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Retirement and Postretirement Plans | 12 Months Ended
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Dec. 31, 2011
Retirement and Postretirement Plans |
Retirement and Postretirement Plans |
NOTE 10. Retirement and Postretirement 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, as well as former employees that had met the eligibility requirements and 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”). The Plans were frozen and curtailed in 2002 and, as a result, the projected benefit obligation is equal to the accumulated benefit obligation. The benefits for the Plans are based primarily on years of service and employees’ compensation through December 31, 2002. Participants generally vest after five years of continuous service. OneBeacon’s funding policy is consistent with the funding requirements of U.S. federal laws and regulations. The following tables set forth the obligations and funded status, assumptions, plan assets and cash flows associated with the various pension plans at December 31, 2011 and 2010:
|  | Pension Benefits |
Millions |  | 2011 |  | 2010 |
Change in projected benefit obligation: |  |  |  |  |
Projected benefit obligation at beginning of year |  | $ | 110.2 |  | $ | 117.1 |
Service cost |  | .8 |  | .8 |
Interest cost |  | 5.2 |  | 6.0 |
Settlement gain |  | (.6 | ) | (2.2 | )
Special termination benefit cost |  | .8 |  | 1.9 |
Assumption changes |  | 7.7 |  | 6.6 |
Actuarial (gain) loss |  | (.3 | ) | (1.5 | )
Benefits and expenses paid with plan assets, net of participant contributions |  | (8.4 | ) | (15.9 | )
Benefits paid directly by OneBeacon |  | (2.4 | ) | (2.6 | )
Projected benefit obligation at end of year |  | $ | 113.0 |  | $ | 110.2 |
Change in plan assets: |  |  |  |  |
Fair value of plan assets at beginning of year |  | $ | 133.0 |  | $ | 130.2 |
Actual return on plan assets |  | (3.8 | ) | 18.7 |
Benefits and expenses paid, net of participant contributions |  | (8.4 | ) | (15.9 | )
Fair value of plan assets at end of year |  | $ | 120.8 |  | $ | 133.0 |
Funded status at end of year |  | $ | 7.8 |  | $ | 22.8 |
The funded status of the consolidated pension plans at December 31, 2011 was $7.8 million, which represents an over-funding of $34.3 million related to the Qualified Plan and an under-funding of $26.5 million related to the Non-qualified Plan. The Non-qualified Plan, which is unfunded, does not hold any assets. OneBeacon has set aside $12.2 million in an irrevocable rabbi trust for the benefit of Non-qualified Plan participants. In accordance with GAAP, the assets held in the rabbi trust are not reflected in the funded status of the consolidated pension plans as presented. Amounts recognized in the financial statements as of December 31, 2011 and 2010 consist of:
|  | Pension Benefits |
Millions |  | 2011 |  | 2010 |
Net balance recorded in other assets |  | $ | 34.3 |  | $ | 50.3 |
Net balance recorded in other liabilities |  | (26.5 | ) | (27.5 | )
Net amount accrued in the financial statements |  | $ | 7.8 |  | $ | 22.8 |
Information for the Non-qualified Plan, which had accumulated benefit obligations in excess of plan assets, was as follows:
|  | December 31, |
Millions |  | 2011 |  | 2010 |
Projected benefit obligation |  | $ | 26.5 |  | $ | 27.5 |
Accumulated benefit obligation |  | $ | 26.5 |  | $ | 27.5 |
Fair value of plan assets |  | $ | — |  | $ | — |
Information for the Qualified Plan, which had accumulated benefit obligations less than plan assets, was as follows:
|  | December 31, |
Millions |  | 2011 |  | 2010 |
Projected benefit obligation |  | $ | 86.5 |  | $ | 82.7 |
Accumulated benefit obligation |  | $ | 86.5 |  | $ | 82.7 |
Fair value of plan net assets (1) |  | $ | 120.8 |  | $ | 133.0 |
(1) Includes receivables related to securities sold, interest and dividends as well as payables related to securities purchased. The amounts recognized in accumulated other comprehensive income (loss) on a pre-tax basis and before noncontrolling interest for the years ended December 31, 2011 and 2010 were as follows:
|  | December 31, |
Millions |  | 2011 |  | 2010 |
Accumulated other comprehensive income (loss) beginning balance |  | $ | .5 |  | $ | (8.5 | )
Increase (decrease) in accumulated other comprehensive income (loss): |  |  |  |  |
Amortization of net actuarial losses recognized during the year |  | .5 |  | .6 |
Net actuarial (losses) gains occurring during the year(1) |  | (18.2 | ) | 8.4 |
Other adjustments |  | .5 |  | — |
Accumulated other comprehensive (loss) income ending balance |  | $ | (16.7 | ) | $ | .5 |
(1) Primarily relates to investment results relating to the overfunded status of the Plans. The amount in accumulated other comprehensive loss, on a pre-tax basis and before noncontrolling interest, that has not yet been recognized as a component of net periodic benefit cost for the year ended December 31, 2011 is attributable to net losses. During 2012, OneBeacon expects $0.7 million will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost. The components of net periodic benefit cost (income) for the years ended December 31, 2011, 2010 and 2009 were as follows:
|  | Year Ended December 31, |
Millions |  | 2011 |  | 2010 |  | 2009 |
Service cost |  | $ | .8 |  | $ | .8 |  | $ | .5 |
Interest cost |  | 5.2 |  | 6.0 |  | 6.5 |
Expected return on plan assets |  | (7.6 | ) | (7.3 | ) | (6.3 | )
Amortization of unrecognized loss |  | .5 |  | .6 |  | 1.6 |
Net periodic pension cost (income) before settlements, curtailments and special termination benefits |  | (1.1 | ) | .1 |  | 2.3 |
Settlement gain |  | .5 |  | (.1 | ) | — |
Special termination benefits expense(1) |  | .8 |  | 1.9 |  | 1.2 |
Total net periodic benefit cost |  | $ | .2 |  | $ | 1.9 |  | $ | 3.5 |
(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. Assumptions The weighted average discount rate assumptions used to determine benefit obligations was 4.38% and 4.94% at December 31, 2011 and 2010. The weighted average assumptions used to determine net periodic benefit cost included a 4.94% discount rate and 5.75% expected long-term rate of return on plan assets for the year ended December 31, 2011. The weighted average assumptions used to determine net periodic benefit cost included a 5.16% discount rate and 5.75% expected long-term rate of return on plan assets for the year ended December 31, 2010. OneBeacon’s discount rate assumptions used to account for the Plans reflect the rates at which the benefit obligations could be effectively settled. For 2011 and 2010, in addition to consideration of published yields for high quality long-term corporate bonds, U.S. Treasuries and insurance company annuity contract pricing, consideration was given to a cash flow matching analysis. OneBeacon performed an analysis of expected long-term rates of return based on the allocation of its Qualified Plan assets at December 31, 2010 and 2009 to develop expected rates of return for 2011 and 2010 for each significant asset class or economic indicator. A range of returns was developed based both on forecasts and on broad market historical benchmarks for expected return, correlation, and volatility for each asset class. Plan Assets The majority of the Qualified Plans’ assets are managed by Prospector Partners, LLC (“Prospector”), a related party (see Note 18). The investment policy places an emphasis on preserving invested assets through a diversified portfolio of high-quality income producing investments and equity investments. The investment management process integrates the risks and returns available in the investment markets with the risks and returns available to the Qualified Plan in establishing the proper allocation of invested assets. The asset classes include fixed maturity, equity, convertible fixed maturities, and cash and short-term investments. Fixed maturity and convertible fixed maturities include bonds, convertible fixed maturities and convertible preferred stocks of companies from diversified industries. Equity securities primarily include investments in large-cap and mid-cap companies primarily located in the United States. Cash and short-term investments include registered investment companies and common/collective trust funds. The factors examined in establishing the appropriate investment mix include the outlook for risk and return in the various investment markets and sectors and the long-term need for capital growth. The Qualified Plan’s investments are stated at fair value. Many factors are considered in arriving at fair market value. In general, fixed maturity investments such as corporate bonds and government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Shares of common and preferred stock are valued at quoted market prices when available. Convertible fixed maturities are valued based on quoted market prices, analysis of listed markets and use of sensitivity analyses. Registered investment companies are valued at the net asset value as reported by the fund at year-end. The fair value of the Qualified Plan’s assets and their related inputs at December 31, 2011 by asset category were as follows:
|  | December 31, 2011 |  | December 31, 2010 |
Millions |  | Fair Value |  | Level 1 Inputs |  | Level 2 Inputs |  | Level 3 Inputs |  | Fair Value |  | Level 1 Inputs |  | Level 2 Inputs |  | Level 3 Inputs |
Fixed maturity investments |  | $ | 2.4 |  | $ | — |  | $ | 2.4 |  | $ | — |  | $ | .5 |  | $ | — |  | $ | .5 |  | $ | — |
Common equity securities |  | 72.2 |  | 72.2 |  | — |  | — |  | 74.5 |  | 74.5 |  | — |  | — |
Convertible fixed maturities |  | 42.8 |  | — |  | 42.8 |  | — |  | 55.7 |  | — |  | 55.7 |  | — |
Cash and short-term investments |  | 3.1 |  | 3.1 |  | — |  | — |  | 2.0 |  | 2.0 |  | — |  | — |
Total |  | $ | 120.5 |  | $ | 75.3 |  | $ | 45.2 |  | $ | — |  | $ | 132.7 |  | $ | 76.5 |  | $ | 56.2 |  | $ | — |
There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2011 or 2010. The Qualified Plan’s asset allocations at December 31, 2011 and 2010, by asset category were as follows:
|  | Plan Assets at December 31, |
Asset Category |  | 2011 |  | 2010 |
Fixed maturity investments |  | 2.0 | % | .4 | %
Common equity securities |  | 59.9 |  | 56.1 |
Convertible fixed maturities |  | 35.5 |  | 42.0 |
Cash and short-term investments |  | 2.6 |  | 1.5 |
Total |  | 100.0 | % | 100.0 | %
As described above, the Qualified Plan’s investment securities are exposed to various risks such as interest rate, market, and credit risks. Market prices of common equity securities, in general, are subject to fluctuations which would cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of fixed maturity and convertible fixed maturity investments, respectively. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. Cash Flows 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, for which OneBeacon has assets held in a rabbi trust. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Millions |  | Expected Benefit Payments |
2012 |  | $ | 4.6 |
2013 |  | 5.0 |
2014 |  | 5.3 |
2015 |  | 5.7 |
2016 |  | 6.0 |
2017—2021 |  | 34.0 |
Other Benefit Plans OneBeacon sponsors an employee savings plan (defined contribution plan) covering the majority of its employees. The contributory plan provides qualifying employees with matching contributions of 50% up to the first six percent of salary (subject to U.S. federal limits on allowable contributions in a given year). Total expense for the plan was $3.0 million, $3.8 million and $4.6 million in 2011, 2010 and 2009. OneBeacon had a post-employment benefit liability of $6.7 million and $7.9 million at December 31, 2011 and 2010.

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