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Executives

Todd Mills - Treasurer and VP IR

Mike Miller - Director, President and CEO

Paul McDonough - CFO

Analyst

Bob Glasspiegel - Langen McAlenney

Sarah DeWitt - Barclays Capital

OneBeacon Insurance Group (OB) Q1 2010 Earnings Call April 29, 2010 10:00 AM ET

Operator

Good morning and welcome to OneBeacon Insurance Group first quarter 2010 financial results webcast. This call is being recorded at 10:00 eastern time on Thursday April 29, 2010. All participants are in a listen-only mode.

At the conclusion of the prepared remarks we will host a question and answer session. Now let me turn the call over to Todd Mills OneBeacon Treasurer and Vice President of Investor Relations, please proceed sir.

Todd Mills

Good morning. On behalf of OneBeacon’s management team welcome and thank you for joining us. As we review our first quarter 2010 financial results. Today’s call is being hosted by Mike Miller, our Chief Executive Officer and Paul McDonough, our Chief Financial Officer. I will be joined during the Q&A by other members of senior management.

We released our first quarter results earlier today. [And we issued] a release, today’s slide presentation and our financial supplement are available on the investor relations section of our website www.onebeacon.com an audio replay of today’s webcast will also be available on our site following this call.

Turning to slide two, let me remind you that any statements we make during today’s call that are not historical facts, constitute forward looking statements. These statements are based on certain assumptions and analysis made by OneBeacon, in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors.

However, actual results may differ materially from expectations. Please refer to the summary of risk factors at the end of our earnings release as well as a detailed list of risk factors contained in our annual report filed on Form 10-K for the fiscal year ending December 31 2009 filed on February 26th, 2010.

In addition, any forward looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

Slide three, during this call we will refer to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Our reconciliation of the non-GAAP financial measures and most directly comparable GAAP measures accompanies the press release financial statement, and is provided in the financial supplement posted on our website.

Now let me turn the call over to Mike.

Mike Miller

Thank you Todd and good morning everyone. Before we jump in to the slide presentation. I’d like to make a few key points. First of all we clearly had a tough underwriting quarter. But it is also clear that the majority of the higher losses were driven by businesses we are exiting. Despite a challenging quarter, our ongoing specialty businesses delivered an underwriting profit.

Second as you all know, we are in the process of transforming the company through our announced personalized transaction which is targeted to close in the second quarter and the renewal rates transaction on our non-specialty commercial business which is moving along nicely through one quarter of the agreement.

These transactions free up substantial capital amounts which position the company at its strongest level, since our formation in 2001. Throughout 2010 we will right size the capital for this specialty company, which will include further reducing our debt, working for new specialty opportunities and returning capital to our owners.

In addition of the capital position, we are now focused on specialty operations fully which continue to perform well and present a strong platform to build upon going forward.

In total this is an exciting time at OneBeacon.

Now turning to the presentation, on slide 4. Our book value per share remain flat from year-end principally due to fore underwriting results. We reported a 112 combined ratio as you can see. While in specialty we reported an acceptable 97 or 97 [3X cat]. And I will provide additional color on each of these in a moment.

Our investment return was quite good, at 1.8 % in the quarter which Paul will discuss further in a moment. Turning to slide 5, first quarter 2010 total result this quarter, specially contrasted to the first quarter 2009 which happen to be the reported combined ratio for the company ever.

It was a quarter with lower than expected large losses last year, almost no cat losses and an expense ratio which was abnormally low due to lower incentive compensation cost. Obviously the first quarter of 2010 is a different story with outsized large losses, 10 point of cat losses, and our expenses higher than normal but on a comparative basis against declining premium related excelling businesses.

Moving to slide 6, our specialty results were okay, producing 93% combined ration ex-cat and growing at 13%. Our non-cat [actioning] year result was impacted by a handful of large claims driving a reported result roughly four points worse than expected against one quarters worth of net earned premium.

Cat losses of 10 million hours in the first quarter were roughly 2.5 times our planned levels for specialty. Prior year release remains positive, but lower than recent quarters as a result of approximately $9 million of adverse development on a (inaudible) December 2009 losses and a large claim from 2010.

Overall across our specialty businesses prior year losses continue to develop favorably. We ate please with the growth across many of our specialty businesses and at OneBeacon professional, growth is driven by new business in our provider excess segment.

Turning to personal lines on slide 7. In the first quarter we announced our agreement to sell our personal lines business to power and we continue on track towards closing this deal in this quarter. During the first quarter we were ahead 10 points of cap from the March storms in the North East our claims team has done a terrific job of handling an usually large number of claims mostly generated within a three week period.

Our non-cat current accident year result is elevated due to a mix shift driven by our home owners quarter share and slightly higher incurred losses for ROI ability in the quarter. The expense ratio or run rate is roughly 32% excluding the impact of one time premium tax accrual adjustments.

Moving onto slide 8, our renewal rates transition on our non-specialty commercial businesses moving along smoothly through the first quarter. As you will note on foot note number 2, at the end of the first quarter our un-earned premiums were roughly a $142 million which will run off through the remainder of this year.

We experienced 10 points of large losses on a few claims in the quarter and as previously announced cat impacted the quarter by 23 points. Prior year losses have developed favorably consistent with prior quarter. And we remain very comfortable with the outstanding reserves on this segment.

Now I am going to turn this over to Paul who will review our investment results and capital position.

Paul McDonough

Turning to slide 9, our investment portfolio generated a total return for the quarter of $71 million. On average investments of roughly 4 billion or 1.8%. [Not] the annualized fixed income and equity is performing quite well.

Net investment income in the quarter excluding the adjustment or inflation index treasuries was about $2 million lower than the prior year period and about $4 million lower than the fourth quarter of 2009.

The decline in net investment income in sequential quarter is driven by lower yields and also by an increase in the amount of short term investments outstanding. AT March 31, we have roughly $1.1 billion of short terms investments as compared to about 550 million at year end 2009. The increase reflects or liquidation of roughly 600 million of investments, connected to the personal volumes business which we are committed to delivering in the form of cash and cash equivalence at the closing of the personal line sale.

Turning to asset allocation on slide 10, equities consisting of common stock convertible behind hedge funds and private equity account for roughly 14% of total investments, up from 12% at year end ’09, primarily reflecting additional investments in common stock, insight of our prospective partners managed portfolio.

Our fixed maturity investments continue to be very liquid in high quality with relatively short duration.

Turning now to capital management on slide 11, as I mentioned on our last earnings call we expect to have approximately $0.5 billion of un-deployed capital to work with in 2010. Driven primarily by capital that will be freed up during the year in connection with our commercial lines and personal line sales.

As Mike indicated we intend to use that un-deployed capital to reduce debt, return capital to share holders and also continue to explore specialty growth opportunities. In the first quarter we reduced our debt outstanding by 26 million which pushed the debt to total capital ratio below 30%. In the coming quarters we will actively manage our un-deployed capital.

And with that I’ll turn it back to Mike.

Mike Miller

Thanks Paul, as I stated in my opening remarks. We stand on the verge of transforming this organization to a true specialty company. This has been our clearly stated objective for many years and was laid out clearly in our IPO. Our specialty business is profitable and growing. Our capital position has never been stronger.

We have significant un-deployed capital which we will use to reduce debt levels, appropriate for the specialty company. Return capital to our shareholders and a support growth in existing specialty business as well as investing in new specialty segments.

Our specialty business and capital position allow us to ride out the current soft market cycle, but more importantly position us to significantly increase the value of our company when more favorable conditions appear.

With that we are ready to take the question, operator I’ll turn it over to you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Bob Glasspiegel with Langen McAlenney. Please proceed.

Bob Glasspiegel - Langen McAlenney

I couldn’t quite (inaudible) the expense ratio discussion across the company, what is the run rate is there unusual items sort of flowing through in total for all the deals that are getting done and I think you [said] last time that your expenses ratio going forward was going to be higher with specialty, being the pure specialty company than before what is the ultimate run rate on expense ratio we should look towards?

Mike Miller

The expense ratio that you see is roughly 39% you are right as we indicated last quarter, I think that’s roughly inline with what we would expect here, especially as we transition and we do have run-off associated cost, as you aware and as you have noted as well as the elevated acquisition cost and specialty, so I think in the near term that is the expense level, that we would expect to see obviously as we transition the company going forward, over the next couple of years, we hope there’ll be some opportunities to improve that somewhat.

Bob Glasspiegel - Langen McAlenney

Couple of hits and run-off from on expense ratio one is the actual expenses of running in North that you can’t reserve for. The second is just over ahead that isn’t been absorbed, give us a sense in sort of in total how much it is going to be?

Paul McDonough

I think point is what is the point that Mike already made with respect to run-off and there are a couple of moving pieces as we amortized the [dac] that obviously pushes the acquisition cost up but most of the direct expenses in the business go away and so direct [OUE] goes down and then as you mentioned, there is the challenge of absorbing allocated cost that business use to absorb.

Bob Glasspiegel - Langen McAlenney

One last question on the personal divestiture, what is the sort of GAAP equity for the business that’s been so today and how did that change versus year-end?

Paul McDonough

If you look at the deal structure the GAAP equity that you would expect supporting that business is different than the GAAP equity that we’ll transfer it close because we are delivering the traditional companies with capital equal to minimum surplus.

From our prospective I think the important point is the capital that’s being freed up by the transactions both personal and commercial and that’s in the neighborhood of the [profitability] that we have been providing.

Bob Glasspiegel - Langen McAlenney

I guess the question I was asking, given that segment lost money this quarter, what you are keeping is less than what you thought you are going to keep. That sort of the number is trying to drive I mean recognizing (inaudible) all the transfers.

Paul McDonough

Yeah certainly we continue to own the economics of the business until close.

Mike Miller

But close calls that won’t be the case.

Bob Glasspiegel - Langen McAlenney

Great, I’ll hit you offline with the question when (inaudible) getting there. Thanks.

Operator

Your next question comes from the line of Sarah DeWitt with Barclays Capital, please proceed.

Sarah DeWitt - Barclays Capital

You have an underwriting loss in the run-off business even excluding cap and I want to see a (inaudible) on how should we think about the potential for further losses in the (inaudible) going forward?

Mike Miller

We did have a few large claims as I mentioned in the second quarter in run-off (inaudible) your claims number one. Number two as we pointed out you should look at roughly a $142 million on our premium reserve throughout the remainder of the year. And finally point number three would be that, relative to any issue or concern regarding development that the prior year development in that segment continued to be favorable and we are very comfortable with the reserves on the run-off segment.

Sarah DeWitt - Barclays Capital

And then turning to the $0.5 billion of excess capital that you have, how much of that could be used to paid on debt, and how much could be returned to shareholder in a more glamoury thinking?

Mike Miller

We have got flexibility to use that however we want and I think as we have stated before clearly we want to right size the capital structure to the new organization going forward. So I think you’ll see us reduce the debt further. And beyond that I think its an opportunity to utilize proceeds to return to owners and it’ll depend on as time evolves here what the best use of the capital is, but roughly the full amount of that’s available to use to help support those efforts.

Sarah DeWitt - Barclays Capital

What are your thoughts in maintaining the dividend after the sale of the personal lines business and (inaudible) right same of the commercial lines?

Mike Miller

Again well as part of right sizing the capital structure, the company will look at the ongoing dividend. The normal dividend and I think we’ll have some guidance on that coming out probably post the personal lines transaction.

Paul McDonough

Yeah I think I would add to that Sarah that given the dynamics of our company and also given the flow and sort of limited opportunity for share repurchase, it will continue to make sense for us to have a fairly healthy dividend.

Operator

(Operator Instructions). With no further questions in the queue I would now like to turn the call back over Mike Miller for closing remarks. You may proceed sir.

Mike Miller

Alright, thank you. Thank you everyone for joining us and we look forward to speaking with you next quarter.

Operator

Thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect. Have a great day.

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