OneBeacon Insurance Group, Ltd. Earnings Call Nuggets: Debt Reduction Outlook, Undeployed Capital

On Friday, OneBeacon Insurance Group, Ltd. (NYSE:OB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors.

Debt Reduction Outlook

John Fox – Fenimore: My first question I guess, is on the last slide, you probably already answered it, but obviously, we’re in a period of special dividends and buyback and debt reduction and capital management, what do you see the outlook on that front in 2012?

Paul McDonough – SVP and CFO: I’d say on the debt reduction front John, that roughly 19%, 20% debt to total capital where we want to be. With respect to dividend, as I mentioned on the last call, I think a special dividend in 2012 is possible, but unlikely. With respect to share repurchase, with our shares trading well above book value, we tend to have a bias for special dividend over share repurchase. And lastly, with respect to our ordinary dividend, as I mentioned, we expect the capital freed up and run-off will fund growth in specialty and our earnings very comfortably cover our ordinary quarterly dividend as well as contribute to some growth in un-deployed capital.

John Fox – Fenimore: That’s very clear, let me came at another way, I mean, in specialty you’re making $0.10 on every $1 you write, which is very nice underwriting profit, with your current equity base and if the market continues to do well, how much premiums would you be comfortable writing at this point?

T. Michael Miller – President and CEO: John, it’s Mike. Obviously, we’ve got plenty of room, 17% growth in the first quarter and specialty is clearly a very strong quarter. Probably a little bit higher than one might expect for the full year, but we don’t see any near term problems given the current market conditions in our capital position supporting what we see as a near-term growth prospects.

John Fox – Fenimore: On the investment area, so I guess back to Paul. Can you talk about the $300 million in short-term investments, which obviously are earning nothing, why that amount is there – you know, an opportunity you talked about going more into corporates and buying a little bit more duration. Is there a possibility of taking some of that and continuing with those trends?

Paul McDonough – SVP and CFO: John, the $300 million is certainly higher than we would like higher than optimal. Our expectation is that we bring that down and put it to work in the 3- to 5-year area and lately we’ve been mostly putting out of the corporates and CMBS.

John Fox – Fenimore: Is there a kind of normal amount of short-term investments?

Paul McDonough – SVP and CFO: I think the optimal amount would be closer to $100 million to $150 million.

Undeployed Capital

Sarah DeWitt – Barclays Capital: Could you update us following up on the last question on what your current excess capital position is right now, and then on the runoff business, over what time period do you expect that to runoff and what’s your outlook for the potential for further reserve strengthening there?

Paul McDonough – SVP and CFO: With respect to undeployed capital, it’s really little change from year end ’11. So, roughly $50 million to $75 million of undeployed capital on top of a capital cushion of $100 million to $125 million. With respect to runoff, really no change there as well, the runoff that relates to the non-standard commercial book that we sold in renewal rights transaction at the end of ’09 runs off fairly quickly. The legacy reserves are much longer dated, but also subject to both the NICO and GenRe cover. So, on a growth basis, payout over a longer period, on a net basis, get closer to zero more quickly as well.

John Fox – Fenimore: My first question I guess, is on the last slide, you probably already answered it, but obviously, we’re in a period of special dividends and buyback and debt reduction and capital management, what do you see the outlook on that front in 2012?

Paul McDonough – SVP and CFO: I’d say on the debt reduction front John, that roughly 19%, 20% debt to total capital where we want to be. With respect to dividend, as I mentioned on the last call, I think a special dividend in 2012 is possible, but unlikely. With respect to share repurchase, with our shares trading well above book value, we tend to have a bias for special dividend over share repurchase. And lastly, with respect to our ordinary dividend, as I mentioned, we expect the capital freed up and run-off will fund growth in specialty and our earnings very comfortably cover our ordinary quarterly dividend as well as contribute to some growth in un-deployed capital.

John Fox – Fenimore: That’s very clear, let me came at another way, I mean, in specialty you’re making $0.10 on every $1 you write, which is very nice underwriting profit, with your current equity base and if the market continues to do well, how much premiums would you be comfortable writing at this point?

T. Michael Miller – President and CEO: John, it’s Mike. Obviously, we’ve got plenty of room, 17% growth in the first quarter and specialty is clearly a very strong quarter. Probably a little bit higher than one might expect for the full year, but we don’t see any near term problems given the current market conditions in our capital position supporting what we see as a near-term growth prospects.

John Fox – Fenimore: On the investment area, so I guess back to Paul. Can you talk about the $300 million in short-term investments, which obviously are earning nothing, why that amount is there – you know, an opportunity you talked about going more into corporates and buying a little bit more duration. Is there a possibility of taking some of that and continuing with those trends?

Paul McDonough – SVP and CFO: John, the $300 million is certainly higher than we would like higher than optimal. Our expectation is that we bring that down and put it to work in the 3- to 5-year area and lately we’ve been mostly putting out of the corporates and CMBS.

John Fox – Fenimore: Is there a kind of normal amount of short-term investments?

Paul McDonough – SVP and CFO: I think the optimal amount would be closer to $100 million to $150 million.