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 June 30, 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

601 Carlson Parkway
Minnetonka, Minnesota		55305
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Large accelerated filer o		Accelerated Filer o

Non-accelerated filer x		Smaller reporting company o

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

As of August 3, 2012, there were 505 outstanding shares of Common Stock, $1.00 par value per share, of the Registrant.

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

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ONEBEACON U.S. HOLDINGS, INC.

PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets: As of June 30, 2012 and December 31, 2011	2

	Consolidated Statements of Operations and Comprehensive Income: Three and six months ended June 30, 2012 and 2011	3

	Consolidated Statements of Common Shareholder’s Equity: Six months ended June 30, 2012 and 2011	4

	Consolidated Statements of Cash Flows: Six months ended June 30, 2012 and 2011	5

	Notes to Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Results of Operations —For the three and six months ended June 30, 2012 and 2011	36

	Liquidity and Capital Resources	51

	Critical Accounting Estimates	55

	Forward-Looking Statements	56

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	57

ITEM 4.	Controls and Procedures	57

PART II	OTHER INFORMATION

ITEM 1.	Legal Proceedings	57

ITEM 1A.	Risk Factors	57

ITEM 4.	Mine Safety Disclosure	58

ITEM 6.	Exhibits	58

SIGNATURES		59

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PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2012			2011
	(Unaudited)
	(in millions, except
	share and per share
	amounts)
Assets
Investment Securities:
Fixed maturity investments, at fair value	$	1,855.9		$	1,745.8
Short-term investments, at amortized cost (which approximates fair value)	118.4			291.8
Common equity securities, at fair value	243.4			243.5
Convertible fixed maturity investments, at fair value	68.3			72.5
Other investments	155.3			155.1
Total investments	2,441.3			2,508.7
Cash	26.9			49.0
Reinsurance recoverable on unpaid losses	2,040.7			2,167.5
Reinsurance recoverable on paid losses	24.2			16.5
Premiums receivable	275.9			230.9
Deferred acquisition costs	120.9			123.5
Ceded unearned premiums	10.9			10.7
Net deferred tax asset	138.3			145.0
Investment income accrued	12.0			12.8
Accounts receivable on unsettled investment sales	7.0			0.4
Other assets	255.9			255.2
Assets held for sale	—			132.6
Total assets	$	5,354.0		$	5,652.8
Liabilities
Loss and LAE reserves	$	3,175.3		$	3,358.6
Unearned premiums	570.4			528.0
Debt	269.8			269.7
Ceded reinsurance payable	26.6			23.4
Accounts payable on unsettled investment purchases	37.8			22.7
Other liabilities	312.6			396.2
Liabilities held for sale	—			107.6
Total liabilities	4,392.5			4,706.2
OB Holdings’ common shareholder’s equity and noncontrolling interests
OB Holdings’ common shareholder’s equity:
Common shares and paid-in surplus (par value $1.00, issued and outstanding, 505 shares	936.4			950.9
Retained earnings (deficit)	21.2			(7.5		)
Accumulated other comprehensive loss, after tax:
Other comprehensive income and loss items	(10.6		)	(10.9		)
Total OB Holdings’ common shareholder’s equity	947.0			932.5
Total noncontrolling interests	14.5			14.1
Total OB Holdings’ common shareholder’s equity and noncontrolling interests	961.5			946.6
Total liabilities, OB Holdings’ common shareholder’s equity and noncontrolling interests	$	5,354.0		$	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						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	($ in millions)
Revenues
Earned premiums	$	282.0		$	247.5		$	554.8		$	492.6
Net investment income	12.9			17.8			26.5			37.5
Net realized and unrealized investment (losses) gains	(10.6		)	9.9			17.5			31.8
Net other revenues (expenses)	0.2			(11.4		)	0.3			(10.6		)
Total revenues	284.5			263.8			599.1			551.3
Expenses
Loss and LAE	152.5			137.9			301.8			268.3
Policy acquisition expenses	60.1			53.5			117.5			102.5
Other underwriting expenses	52.0			44.1			100.8			93.4
General and administrative expenses	1.2			0.8			2.2			2.0
Interest expense on debt	4.0			6.2			8.1			12.5
Total expenses	269.8			242.5			530.4			478.7
Pre-tax income from continuing operations	14.7			21.3			68.7			72.6
Income tax expense	(5.3		)	(7.8		)	(23.6		)	(25.5		)
Net income from continuing operations	9.4			13.5			45.1			47.1
Loss from discontinued operations, net of tax	—			(1.2		)	(0.1		)	(1.9		)
Net income including noncontrolling interests	9.4			12.3			45.0			45.2
Less: Net income attributable to noncontrolling interests	(0.2		)	(0.5		)	(0.8		)	(0.9		)
Net income attributable to OB Holdings’ common shareholder	9.2			11.8			44.2			44.3
Change in other comprehensive income and loss items	0.1			—			0.3			0.1
Comprehensive income attributable to OB Holdings’ common shareholder	$	9.3		$	11.8		$	44.5		$	44.4

See Notes to Consolidated Financial Statements.

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER’S EQUITY

(Unaudited)

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

Balances at January 1, 2012	$	932.5		$	950.9		$	(7.5	)	$	(10.9	)	$	14.1
Net income	44.2			—			44.2			—			0.8
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	0.3			—			—			0.3			—
Balances at June 30, 2012	$	947.0		$	936.4		$	21.2		$	(10.6	)	$	14.5

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

Balances at January 1, 2011	$	960.5		$	961.5		$	(1.3	)	$	0.3	$	19.9
Net income	44.3			—			44.3			—		0.9
Issuance of common shares	—			—			—			—		0.3
Repurchases and retirements of common shares	—			—			—			—		(1.3		)
Dividends to OneBeacon U.S. Enterprises Holdings, Inc.	(19.4		)	—			(19.4		)	—		—
Return of capital to OneBeacon U.S. Enterprises Holdings, Inc.	(10.6		)	(10.6		)	—			—		—
Dividends	—			—			—			—		(0.9		)
Other comprehensive income, after tax	0.1			—			—			0.1		—
Balances at June 30, 2011	$	974.9		$	950.9		$	23.6		$	0.4	$	18.9

See Notes to Consolidated Financial Statements.

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ONEBEACON U.S. HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	June 30,
	2012			2011
	($ in millions)
Cash flows from operations:
Net income including noncontrolling interests	$	45.0		$	45.2
Charges (credits) to reconcile net income to cash flows used for operations:
Net loss from discontinued operations	0.1			1.9
Net realized and unrealized investment gains	(17.5		)	(31.8		)
Net other realized losses	—			11.7
Deferred income tax expense	7.0			6.7
Other operating items:
Net change in loss and LAE reserves	(183.3		)	(154.4		)
Net change in unearned premiums	42.4			(54.8		)
Net change in ceded reinsurance payable	3.2			(98.3		)
Net change in ceded unearned premiums	(0.2		)	87.7
Net change in premiums receivable	(45.0		)	(4.8		)
Net change in reinsurance recoverable on paid and unpaid losses	119.1			95.6
Net change in other assets and liabilities	(58.1		)	(38.4		)
Net cash used for operations — continuing operations	(87.3		)	(133.7		)
Net cash used for operations — discontinued operations	(2.0		)	(0.3		)
Net cash used for operations	(89.3		)	(134.0		)
Cash flows from investing activities:
Net maturities, purchases and sales of short-term investments	104.8			69.7
Maturities of fixed maturity investments	91.6			243.6
Sales of fixed maturity investments	821.8			707.7
Sales of common equity securities	24.3			26.5
Sales of convertible fixed maturity investments	8.4			28.1
Distributions and redemptions of other investments	10.6			26.6
Purchases of fixed maturity investments	(935.8		)	(739.8		)
Purchases of common equity securities	(28.5		)	(28.5		)
Purchases of convertible fixed maturity investments	(3.0		)	(10.8		)
Contributions for other investments	(6.8		)	(3.1		)
Net change in unsettled investment purchases and sales	8.5			6.1
Net acquisitions of property and equipment	(0.7		)	(2.9		)
Net cash provided from investing activities — continuing operations	95.2			323.2
Net cash provided from investing activities — discontinued operations	—			—
Net cash provided from investing activities	95.2			323.2
Cash flows from financing activities:
Repurchases of debt	—			(161.6		)
Cash dividends paid to OneBeacon U.S. Enterprises Holdings, Inc.	(15.5		)	(19.4		)
Return of capital to OneBeacon U.S. Enterprises Holdings, Inc.	(14.5		)	(10.6		)
Net cash used for financing activities — continuing operations	(30.0		)	(191.6		)
Net cash used for financing activities — discontinued operations	—			—
Net cash used for financing activities	(30.0		)	(191.6		)
Net decrease in cash during period	(24.1		)	(2.4		)
Cash reclassified from assets held for sale	5.5			—
Cash transferred as part of the AutoOne Transaction	(3.5		)	—
Net decrease excluding cash relating to the AutoOne Transaction	(22.1		)	(2.4		)
Cash balance at beginning of period	49.0			33.2
Cash balance at end of period	$	26.9		$	30.8

Supplemental cash flows information:
Interest paid	$	8.1		$	10.8
Net tax payments to state and national governments	15.0			10.9

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 through independent agencies, regional and national brokers, wholesalers and managing general agencies.

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

OB Holdings’ reportable segments are Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations. The Specialty Insurance Operations segment is comprised of a number of underwriting units that are aggregated into three major underwriting units for financial reporting: Managing General Agency (“MGA”) Business, Specialty Industries and Specialty Products. OB Holdings’ Other Insurance Operations segment 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 and six months ended June 30, 2012, $2.0 million and $4.4 million, respectively, of the $5.6 million of unamortized acquisitions costs as of January 1, 2012 was recognized in expense. If OB Holdings had followed ASU 2010-26 in 2011, $2.5 million and $4.3 million, respectively, of acquisition costs that had been deferred would have been recognized in expense during the three and six months ended June 30, 2011.

Fair Value Measurements and Disclosures

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

Comprehensive Income

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

Goodwill Impairment

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

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Recently Issued Accounting Pronouncements

Offsetting Assets and Liabilities

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

NOTE 2. Acquisitions and Dispositions

On February 22, 2012, OBIG and certain of its subsidiaries completed the sale of the AutoOne business to Interboro. Pursuant to the terms of the sale, at closing, OB Holdings transferred to Interboro all of the issued and outstanding shares of common stock of AutoOne Insurance Company (“AOIC”) and AutoOne Select Insurance Company (“AOSIC”), through which substantially all of the AutoOne business was written on a direct basis. At closing, OB Holdings also transferred the assets, liabilities (including loss reserves and unearned premiums) and capital of the business as well as substantially all of the AutoOne infrastructure including systems and office space as well as certain staff. The closing balance sheet is subject to post-closing adjustments. 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 accrues and is payable quarterly at a rate of LIBOR plus 550 basis points.

Except as described above, during the three and six months ended June 30, 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 and six months ended June 30, 2012 and 2011:

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	($ in millions)
Gross beginning balance	$	3,249.6		$	3,224.7		$	3,358.6		$	3,295.5
Less beginning reinsurance recoverable on unpaid losses	(2,109.0		)	(1,864.0		)	(2,167.5		)	(1,893.2		)
Net loss and LAE reserves	1,140.6			1,360.7			1,191.1			1,402.3
Loss and LAE incurred relating to:
Current year losses	155.8			148.0			294.6			283.5
Prior year losses	(3.3		)	(10.1		)	7.2			(15.2		)
Total incurred loss and LAE from continuing operations	152.5			137.9			301.8			268.3
Loss and LAE paid relating to:
Current year losses	(45.9		)	(54.1		)	(68.2		)	(79.2		)
Prior year losses	(112.6		)	(133.9		)	(290.1		)	(276.2		)
Total loss and LAE payments from continuing operations	(158.5		)	(188.0		)	(358.3		)	(355.4		)
Total incurred loss and LAE from discontinued operations	—			13.9			6.7			28.1
Total loss and LAE payments from discontinued operations	—			(18.9		)	(7.6		)	(37.7		)
Net loss and LAE reserves	1,134.6			1,305.6			1,133.7			1,305.6
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	1,134.6			1,305.6			1,134.6			1,305.6
Plus ending reinsurance recoverable on unpaid losses	2,040.7			1,825.9			2,040.7			1,825.9
Gross ending balance	$	3,175.3		$	3,131.5		$	3,175.3		$	3,131.5

During the three months ended June 30, 2012, OB Holdings experienced $3.3 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $3.4 million in Specialty Insurance Operations, partially offset by $0.1 million of unfavorable loss and LAE reserve development on prior accident year loss reserves 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 other general liability lines. During the three months ended June 30, 2011, OB Holdings experienced $10.1 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $7.1 million in Specialty Insurance Operations and $3.0 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 other general liability lines.

During the six months ended June 30, 2012, OB Holdings experienced $7.2 million of unfavorable loss and LAE reserve development on prior accident year loss reserves, with $12.5 million in Other Insurance Operations, partially offset by $5.3 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 six months ended June 30, 2011, OB Holdings experienced $15.2 million of favorable loss and LAE reserve development on prior accident year loss reserves, with $8.3 million in Specialty Insurance Operations and $6.9 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 other general liability lines.

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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 June 30, 2012 and December 31, 2011, the remaining fair value reductions to both loss and LAE reserves and reinsurance recoverable on unpaid losses were $156.7 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.

NOTE 4. Reinsurance

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

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

At June 30, 2012, OB Holdings had $24.2 million of reinsurance recoverables on paid losses and $2,197.4 million (gross of $156.7 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, collectibility of balances due from its reinsurers is critical to OB Holdings’ financial strength. OB Holdings is selective in regard to its reinsurers, principally placing reinsurance with those reinsurers with strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis. As a result, uncollectible amounts have historically not been significant.

The following table provides a listing of OB Holdings’ top reinsurers 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.

	Balance at				A.M. Best
($ in millions)	June 30, 2012		% of total		Rating (1)
National Indemnity Company and General Reinsurance Corporation (2)	$	1,475.1	66	%	A	++
Hanover Insurance Company	74.8		3	%	A
Tokio Marine and Nichido Fire (3)	54.4		2	%	A	++
Tower Insurance Company	26.2		1	%	A	-
Munich Reinsurance America	25.5		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 $28.3 million of reinsurance recoverables from the 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.

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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.

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 June 30, 2012. Net losses paid totaled approximately $1.4 billion as of June 30, 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 June 30, 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 June 30, 2012, OB Holdings has $409.3 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 June 30, 2012 and December 31, 2011.

Other investments primarily include hedge funds and private equity funds. OB Holdings measures its investments in hedge funds and private equity funds at fair value with changes therein reported in 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.

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

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	($ in millions)
Fixed maturity investments	$	12.1		$	18.1		$	24.7		$	37.2
Short-term investments	0.1			0.1			0.1			0.1
Common equity securities	1.4			1.0			3.0			2.3
Convertible fixed maturity investments	1.0			0.7			2.1			1.7
Other investments	(0.1		)	(0.4		)	(0.2		)	(0.4		)
Gross investment income	14.5			19.5			29.7			40.9
Less investment expenses	(1.6		)	(1.7		)	(3.2		)	(3.4		)
Net investment income, pre-tax	$	12.9		$	17.8		$	26.5		$	37.5

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

	Three months ended					Six months ended
	June 30,					June 30,
	2012			2011		2012			2011
	($ in millions)
Fixed maturity investments	$	1.0		$	11.3	$	15.5		$	21.9
Short-term investments	—			—		—			—
Common equity securities	(6.1		)	1.3		(2.7		)	3.8
Convertible fixed maturity investments	0.5			1.1		1.3			4.4
Other investments (1)	0.9			2.8		2.0			7.6
Net realized investment (losses) gains, pre-tax	$	(3.7	)	$	16.5	$	16.1		$	37.7

(1) The three and six months ended June 30, 2011 include $1.3 million of realized losses related to the impairment of a receivable related to an outstanding hedge fund redemption.

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

	Three months ended									Six months ended
	June 30, 2012 (1)									June 30, 2012 (1)
				Changes in net			Total net						Changes in net		Total net
	Changes in net			foreign currency			changes in fair			Changes in net			foreign currency		changes in fair
	unrealized gains			translation gains			value reflected			unrealized gains			translation gains		value reflected
	and losses			and losses			in revenues			and losses			and losses		in revenues
	($ in millions)
Fixed maturity investments	$	4.5		$	(0.1	)	$	4.4		$	2.4		$	—	$	2.4
Short-term investments	—			—			—			—			—		—
Common equity securities	(5.9		)	—			(5.9		)	(1.6		)	—		(1.6		)
Convertible fixed maturity investments	(3.5		)	—			(3.5		)	(1.3		)	—		(1.3		)
Other investments	(1.9		)	—			(1.9		)	1.9			—		1.9
Total	$	(6.8	)	$	(0.1	)	$	(6.9	)	$	1.4		$	—	$	1.4

(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 $(0.2) million, pre-tax, for the three and six months ended June 30, 2012, respectively.

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

	Three months ended									Six months ended
	June 30, 2011 (1)									June 30, 2011 (1)
				Changes in net			Total net						Changes in net			Total net
	Changes in net			foreign currency			changes in fair			Changes in net			foreign currency			changes in fair
	unrealized gains			translation gains			value reflected			unrealized gains			translation gains			value reflected
	and losses			and losses			in revenues			and losses			and losses			in revenues
	($ in millions)
Fixed maturity investments	$	1.0		$	—		$	1.0		$	(2.9	)	$	0.1		$	(2.8	)
Short-term investments	—			0.1			0.1			—			0.1			0.1
Common equity securities	(5.1		)	(0.1		)	(5.2		)	0.6			(0.1		)	0.5
Convertible fixed maturity investments	(3.8		)	—			(3.8		)	(6.6		)	—			(6.6		)
Other investments	1.3			—			1.3			2.9			—			2.9
Total	$	(6.6	)	$	—		$	(6.6	)	$	(6.0	)	$	0.1		$	(5.9	)

(1) Includes changes in net deferred gains and losses on sales of investments between OB Holdings and entities under White Mountains’ common control of $(0.9) million and $(1.3) million, pre-tax, for the three and six months ended June 30, 2011, respectively.

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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 June 30, 2012 and December 31, 2011 were as follows:

	June 30,			December 31,
	2012			2011
	($ in millions)
Investment securities:
Gross unrealized investment gains	$	108.4		$	118.0
Gross unrealized investment losses	(10.0		)	(21.2		)
Net unrealized gains from investment securities	98.4			96.8
Income taxes	(34.4		)	(33.9		)
Total net unrealized investment gains, after tax	$	64.0		$	62.9

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

	June 30, 2012
	Cost or		Gross		Gross			Net foreign
	amortized		unrealized		unrealized			currency			Carrying
	cost		gains		losses			losses			value
	($ in millions)
U.S. Government and agency obligations	$	196.7	$	0.7	$	—		$	—		$	197.4
Debt securities issued by corporations	650.3		30.4		(0.9		)	(0.1		)	679.7
Municipal obligations	3.3		0.1		—			—			3.4
Asset-backed securities	878.2		6.9		(0.4		)	—			884.7
Foreign government obligations	7.6		0.5		(0.1		)	—			8.0
Preferred stocks	78.3		4.4		—			—			82.7
Total fixed maturity investments	$	1,814.4	$	43.0	$	(1.4	)	$	(0.1	)	$	1,855.9

	December 31, 2011 (1)
	Cost or		Gross		Gross			Net foreign
	amortized		unrealized		unrealized			currency			Carrying
	cost		gains		losses			losses			value
	($ in millions)
U.S. Government and agency obligations	$	213.6	$	1.8	$	—		$	—		$	215.4
Debt securities issued by corporations	654.8		32.7		(1.9		)	(0.1		)	685.5
Municipal obligations	2.2		—		—			—			2.2
Asset-backed securities	862.1		9.8		(0.8		)	—			871.1
Foreign government obligations	7.7		0.5		(0.1		)	—			8.1
Preferred stocks	78.3		3.2		(6.2		)	—			75.3
Total fixed maturity investments	$	1,818.7	$	48.0	$	(9.0	)	$	(0.1	)	$	1,857.6

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

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

	June 30, 2012
	Cost or		Gross		Gross			Net foreign
	amortized		unrealized		unrealized			currency		Carrying
	cost		gains		losses			gains		value
	($ in millions)
Common equity securities	$	221.0	$	26.7	$	(4.3	)	$	—	$	243.4
Convertible fixed maturity investments	66.3		3.0		(1.0		)	—		68.3
Other investments	122.9		35.7		(3.3		)	—		155.3

	December 31, 2011
	Cost or		Gross		Gross			Net foreign
	amortized		unrealized		unrealized			currency		Carrying
	cost		gains		losses			gains		value
	($ in millions)
Common equity securities	$	219.5	$	28.1	$	(4.1	)	$	—	$	243.5
Convertible fixed maturity investments	69.2		4.1		(0.8		)	—		72.5
Other investments	124.6		37.8		(7.3		)	—		155.1

Fair value measurements

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

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

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

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

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

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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 June 30, 2012 and December 31, 2011, OB Holdings did not record a liquidity adjustment to the net asset value related to its investments in hedge funds or private equity funds.

As of June 30, 2012 and December 31, 2011, other investments reported at fair value represented approximately 6% and 5% of the investment portfolio recorded at fair value, respectively. Other investments accounted for at fair value as of June 30, 2012 and December 31, 2011 were comprised of $53.2 million and $53.5 million, respectively, in hedge funds, $66.5 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 June 30, 2012 and December 31, 2011, OB Holdings held investments in 9 hedge funds and 15 and 14 private equity funds, respectively. The largest investment in a single fund was $12.4 million and $13.7 million, respectively, at June 30, 2012 and December 31, 2011. As of June 30, 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.

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

	Fair value at
	June 30, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	197.4	$	197.4	$	—	$	—
Debt securities issued by corporations:
Consumer	232.7		—		232.7		—
Industrial	138.4		—		138.4		—
Financial	77.7		—		77.7		—
Communications	37.8		—		37.8		—
Energy	48.4		—		48.4		—
Basic materials	91.5		—		91.5		—
Utilities	38.1		—		38.1		—
Technology	15.1		—		15.1		—
Debt securities issued by corporations	679.7		—		679.7		—
Municipal obligations	3.4		—		3.4		—
Asset-backed securities	884.7		—		870.2		14.5
Foreign government obligations	8.0		7.3		0.7		—
Preferred stocks	82.7		—		12.6		70.1
Fixed maturity investments	1,855.9		204.7		1,566.6		84.6
Short-term investments	118.4		118.4		—		—
Common equity securities:
Financials	69.6		68.8		—		0.8
Basic Materials	45.2		45.2		—		—
Consumer	40.2		40.1		0.1		—
Energy	25.2		25.2		—		—
Utilities	15.6		15.6		—		—
Other	47.6		47.6		—		—
Common equity securities	243.4		242.5		0.1		0.8
Convertible fixed maturity investments	68.3		—		68.3		—
Other investments(1)	133.8		—		—		133.8
Total(1)	$	2,419.8	$	565.6	$	1,635.0	$	219.2

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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 June 30, 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 June 30, 2012 and December 31, 2011, OB Holdings held one private preferred stock that represented approximately 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 $38.1 million and $36.9 million, respectively, of liabilities recorded at fair value and included in other liabilities as of June 30, 2012 and December 31, 2011. These liabilities relate to securities that have been sold short by a limited partnership that OB Holdings invests in and is required to consolidate in accordance with GAAP. As of June 30, 2012 and December 31, 2011, all of the liabilities included in the $38.1 million and $36.9 million, respectively, have been classified as Level 1 measurements.

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The following table summarizes the ratings of OneBeacon’s corporate debt securities as of June 30, 2012 and December 31, 2011:

	June 30,		December 31,
	2012		2011
	($ in millions)
AA	$	62.6	$	59.2
A	317.0		272.9
BBB	289.1		342.7
BB	7.5		6.1
Other	3.5		4.6
Debt securities issued by corporations	$	679.7	$	685.5

Rollforwards of Fair Value Measurements by Level

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

	Fixed			Common			Convertible
	maturity			equity			fixed maturity		Other
	investments			securities			investments		investments		Total(1)
	($ in millions)
Balance at January 1, 2012	$	222.8		$	242.6		$	—	$	—	$	465.4
Amortization/accretion	(0.1		)	—			—		—		(0.1		)
Total net realized and unrealized gains (losses)	0.1			7.7			—		—		7.8
Purchases	17.8			14.9			—		—		32.7
Sales	(28.8		)	(8.9		)	—		—		(37.7		)
Transfers in	—			—			—		—		—
Transfers out	—			—			—		—		—
Balance at March 31, 2012	$	211.8		$	256.3		$	—	$	—	$	468.1
Amortization/accretion	0.2			—			—		—		0.2
Total net realized and unrealized gains (losses)	(0.7		)	(11.0		)	—		—		(11.7		)
Purchases	6.6			13.5			—		—		20.1
Sales	(13.2		)	(16.3		)	—		—		(29.5		)
Transfers in	—			—			—		—		—
Transfers out	—			—			—		—		—
Balance at June 30, 2012	$	204.7		$	242.5		$	—	$	—	$	447.2

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

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The changes in Level 2 fair value measurements for the three and six months ended June 30, 2012 are as follows:

	Fixed			Common		Convertible
	maturity			equity		fixed maturity			Other
	investments			securities		investments			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
Amortization/accretion	(2.3		)	—		0.6			—		(1.7		)
Total net realized and unrealized gains (losses)	6.1			—		(3.0		)	—		3.1
Purchases	540.5			—		1.6			—		542.1
Sales	(345.0		)	—		(3.4		)	—		(348.4		)
Transfers in	—			—		—			—		—
Transfers out	—			—		—			—		—
Balance at June 30, 2012	$	1,566.6		$	0.1	$	68.3		$	—	$	1,635.0

The changes in Level 3 fair value measurements for the three and six months ended June 30, 2012 are as follows:

	Fixed			Common		Convertible
	maturity			equity		fixed maturity		Other
	investments			securities		investments		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
Amortization/accretion	0.1			—		—		—			0.1
Total net realized and unrealized gains (losses)	0.3			—		—		(0.9		)	(0.6		)
Purchases	18.1			—		—		11.6			29.7
Sales	(39.6		)	—		—		(11.3		)	(50.9		)
Transfers in	—			—		—		—			—
Transfers out	—			—		—		—			—
Balance at June 30, 2012	$	84.6		$	0.8	$	—	$	133.8		$	219.2

(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.

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

	Fixed			Common			Convertible
	maturity			equity			fixed maturity		Other
	investments			securities			investments		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
Amortization/accretion	—			—			—		—			—
Total net realized and unrealized gains (losses)	(3.4		)	0.3			—		4.2			1.1
Purchases	22.2			—			—		0.8			23.0
Sales	—			—			—		(9.8		)	(9.8		)
Transfers in	—			—			—		—			—
Transfers out	—			—			—		—			—
Balance at June 30, 2011	$	92.3		$	42.3		$	—	$	136.6		$	271.2

(1) Excludes the carrying value of $21.8 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, OB Holdings 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 June 30, 2012:

Ratings

Input

Description

Fair Value

Range (1)

Valuation Technique

Unobservable Inputs

Range (1)

Agency commercial

mortgage-backed securities

12.3

AA+

Discounted cash flow

Prepayment/default rate
Discount yield

15.0% CPJ (2)
1.2%

Non-agency residential

mortgage-backed securities

2.2

CCC

Single broker indication (3)

N/A

Preferred stock

70.1

Discounted cash flow

Discount yield

8.7%

Price cap

102.3%

(1) As of June 30, 2012, each asset type consists of one security.

(2) CPJ refers to the market convention for prepayment and default vector assumptions.

(3) 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 outside pricing services to determine fair value and performs procedures to validate the market prices obtained from the outside sources. As a result of these procedures, OB Holdings did not use the price provided by a third party pricing vendor and chose to use a single broker indication for this security. At June 30, 2012, the estimated fair value for this security was $0.2 million less than the estimated fair value based upon quoted prices provided by a third party pricing vendor.

The assumed prepayment and default rates are significant unobservable inputs used to estimate the fair value of investments in agency commercial mortgage-backed securities (“CMBS”). 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.

The following table summarizes the change in net unrealized gains or losses for assets designated as Level 3 for the three and six months ended June 30, 2012 and 2011:

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012		2011
	($ in millions)
Fixed maturity investments	$	0.2		$	(3.1	)	$	6.3	$	(1.3	)
Short-term investments	—			—			—		—
Common equity securities	—			3.1			—		1.8
Convertible fixed maturity investments	—			—			—		—
Other investments	(1.9		)	(1.3		)	1.9		2.9
Total	$	(1.7	)	$	(1.3	)	$	8.2	$	3.4

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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 CMBS portfolio 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 June 30, 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 June 30, 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 residential mortgage-backed securities (“RMBS”) categorized as sub-prime as of June 30, 2012. OB Holdings’ investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage-backed securities as of June 30, 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 June 30, 2012, OB Holdings held $2.2 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 June 30, 2012 and December 31, 2011:

	June 30, 2012						December 31, 2011
	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
	($ in millions)
Mortgage-backed securities:
Agency:
GNMA	$	675.4	$	663.1	$	12.3	$	588.4	$	588.4	$	—
FNMA	14.9		14.9		—		156.4		156.4		—
FHLMC	0.1		0.1		—		4.9		4.9		—
Total agency(1)	690.4		678.1		12.3		749.7		749.7		—
Non-agency:
Residential	29.6		27.4		2.2		13.7		11.4		2.3
Commercial	154.0		154.0		—		58.4		58.4		—
Total Non-agency	183.6		181.4		2.2		72.1		69.8		2.3
Total mortgage-backed securities	874.0		859.5		14.5		821.8		819.5		2.3
Other asset-backed securities:
Credit card receivables	—		—		—		46.0		46.0		—
Vehicle receivables	10.7		10.7		—		3.3		3.3		—
Total other asset-backed securities	10.7		10.7		—		49.3		49.3		—
Total asset-backed securities	$	884.7	$	870.2	$	14.5	$	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 June 30, 2012 are as follows:

	Fair Value		2007		2009		2010		2011		2012
	($ in millions)
Non-agency RMBS	$	29.6	$	2.2	$	—	$	13.1	$	14.3	$	—
Non-agency CMBS	154.0		3.8		3.9		4.0		40.0		102.3
Total	$	183.6	$	6.0	$	3.9	$	17.1	$	54.3	$	102.3

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 June 30, 2012:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Prime	$	27.4	$	—	$	27.4	$	—
Non-prime	2.2		2.2		—		—
Total	$	29.6	$	2.2	$	27.4	$	—

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

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

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

Non-agency Commercial Mortgage-backed Securities

The amount of fixed and floating rate securities and their tranche levels are as follows as of June 30, 2012:

	Fair Value		Super Senior(1)		Senior(2)		Subordinate(3)
	($ in millions)
Fixed rate CMBS	$	150.2	$	107.0	$	43.2	$	—
Floating rate CMBS	3.8		3.8		—		—
Total	$	154.0	$	110.8	$	43.2	$	—

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

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

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

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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 tables summarize investments in hedge funds and private equity funds at June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
	Fair		Unfunded		Fair		Unfunded
	Value		Commitments		Value		Commitments
	($ in millions)
Hedge funds
Long/short credit and distressed	$	14.9	$	—	$	15.1	$	—
Long bank loan	0.2		—		0.2		—
Long/short equity	35.7		—		36.1		—
Long/short equity activist	2.4		—		2.1		—
Total hedge funds	$	53.2	$	—	$	53.5	$	—
Private equity funds
Insurance	$	3.1	$	0.1	$	3.3	$	0.1
Distressed residential real estate	10.6		—		13.7		—
Energy infrastructure and services	17.6		4.4		16.3		4.6
Healthcare	1.8		3.2		1.1		3.5
Multi-sector	20.2		4.4		19.3		5.2
Private equity secondaries	7.3		2.3		7.6		2.6
Real estate	5.9		0.1		4.4		0.1
Total private equity funds	$	66.5	$	14.5	$	65.7	$	16.1

Total hedge funds and private equity funds(1)	$	119.7	$	14.5	$	119.2	$	16.1

(1) Other investments also includes $14.1 million of an investment in a community reinvestment vehicle as of June 30, 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 June 30, 2012 and December 31, 2011.

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