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OneBeacon Insurance: Value Research on Demand

August 09, 2011 | About:
Business overview

OneBeacon Insurance Group (OB) is a property and casualty insurance company registered in Bermuda. The firm’s products include professional liability, marine, collector cars and boats, excess property, accident and health, etc. The business can be divided into three main segments: Specialty Insurance Operations, Other Insurance Operations and Investing, Financing and Corporate Operations. In 2001, the firm was acquired by White Mountain Insurance group from Aviva, and became the wholly owned subsidiary of White Mountain. At the end of 2006, 27.6 million or 27.6% of company’s common shares were sold by White Mountain in the IPO. As the result, White Mountain now holds 76% of the company.

Insurance operation

200520062007200820092010
Premiums earned2,0132,0761,8741,8791,9601,488
Net investment income23719220816412697
Pre-tax income263304398-602457128
Net income233247251-383342118


For OB, the premium earned keeps reducing in value. The biggest drop was in 2010 when the earned premium dropped from $1.9 billion to $1.5 billion. This was mainly due to the sale of personal lines and non-specialty commercial lines. In December 2009, the company sold the renewal rights to Hanover, and the traditional personal line to Tower was completed on July 2010.

In the last six years, there has been one year of negative net income. The negative net income was due to the negative realized investment losses and the change in accounting policies adoptioned from 2008. The firm adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities." It elected to record the changes in net unrealized gains and losses from available-for-sale securities and investments in limited partnerships, hedge funds and private equity interests in revenues to calculate net income. Before, these changes had been included in other comprehensive income.

20062007200820092010
Loss and LAE ratio61.8%58.2%59.9%57.3%62.5%
Expense ratio35.4%34.2%34.7%36.7%38.2%
Combined ratio97.2%92.4%94.6%94.0%100.7%


The combined ratio is the common measure for the insurance industry. A ratio above 100% means that the insurance company pays out a claim larger than the premium received. Over the last five years, the combined ratio of OB was well under 100, except for 2010, when it reached just above 100. The increase in the combined ratio for 2010 was primarily due to higher catastrophe losses and a number of large losses experienced earlier in the year, especially in the exited businesses, the non-specialty commercial lines business which had been in run-off following the sale of the renewal rights, and the traditional personal lines business. Above is the consolidated ratio, comprised of specialty insurance operations and other insurance operations, whereas specialty insurance combined ratios always stay well below 100.

Insurance float

In order to assess the operation efficiency and profitability of the insurer, the amount of float generated compared to the cost of generating it determines whether the business gets the negative and positive value or not. The float is the money that insurance companies temporarily hold but do not own. There is float because premiums are received before losses are paid. The time interval can sometimes extend to decades. During this time, the money can be invested by the insurer. The good insurance companies are those which can grow their float over time, and the cost of float should be below the cost of Treasury 10-year notes. Below is the insurance float reported by the company over the last five years:

US$ millions20062007200820092010
Insurance float2,3742,3172,0202,0551,642


The insurance float of the company keeps reducing over time, and the big reduction in 2010 compared to 2009 is due to the personal line transaction. The figures do not look very impressive. OB seems to downsize its business by selling other business segments, which leads to a decrease in the float generated.

Investment

In OB's investment portfolio, 74% is fixed income instruments, then short-term investments and common securities; the least is in private equity, hedge funds and convertible bonds. In the large category of fixed income instruments, the majority is asset backed securities (46%), then debts issued by corporations. The US government obligations (which are considered risk-free) take only 10% of the fixed income segments or 7.7% of the total investment portfolio.

Management

Lowndes A. Smith – Independent Chairman of the Board of Directors of OneBeacon Insurance Group

Mr. Lowndes A. Smith became independent chairman of OB in October 2006. Mr. Smith serves as Managing Partner of Whittington Gray Associates. Mr. Smith formerly served as currently ice Chairman of The Hartford Financial Services Group, Inc. and President and Chief Executive Officer of Hartford Life Insurance Company until 2001. He joined The Hartford in 1968. Mr. Smith is also a director of White Mountains, and the Chair of the Audit Committee and serves on the Compensation Committee of the Board of Directors of White Mountains.

T. Michael Miller – President, CEO

He has been a director of the Company since August 2006. He joined the Company as Chief Operating Officer in April 2005 and became President and Chief Executive Officer in July 2005.

Paul McDonough – CFO

Mr. Paul H. McDonough is Chief Financial Officer, Senior Vice President of OB. He was elected Chief Financial Officer of OneBeacon in August 2006 and was elected Chief Financial Officer of OneBeacon LLC in December 2005.

Bradford Rich – General Counsel

Mr. Bradford W. Rich is Senior Vice President, General Counsel of OB since September 2007. Mr. Rich previously served as General Counsel of USAA and ACE Ltd. He began his legal career as an assistant staff judge advocate in the United States Air Force, after serving as a staff assistant to the President of the United States.

Ann Andrews – Chief Accountant

Ms. Ann Marie Andrews is Chief Accounting Officer of OB since October 2006. She joined the company in 2002.

The total insiders including executives and directors altogether hold around 3.9% of the total shares outstanding. The largest shareholder of OB is White Mountain, with 76% of the company.

With the majority of executives being low-level shareholders with several years of contribution, the management at OB in the shareholders’ view has a low probability of being outstanding compared with other insurance/reinsurance companies.

Valuation

Liquidation valuation

Tangible book value is considered the proxy for liquidation value — an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. The tangible book value of OB was US$1.152 billion by June 2011, at a market capitalization of US$1.23 billion. The company is trading at 1.06x the tangible book value.

Comparables valuation

For the insurance and banking industries, P/B has proven to be more meaningful than the P/E ratio. Over the last five years, the P/B of OB has been as follows:

20062007200820092010TTM
P/B1.61.10.90.91.21


For its competitors, according to Yahoo! Finance:

OBCBCANTRV
P/B11.140.590.9


The valuation does not point out a screaming buy for an investor like me at this current price, justifying with both its past valuation and its comparables valuation.

Conclusions

OB is in a downsizing phase to focus on some key insurance segments only. The company has completed the sale of Commercial Lines and Personal Lines. It is held by its parent company, White Mountain Insurance. Only when the company at least shows some of its success in its future development would I maybe feel more comfortable to take some position in this company. Otherwise, with the current situation, the declining float amount due to business restructuring, the investment portfolio mainly of asset-backed securities, the light investment of management, and a not very attractive current valuation, the value investor like me will not consider OB at the moment.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks

For other posts on insurance fields, please visit:

Partner Re (PRE) - A Conservative Stock In Reinsurance Industry

Valuing Insurance Companies

Warren Buffett: Accounting And Bond Investment Of Insurers

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.1/5 (44 votes)

Comments

rgosalia
Rgosalia - 3 years ago
The first thing I focus on when looking at insurance companies is their reserve history.

Take the example of AIG who was in the recent few years did quite a bit of catching up with its reserves indicating that reserves set in the past weren't sufficient. Insurance company trading at P/B of 1.2x is cheaper than the one at 1x if the one at 1x is under-reserving and the one at 1.2x is more conservative. So, it's good to look at the P/B ratio, but without analyzing their reserving history, I find it meaningless.

Don't know if you have taken a look, but check out Aspen Insurance (AHL). I own it, so I a bit biased. But it has very conservative reserving policy. Over time you see that they have released reserves, stayed disciplined at underwriting risk that makes sense only when the price is justified, and bought back stock otherwise. Despite that it is trading 0.6 BV.

Any thoughts?

- Rishi
pratipals
Pratipals - 3 years ago


Thanks for the research. Just some thoughts from my side.

  1. Given they have shown underwriting discipline which you point out. And the only

    reason they have an underwriting loss in 2010 is from business they are

    shutting down, would not the remaining business be less risky and actually

    grow?? The remaining business is quality not quantity??
  2. Also most of the directors are also directors of White Mountain, which owns 76% of the outstanding stock. So that points to the management being more shareholder oriented??
  3. The research also does not talk about return of capital to the shareholders. This stock is a MLP, and I understand it is more tax efficient. It currently gives 0.21 per quarter which is over 6% annually. The business it is selling, the capital is being returned to the shareholders as special dividends, which in 2011 was $1 and 2010 was $2 I believe?


Any thoughts on this??

warner13
Warner13 - 3 years ago
Where can I find informationa about them being a Mlp? I didn't see this on their website.
pratipals
Pratipals - 3 years ago
This is from their recent 10-Q. They are not an MLP but an LLC. My mistake. I am guessing shareholders would still be getting k-1's???

"These interim consolidated financial statements include the accounts of OneBeacon Insurance

Group, Ltd. (the “Company” or the “Registrant”) and its subsidiaries (collectively, “OneBeacon”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company is an exempted Bermuda limited liability company."

ken_hoang
Ken_hoang - 3 years ago
@ Rgosalia: Thanks for the comments. In terms of valuing the insurance companies, I totally agree with you on the point of conservative reserves,and the relative premium written along with the book value it has. Insurance without reserves is not insurance at all.

Three main important thing is mentioned in my post of valuing insurance: _http://www.gurufocus.com/news/136885/valuing-insurance-companies

1. The safety of the exposure: writing disciplines as well as the reserves the companies are taking.

2. Cost of float and the amount of it over time.

3. Investment income it generates on the float.

for AHL, it will take sometime for me to have a look at it. Currently, the banking market valuation appears to be cheap so i'm focusing on selecting those now.

How do you think about the reserves of OB?

@pratipals:

1. The underwriting loss in 2010 due to : 1. large catastrophe losses and 2. from the exited business which they still are liable to. In their two exited business, the loss from existing policies would still burden on the company due to their agreement with the purchasers.That is the good sign of the company exiting other businesses to focus on their core strength.

2. It is the management's share % counts, not the directors, as the management is the one who make decision based on day-to-day operation. Even with White Mountains, key insiders hold only 1.34% of the total outstanding shares. Miller, the CEO of OB, hold no stock in White Mountains.

The most important thing is about the company's operation. If the operation is strong and decent, it would give the investors good night sleep, then wake up some day and feel rich. For the personal point of view only, i dont' feel comfortable of holding this stock right now.

Please leave your comment:


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