8		%	88.4		%	91.4		%	89.1		%	n/m		93.6		%
Three months ended March 31, 2011
Net written premiums	$	48.5		$	85.6		$	124.2		$	258.3		$	1.6	$	259.9
Earned premiums	66.0			80.9			95.0			241.9			3.2		245.1
Ratios:
Loss and LAE	45.3		%	57.0		%	59.6		%	54.8		%	n/m		53.2		%
Expense	42.1			42.4			35.3			39.5			n/m		40.1
Total GAAP combined	87.4		%	99.4		%	94.9		%	94.3		%	n/m		93.3		%

(1) Within Specialty Insurance Operations, OB Holdings reports its businesses through three major underwriting units, representing an aggregation of its specialty lines businesses. MGA Business includes Collector Cars and Boats, A.W.G. Dewar and OneBeacon Entertainment. In addition, in April 2012, OB Holdings announced the formation of its newest specialty business, OneBeacon Program Group which is included in MGA Business. Specialty Industries includes International Marine Underwriters, OneBeacon Technology Insurance, OneBeacon Accident Group, OneBeacon Government Risks and OneBeacon Energy Group. Specialty Products includes OneBeacon Professional Insurance, OneBeacon Property and Inland Marine, OneBeacon Specialty Property and OneBeacon Excess and Surplus.

(2) As Other Insurance Operations consists of business in run-off, GAAP ratios are not meaningful.

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NOTE 8. Retirement Plans

OneBeacon sponsors qualified and non-qualified, non-contributory, defined benefit pension plans covering substantially all employees who were employed as of December 31, 2001 and former employees who had met the eligibility requirements, as well as retirees. Current plans include the OneBeacon qualified pension plan (the “Qualified Plan”) and the OneBeacon non-qualified pension plan (the “Non-qualified Plan”) (collectively the “Plans”). OneBeacon’s Plans were frozen and curtailed in the fourth quarter of 2002.

The components of net periodic benefit cost (income) for the three months ended March 31, 2012 and 2011 were as follows:

	Three months ended March 31,
	2012			2011
	($ in millions)
Service cost	$	0.2		$	0.2
Interest cost	1.2			1.3
Expected return on plan assets	(1.7		)	(1.9		)
Amortization of unrecognized loss	0.2			0.1
Net periodic pension income before special termination benefits expense	(0.1		)	(0.3		)
Special termination benefits expense(1)	—			0.2
Net periodic benefit income	$	(0.1	)	$	(0.1	)

(1) Special termination benefits represent additional payments made from the Qualified Plan to certain vested participants when their employment was terminated due to a reduction in force.

OneBeacon does not expect to make a contribution to its Qualified Plan in 2012. OneBeacon anticipates contributing $2.4 million to the Non-qualified Plan in 2012, for which OneBeacon has assets held in a rabbi trust. As of March 31, 2012, $0.6 million in contributions have been made to the Non-qualified Plan.

NOTE 9. Employee Share-Based Incentive Compensation Plans

OB Holdings’ share-based compensation plans consist of performance shares. OB Holdings’ 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 OBIG’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 OB Holdings’ deferred compensation plan. OB Holdings expenses the full cost of all its share-based compensation.

OB Holdings 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 OB Holdings performance share awards are subject to the fair value measurement and recognition requirements of ASC 718.

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Performance Shares

The following summarizes performance share activity for performance shares whose value is based upon the market price of an underlying OBIG common share (“OB Performance Shares”) for the three months ended March 31, 2012 and 2011:

	Three Months Ended March 31,
	2012					2011
	Target OB Performance Shares outstanding		Accrued expense			Target OB Performance Shares outstanding		Accrued expense
	($ in millions)
Beginning of period	642,667		$	9.7		1,464,295		$	18.5
Payments and deferrals (1)(2)(3)	(249,733	)	(7.5		)	(936,150	)	(10.5		)
New awards	181,290		—			194,900		—
Forfeitures and net change in assumed forfeitures	(4,479	)	—			(4,873	)	—
Expense recognized	—		1.0			—		0.4
End of period	569,745		$	3.2		718,172		$	8.4

(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 share expense at March 31, 2012 for each performance cycle:

	Target OB Performance Shares outstanding		Accrued expense
	($ in millions)
Performance cycle:
2009—2011	9,168		$	0.3
2010—2012	242,098		1.6
2011—2013	151,563		1.1
2012—2014	181,290		0.3
Sub-total	584,119		3.3
Assumed forfeitures	(14,374	)	(0.1		)
Total at March 31, 2012	569,745		$	3.2

If 100% of the outstanding performance shares had been vested on March 31, 2012, the total additional compensation cost to be recognized would have been $4.6 million, based on current accrual factors at March 31, 2012 (common share price and payout assumptions).

All performance shares earned and paid for the 2010-2012, 2009-2011 and 2008-2010 performance cycles were settled in cash or by deferral into OB Holdings’ deferred compensation plan.

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NOTE 10. Income Taxes

OBH and its subsidiaries are domiciled in the United States. Substantially all of OB Holdings’ operations are taxed in the United States.

OB Holdings’ income tax expense related to pre-tax income from continuing operations for the three months ended March 31, 2012 and 2011 represented net effective tax rates of 33.9% and 34.5%, respectively. The effective tax rates for the three months ended March 31, 2012 and 2011 were lower than the U.S. statutory rate of 35% due to tax exempt interest and dividend received deduction.

In arriving at the effective tax rate for the three months ended March 31, 2012 and 2011, OB Holdings forecasted the change in net realized and unrealized investment gains or losses for the years ending December 31, 2012 and 2011, respectively, and included these gains or losses in the effective tax rate calculation pursuant to ASC 740-270.

OB Holdings classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. With few exceptions, OB Holdings is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2005. OBH and its subsidiaries join in the filing of a federal consolidated tax return. The consolidated parent, which is not included in these financial statements, is OneBeacon U.S. Financial Services, Inc. (“OBFS”). In October 2008, the IRS commenced examination of OBFS’ U.S. income tax returns for 2005 and 2006. The estimated total assessment, including interest and utilization of alternative minimum and foreign tax credit carryovers, is $19.8 million. The total assessment relating to OB Holdings, including interest, is $21.1 million. OBFS disagrees with the adjustments proposed by the IRS and intends to defend its position. The timing of the resolution of these issues is uncertain, however, it is reasonably possible that the resolution could occur within the next twelve months. An estimate of the range of potential outcomes cannot be made at this time. When ultimately settled, OB Holdings does not expect the resolution of this examination to result in a material change to its financial position.

On July 28, 2011, the IRS commenced an examination of OBFS’ U.S. income tax returns for 2007, 2008 and 2009. OB Holdings does not expect a resolution of this examination to result in a material change to its financial position.

NOTE 11. Fair Value of Financial Instruments

ASC 825 requires disclosure of fair value information of financial instruments. For certain financial instruments where quoted market prices are not available, other independent valuation techniques and assumptions are used. Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. Certain financial instruments are excluded from disclosure, including insurance contracts, other than financial guarantees and investment contracts. OB Holdings carries its financial instruments on its balance sheet at fair value with the exception of its fixed-rate, long-term indebtedness.

The fair values of the fixed-rate, long-term indebtedness were estimated by using quoted market prices. Considerable judgment is required to develop such estimates of fair value. Therefore, the estimate provided herein is not necessarily indicative of the amounts that could be realized in a current market exchange.

At March 31, 2012 and December 31, 2011, the fair value of OBH’s Senior Notes (its fixed-rate, long-term indebtedness) based on quoted market prices was $277.7 million and $277.3 million, respectively, which compared to a carrying value of $269.8 million and $269.7 million, respectively.

NOTE 12. Discontinued Operations

On February 22, 2012, OBIG and certain of its subsidiaries completed the sale of the AutoOne business to Interboro. The AutoOne Transaction included the sale of two insurance entities, AOIC and AOSIC, through which substantially all of the AutoOne business was written on a direct basis. The AutoOne Transaction required 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 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.

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As of December 31, 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 Transaction, are presented separately as single line items in the asset and liability sections of the consolidated balance sheet as of December 31, 2011. The following summarizes the major categories of assets and liabilities associated with the business classified as held for sale:

	December 31, 2011
	($ in millions)
Investments	$	111.8
Cash	5.5
Premiums receivable	8.8
Deferred acquisition costs	2.2
Net deferred tax asset	1.9
Other assets	2.4
Total assets held for sale	$	132.6
Loss and LAE reserves	$	64.7
Unearned premiums	34.1
Other liabilities	8.8
Total liabilities held for sale	$	107.6
Net assets held for sale	$	25.0

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 income and cash flows 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 OB Holdings 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 year ended December 31, 2011, OB Holdings recorded a net charge of $29.6 million pre-tax, $19.2 million after tax, reflecting the estimated loss on sale of the AutoOne business, which includes the $25.0 million of net assets held for sale as well as estimates for transaction costs. The following summarizes the results of operations, including related income taxes associated with the business classified as discontinued operations:

	Three months ended March 31,
	2012			2011
	($ in millions)
Net written premiums	$	2.2		$	18.2
Revenues
Earned premiums	$	7.8		$	18.4
Total revenues	7.8			18.4
Expenses
Loss and LAE	6.7			14.2
Policy acquisition expenses	1.0			2.0
Other underwriting expenses	0.2			3.1
Total expenses	7.9			19.3
Pre-tax loss	(0.1		)	(0.9		)
Income tax benefit	—			0.2
Loss from discontinued operations, net of tax	$	(0.1	)	$	(0.7	)

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains “forward-looking statements.” Statements that are not historical in nature are forward-looking statements. OB Holdings cannot promise that its expectations in such forward-looking statements will turn out to be correct. OB Holdings’ actual results could be materially different from and worse than its expectations. See “Forward-Looking Statements” on page 45 for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

Significant Transactions

AutoOne. On February 22, 2012, OBIG and certain of its subsidiaries completed the sale of AutoOne Insurance business (AutoOne) to Interboro Holdings, Inc. (Interboro) (the AutoOne Transaction). AutoOne 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 AutoOne Transaction, AutoOne has been presented as discontinued operations in the statements of operations with the prior period reclassified to conform to the current presentation. Pursuant to the terms of the AutoOne Transaction, at closing we 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, we 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.

Results of Operations

Review of Consolidated Results

A summary of our consolidated financial results for the three months ended March 31, 2012 and 2011 is as follows:

	Three months ended March 31,
	2012			2011
	($ in millions)
Net written premiums	$	303.6		$	259.9
Revenues
Earned premiums	$	272.8		$	245.1
Net investment income	13.6			19.7
Net realized and unrealized investment gains	28.1			21.9
Net other revenues	0.1			0.8
Total revenues	314.6			287.5
Expenses
Loss and LAE	149.3			130.4
Policy acquisition expenses	57.4			49.0
Other underwriting expenses	48.8			49.3
General and administrative expenses	1.0			1.2
Interest expense on debt	4.1			6.3
Total expenses	260.6			236.2
Pre-tax income from continuing operations	54.0			51.3
Income tax expense	(18.3		)	(17.7		)
Net income from continuing operations	35.7			33.6
Loss from discontinued operations, net of tax	(0.1		)	(0.7		)
Net income including noncontrolling interests	35.6			32.9
Less: Net income attributable to noncontrolling interests	(0.6		)	(0.4		)
Net income attributable to OB Holdings’ common shareholder	35.0			32.5
Change in other comprehensive income and loss items	0.2			0.1
Comprehensive income attributable to OB Holdings’ common shareholder	$	35.2		$	32.6

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The following table provid

OneBeacon U.S. Holdings, Inc. 10-Q