Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Fred Turcotte - VP of IR

Mike Miller - President and CEO

Paul McDonough - CFO

Kevin Rehnberg - SVP, Specialty Lines

Drew Carnase - SVP, Commercial Lines

Alex Archimedes - SVP, Personal Lines

Rich Bradford - SVP and Chief Actuary

Analysts

Bob Glasspiegel - Langen McAlenney

Rohan Pai - Bank of America Securities

Jay Gelb - Lehman Brothers

Ross Haberman - Haberman Fund

OneBeacon Insurance Group (OB) Q3 2007 Earnings Call November 5, 2007 10:00 AM ET

Operator

Good day and welcome to the OneBeacon Insurance Group's Third Quarter 2007 Financial Results Webcast. This call is being recorded at 10 a.m. Eastern Time, Monday, November 5th. All participants are in a listen-only mode. At the conclusion of the prepared remarks, we will be conducting a question-and-answer session.

For opening remarks and introductions, I would like to turn the call over to Fred Turcotte, OneBeacon's Vice President of Investor Relations. Please go ahead, sir.

Fred Turcotte

Thank you and good morning, everyone. On behalf of OneBeacon's management team, I want to welcome you and thank you for joining us this morning as we review our third quarter 2007 financial results.

Today's call is being hosted by Mike Miller, our Chief Executive Officer; and Paul McDonough, our Chief Financial Officer. They will be joined during the Q&A by Kevin Rehnberg, Senior Vice President of Specialty Lines; Drew Carnase, Senior Vice President of Commercial Lines; and Alex Archimedes, Senior Vice President of Personal Lines, as well as other members of senior management.

Our third quarter and nine months 2007 results were released earlier this morning. A copy of our press release is available on the Investor Relations section of our website, www.onebeacon.com, along with today's slide presentation and a copy of our financial supplement. An audio replay of today's webcast will be available on our site following this call.

Turning to slide 2, let me remind you that any statements we make on today's call that are not historical facts constitute forward-looking statements. These statements are based on certain assumptions and analyses 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, 2006, filed on February 28, 2007. 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.

Turning to slide 3, 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures accompanies the press release financial statements and is provided in the financial supplement posted on our website.

Now let me turn the call over to Mike.

Mike Miller

Thank you, Fred. Good morning, everyone.

Let's turn to slide 4 to review our financial highlights for both the third quarter and the first nine months of 2007. First, let me say that I'm very pleased with our results across the board. We had an excellent quarter by any measure in today's market.

Our September 30 adjusted book value per share was $18.85, which represents a 4.6% increase for the third quarter and 13.3% through nine months, including dividends. This brings us to the one-year anniversary of our initial public offering, and in that first year we've produced a 20.4% growth in book value, exceeding our long-term book value growth objective of 15% to 16% a year. Not a bad start.

Our GAAP combined ratio was 83.8% in the third quarter and 92.7% through the first nine months of 2007, reflecting good results from all of our ongoing operations and the favorable impact of certain nonrecurring items.

Our total return on investments was 1.5% for the third quarter and 5.9% through nine months, representing solid returns as compared to the major indices for the year-to-date period. Remember these returns are not annualized.

Let's move on to slide 5 for a closer look at our underwriting results. On a current year accident basis, the third quarter non-CAT loss ratio was a solid 57.2%, and 60.6% through nine months. We saw no significant changes in either frequency or severity. Frequency remains flat, with mid-single-digit increases in severity. Our results were also helped by quiet CAT quarter.

We continue to see favorable non-CAT prior accident year development, which represented three points on the combined ratio through September. The combined ratio for the quarter was positively impacted by a partial settlement of our pension liabilities and a state premium tax refund.

Excluding non-recurring items, we reported a very healthy combined ratio of 91% in the quarter and 94% year-to-date. After adjusting for non-recurring items our expense ratio run rate remains about 35%.

Recently, we took significant actions to mange our expenses by reducing our workforce by approximately 10%. These actions will lower our expense ratio going forward allowing us to attract and retain good accounts.

We have noted our intent to improve of our expense ratio during the past year and these actions are sizable steps in these efforts. While we understand the need to be more competitive as we have discussed previously, we've also continued to invest in specialized opportunities. Managing our expense ratio as a component of our business is not our entire focus.

Now let's move on to slide 6, overall third quarter premiums declined by 1% and by 2% for nine months, an acceptable result relative to prevailing marketing conditions. As you can see our Specialty Lines business continues to achieve double-digit growth rates. Specialty premiums were up 13% for the third quarter and an excellent 21% through September. Commercial Lines grew by 4% in the third quarter and 2% through nine months, reflecting a mid 30s growth rate for small commercial and a low single-digit decline for middle market.

Our personalized business includes both traditional and assigned risk accounts, written through our AutoOne business. Overall premiums continue to decline, although significantly driven by the diminishing New York and New Jersey assigned risk force. Traditional personalized were down slightly, reflecting Massachusetts state mandated rate reductions in an increasingly competitive environment.

Now let's look at slide 7, and follow the information on our primary segments. Our Specialty Lines businesses continue to perform exceptionally well. While, we saw a favorable development in our prior year reserves again this quarter, we've have not reduced our current accident year loss ratios.

Overtime, we believe the under lying accident year results will prove to be exceptional. Specialty Lines combined ratio benefited from three points favorable impact, from nonrecurring items in the quarter and approximately one point year-to-date. Our bottom line 88 combined ratio for nine months reflects the continued strong performance by these businesses.

Turning to slide 8, OneBeacon Professional Partners pricing declined by low double-digits, paralleling favorable market trends for the Professional Liability business. However these trend remains within our rate tolerance range. Pricing pressures have been more significant for larger accounts, which represent a smaller portion of our book of business.

OBPP's overall production was strong for both new and renewal business reflecting solid activity from all areas particularly long-term care, hospital professional liability and lawyers professional liability.

Our lower premium retention reflects market conditions especially on larger accounts as our policy retention rate actually increased year-over-year. We continue to augment our professional liability capabilities having introduced an admitted managed care in old product as well as a new MGA relationship for Podiatrist Liability business in the third quarter.

We continue to believe there are still adequately priced new business opportunities available. IMU our Marine business continues to see modest price increases because our book is comprised of small to mid-size accounts.

Retention levels fell during the quarter reflecting continued competition for a larger hull, cargo and inland marine accounts. We continue to believe there are many new business opportunities in the Marine environment.

Our other specialty category includes our emerging accident and health and government risk solutions groups and our tuition reimbursement business written through the Dewar operation.

Moving onto slide 9, let’s discuss our Commercial Lines results. We are very pleased with our Commercial Lines results particularly considering the competitiveness of the marketplace. In the quarter our current accident year non-CAT results were a strong 52%.

We also experienced three points of favorable prior year development which contributed to an excellent combined ratio of 83%. Included in the combined ratio are four points of favorable nonrecurring items in the third quarter and approximately one point year-to-date.

Normalizing for these items our third quarter combined was a strong 88% and 90% through nine months.

Moving on to slide 10, middle market commercial pricing remains competitive, although we did not see [subsequent] deterioration during the third quarter. Our real prices were down a slight 1% for mid-size accounts and 7% on a pure rate basis, with the retention rates holding in the mid-80's. We’re pleased with the new business flow we're seeing from our newer middle market territories in the Mountain States and from our Inland Marine segment.

Our technology capabilities also continued to evolve, including recent coverage enhancements for our information technology product. Small business pricing has been less affected by the softer market conditions. Our renewal pricing has consistently averaged in the low single digits and was up 3% for the quarter with pure rate down at minus 1.

Retention has trended in the upper 80s. New business grew by 20% over the same period in the prior year, reflecting growth from all parts of the country. We also added several group programs in the third quarter and recently announced our entry into Indiana, our 27th state for small business.

Turning now to slide 11, Personal Lines results were very good this quarter with improvements in our current accident year non-CAT loss ratio and favorable development on prior year reserves. Personal Lines third quarter combined ratio of 80% benefited from 9 points of favorable impact from the non-recurring items and 2% through nine months. We're so very pleased with the 90% combined ratio for the quarter.

Turning to slide 12, renewal pricing for traditional Personal Lines remains positive, with increases of 2% and 9% for auto and home respectively. Retention for auto continues to reflect the competitive market, while homeowner's retentions remained strong. We're pleased with the sustained positive trends in our policy in-force counts and with new business, which held steady with prior quarters, as we leverage our OneChoice product suite and our hallmark package products.

During the third quarter, we began transitioning our legacy business to OneChoice, to streamline our operation through a common platform. This process will take a full year to accomplish and has been seamless to-date.

And with that, let me turn this over to Paul.

Paul McDonough

Thank you Mike, and good morning everyone. Turning to investment on Slide 13, the total return on the portfolio was 1.5% for the third quarter and 6.1% year-to-date, again neither of these annualized. Investment income was essentially flat year-over-year, both in the quarter and the year-to-date period, reflecting a decrease in yield on higher average investment.

As footnote on the table on this slide and the investment exhibits on the next three slides, exclude the investments held in trust to economically defease of the company's preferred stock.

Turning to Slide 14, our investment managers continue to perform exceptionally well on the fixed income side. The portfolio underperformed the Lehman index in the quarter, but has outperformed the index on a year-to-date basis. Contributing to the underperformance versus the index for the quarter, was a shorter duration of our portfolio in a declining interest rate environment and the underweighting of treasuries in our portfolio, in an environment characterized by [flight to] quality and particularly a [flight to] treasury.

We continue to benefit from solid risks and security selection. In particular, our investment managers resisted the temptations to invest in sub-prime mortgaged securities. So we have suffered no adverse affect from dislocations in that market.

On the equity side, summarized on Slide 15, the portfolio slightly underperforms relative to the S & P in the quarter which strong outperformed year-to-date.

Our other investments, primarily hedge funds also produced excellent returns on a year-to-date basis. Here also we continue to benefit from solid risk and security selection, and we have no significant exposure to the decline in value of sub-prime mortgages and related investments.

The asset allocation of the portfolio as illustrated on slide 16 continues to reflect our total return strategy, with 22% of the portfolio in common equity and other investments as of September 30.

Turning now to capital structure on slide 17, the debt to total capital ratio adjusted to the economic defeasance of our preferred stock is 28.4% at September 30, reflecting continued modest deleveraging.

As a reminder, the remaining 300 million of Berkshire preferred stock is mandatorially redeemable in May of next year, and as planned, and previously disclosed the assets set aside in the Berkshire irrevocable trust will be used to execute that redemption and will also be used to continue to fund the dividends on the preferred stock until the redemption date.

Finally, in the third quarter we announced a $200 million share repurchase program. Through the end of last week, we had repurchased approximately 608,000 shares for roughly $13 million. And with that I'll turn it back to Mike.

Mike Miller

Thank you, Paul. Let me take a few minutes to recap our discussion. For the quarter we've reported excellent results driven by very good accident year loss ratios, positive impact from prior year improvements, solid growth in the right places in our on-running units, acceptable pricing levels in each of our segments, a relatively quiet CAT quarter, continued evidence of prudent risk selection and a benefit from some well managed nonrecurring expense items.

And finally, we took difficult but necessary actions to reduce our expenses going forward. While market conditions are more competitive, our business continues to perform well and we are building shareholder book value. OneBeacon will continue to seek specialized capabilities in terms of new products, businesses and teams of people to expand our franchise operations.

I look forward to reporting our yearend results in a few months. And with that, we’ll be happy to open the line and take your questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instruction) Your first question will come from the line of Bob Glasspiegel of Langen McAlenney. Please proceed.

Bob Glasspiegel - Langen McAlenney

Good morning. I was wondering, if you could just talk a little more about personal lines, and specifically the payable development that you saw, maybe you could expand on where you saw the progressives had several months of average development Allstate’s reserve developments sort of end of this quarter and your cousin insurance had to speed bump and had some adverse development, maybe, you could expand on what you are seeing relative to what others may be seeing?

Rich Bradford

Yeah, this is Bradford, Chief Actuary of OneBeacon. I think the amount that we saw this quarter was a little unusual. We are not generally surprised when we see one or two points of favorable development, but I think with personal lines they were around 6 points this quarter was unusual due to the size, as for the future expectation, I don't really have an expectation going forward. They would either be adverse or favorable, but we were somewhat surprised at the amount this quarter, but it was driven by favorable case development on not only accident year '06, but also going back to year '03, '04 and '05, all of those in all segments of favorable case development this quarter.

Bob Glasspiegel - Langen McAlenney

New York Fifth has not been an issue for you guys?

Rich Bradford

It's certainly an issue, but we have tended to find that in retrospect we were, a little conservative than our loss fixed there. So that's contributing to the favorable development.

Bob Glasspiegel - Langen McAlenney

Well, okay. Thank you.

Rich Bradford

Thanks, Bob.

Operator

And your next question will come from line of Rohan Pai of Bank of America Securities.

Rohan Pai - Bank of America Securities

Hey, good morning. Just following up on the personal lines question, just looking sequentially it appears like your accident, your last specs seem to be declining, at least relative to the first and second quarters. If you can just, maybe, give us some color on what you are seeing there, whether it's reflecting the improved trends that you have seen so far?

Fred Turcotte

Yes, Rohan. Sure describe full again. What's really driving the improved result in the third quarter is an absence of unusual amount of large losses which we what we were seeing, in quarter one and quarter two linked in the large loss return to a more normal level in the third quarter, but, that drives an improvement level into the first two quarters.

We are still seeing similar trends in the underlying losses, flat on the frequency, and mid single-digits on severity, but, really was the absence of large losses driving the change in the loss ratio this quarter.

Rohan Pai - Bank of America Securities

So you would say that 3Q is more normalized than the prior two, or should we expect some large losses?

Fred Turcotte

Yes, that's correct. And also recall as well as we've discussed previously with the North Eastern concentration of the Personal Lines book, in the first quarter, we expect more impact from weather conditions. So you look sequentially quarter-over-quarter through the year that they would be expected to trend favorably.

Rohan Pai - Bank of America Securities

Thanks for the clarification. The second question I had was on small commercial, you had strong growth in the quarter? How much of it was from new states that you’ve expanded into and how much from, maybe increased penetration of existing agencies?

Fred Turcotte

We’ll ask Mike Miller who runs our small business operation. Mike?

Mike Miller

Sure. The growth in the quarter is actually coming split pretty well between some of our newer states and existing states. We've looked at our best performing states on the growth side and look at our top ten and actually half of them are coming from states we've entered in the last couple of years, but its’ actually the other half or five states really getting growth by some of our traditional markets. So, we feel pretty good about the growth overall coming from our end.

Rohan Pai - Bank of America Securities

Great. Thanks for the answers and a great quarter.

Mike Miller.

Thank you.

Operator

(Operator Instructions)

Year next question will come from the line of Jay Gelb of Lehman Brothers.

Jay Gelb - Lehman Brothers

Thank you, and good morning

Mike Miller

Good morning, Jay.

Jay Gelb - Lehman Brothers

First, I just want to touch base on the top line growth, can you give us a sense as to whether the AutoOne comparisons, have started to bottom here at around $30 million a quarter?

Mike Miller

Well, Jay, I would say we're clearly nearing the bottom, we said, of our expectation and, again if you look at the decline over the last couple of years, you'll see the direction. And I would say we estimate that we're somewhere near the bottom.

Jay Gelb - Lehman Brothers

Okay. So that should bode pretty well for a resumption of topline growth overall going forward?

Mike Miller

On AutoOne or overall?

Jay Gelb - Lehman Brothers

Overall, since the rest of the business is growing pretty well outside of Personal Lines.

Mike Miller

Yeah. If you look at the third quarter reported results, obviously, as we've talked about, Specialty Lines is up nicely and Commercial Lines overall is up slightly. So Personal Lines clearly is the most significant premium challenge right now.

Jay Gelb - Lehman Brothers

Okay. And then, separately, the expense ratio improvement goal of three points by 2009, with the actions you took in terms of reducing headcount in the third quarter, how much closer did that get you to that goal?

Mike Miller

Sure. I'll ask Paul to answer that, Jay.

Paul McDonough

Jay, I guess I'd say a couple of things. One, I think sort of underlying your question is what are the dollar benefits associated with a reduction in force and what is the likely impact on the expense ratio? And while the reduction in force certainly moves us in the right direction and, hopefully, provides clear evidence that we take that goal very seriously, we have chosen not to identify exactly what the dollar savings are associated with reduction in force.

And there are really two reasons for that. One is that there really are simply too many moving parts that impact the expense ratio, including the investments that we have made over the last couple of years, including the last 12 months, and that we expect we will continue to make.

And the second thing is that, as you know, we prefer to stay away from providing specific guidance relative to our expected future results, and instead prefer to allow our reported results to provide the basis for your projections overtime. I realize I'm not directly answering your question, but hopefully that provides context for why we don't want to provide a specific answer and specific guidance.

Mike Miller

But Jay, this is Mike, I would just add to what Paul said that clearly it's a significant step.

Jay Gelb - Lehman Brothers

I see, okay. Then two separate ones. First on the share buyback program for the $200 million, can you provide some context around in terms of whether you see the ability to increase that amount overtime, and then how quickly, perhaps, you expect to complete the buyback?

And then, separately, if you can just give us a sense if we should expect anymore one-timers to flow through the operating earnings numbers in terms of as much visibilities you have, that'd be helpful? Thank you.

Paul McDonough

With respect to the buyback, Jay, we've been in the market pretty consistently since we announced the share repurchase program back in late August. And we've made steady progress in the context of the safe harbor rules which given the average trading volume in our stock, our ability to make progress beyond sort of the progress we've made at the rate that we've made it, somewhat limited, obviously the wild card there is whether there is a seller inside. And that hasn't been the case.

Mike Miller

Relative to the onetime items, Jay, going forward, obviously those things occur periodically, are not necessarily planned for. These items we called out this quarter because they were significant and nonrecurring.

Paul McDonough

Jay, the one thing I would add with respect to on unusual or nonrecurring items is with regard to the reduction in force, we did incur a charge related to the actions that were taken in September in our third quarter results in the amount of roughly $5 million. The September action related primarily to our Personal Lines business. We took a separate action in October that was more broadly based across the company, and we expect to take an additional charge in the fourth quarter in the amount of, again, roughly of $5 million.

Jay Gelb - Lehman Brothers

Thanks very much.

Operator

And your next question is from the line of Ross Haberman of Haberman Fund.

Ross Haberman - Haberman Fund

Good morning, gentlemen. How are you?

Mike Miller

Good morning.

Ross Haberman - Haberman Fund

Could you just touch upon which categories you're seeing the weakest pricing at the moment and your expectations?

Mike Miller

I am sorry. The latter part of your question faded out.

Ross Haberman - Haberman Fund

Sorry. The weakest sector you're seeing pricing in today and your expectation there?

Mike Miller

Yeah. I would say the most significant sector affected by pricing competition is probably in the larger account area, and that would go across almost all of the segments. A larger account seems to attract the most significant levels of competition. And as we've talked about in the majority of our business across all of our segments, that represents a smaller portion of our overall in-force.

Ross Haberman - Haberman Fund

And you expect that to proceed?

Mike Miller

I would expect that, yes.

Ross Haberman - Haberman Fund

And just finally, what other new lines are you looking into with respect to be in, I guess, over the next couple of quarters which you're not in today?

Mike Miller

Again, we're continually, as we've talked about in the past, looking at new segments and new niches that might be attractive to us. We, obviously if we told you today we would be announcing which ones we are in.

Ross Haberman - Haberman Fund

Okay.

Mike Miller

And we are not in a position to do that, but we will continue to look for new segments that we think offers the opportunity to add value and as you've seen in the last couple of years something we're constantly working on.

Ross Haberman - Haberman Fund

No, I know you've historically said, you're actively looking, you're trying to bring in new people with their expertise to get into new sectors. I don't know if you've brought in any in the last quarter or two and we will begin to see the fruits of all their new works you might say.

Mike Miller

We've started in the last couple of quarters, a couple of new, if you go back to the end of last year actually, couple of new segments in Specialty. Kevin you want to mention a couple of those?

Kevin Rehnberg

Sure, we hired a team in November the year-ago to set us into the Accident & Health business. That business has been producing in the later part of this year. Then in February we brought on a team to do the public entity business, which we call government risk solutions and they've been quite active in, actually they have written some business as well.

We also in November of last year acquired a MGA business focused on yachts, which has really helped to drive some of the growth in our marine business this year and as well in January of this year; we set up an MGA arrangement to get some geographic expansion of our marine business. We tried at marine managers and that has contributed this year to the growth as well.

Mike Miller

Andrew, maybe just to mention of our new team in technology as well as the new territories that we concentrated on?

Andrew Carnase

Yeah, few of the investments we made in middle market over the last couple of years and some more recent, our information technology has been continually growing over the last two years. They slowed down a little bit, there is a little more competition. But they are in a pace of 10% to 15% growth than in previous years, they were in the vicinity of 20%.

The same thing is true of our in the marine team, which continued to add more assets too, they continually grow at 20% to 25%. As part of the technology group and may be to answer your question a little more directly. We are broadening our appetite in technology from information technology it was really hardware and software, to medical technology which is going to be primarily medical device and a little bio business. So, we are expecting that business to come online in the first quarter of 2008.

In terms of geographic extension, I think we mentioned in the last earnings call. That we put a team in to the upper Midwest and in the mountain states specifically Denver and they have been contributing nicely to the middle market growth as well.

Ross Haberman - Haberman Fund

Okay guys, thank you very much.

Mike Miller

You are welcome.

Operator

(Operator Instructions)

And there are no further questions at this time. I would like to turn the call over to Mr. Mike Miller for closing comments.

Mike Miller

Thank you, operator and again thank you everyone for joining us and we will look forward to talking you at year end results. Thank you.

Operator

Ladies and gentleman thank you for your participation in today's conference. This concludes the presentation you may now disconnect have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OneBeacon Insurance Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts