Business overview
OneBeacon Insurance Group (OB, Financial) 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
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.
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:
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:
For its competitors, according to Yahoo! Finance:
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
OneBeacon Insurance Group (OB, Financial) 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
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Premiums earned | 2,013 | 2,076 | 1,874 | 1,879 | 1,960 | 1,488 |
| Net investment income | 237 | 192 | 208 | 164 | 126 | 97 |
| Pre-tax income | 263 | 304 | 398 | -602 | 457 | 128 |
| Net income | 233 | 247 | 251 | -383 | 342 | 118 |
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.
| 2006 | 2007 | 2008 | 2009 | 2010 | |
| Loss and LAE ratio | 61.8% | 58.2% | 59.9% | 57.3% | 62.5% |
| Expense ratio | 35.4% | 34.2% | 34.7% | 36.7% | 38.2% |
| Combined ratio | 97.2% | 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$ millions | 2006 | 2007 | 2008 | 2009 | 2010 |
| Insurance float | 2,374 | 2,317 | 2,020 | 2,055 | 1,642 |
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:
| 2006 | 2007 | 2008 | 2009 | 2010 | TTM | |
| P/B | 1.6 | 1.1 | 0.9 | 0.9 | 1.2 | 1 |
For its competitors, according to Yahoo! Finance:
| OB | CB | CAN | TRV | |
| P/B | 1 | 1.14 | 0.59 | 0.9 |
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
