An Investopedia reader emailed me the other day suggesting I take a look at OneBeacon Insurance (NYSE:OB), a little known property and casualty insurer that has recently undergone a restructuring that leaves it flush with cash and focusing on its specialty lines that are more profitable and less exposed to catastrophic risk. Trading at just one times book value, now is the time to buy this firm, the reader argues. Maybe so, but before I can give it my seal of approval, I'll need to look at the pros and cons of the Bermuda-based insurance company.
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Pros
OneBeacon's recent history is very interesting. In 2001, John Byrne, White Mountain's CEO, convinced his old boss Warren Buffett to provide $300 million in financing for its $2.1 billion acquisition of CGU Insurance's American property and casualty division. They changed the name to OneBeacon and five years later, it went public. Two years after that, Buffett exchanged his 16.3% interest in White Mountains for $836 million in cash and assets. Everybody won.

Dividend Darling
One of the most attractive things about OneBeacon is its dividend. It pays 84 cents per share annually for a yield of 5.7%, double its industry peers. Then there is its move to specialty lines. When White Mountains Insurance (NYSE:WTM) spun off 25% of OneBeacon in 2006, its revenues were split equally among specialty, commercial and personal lines business. As we pass the halfway mark in 2010, business is changing for the better.

Specializing
Specialty insurance accounted for almost half the net written premiums in the first quarter and that number will grow once the deal to sell its personal lines business to Tower Group (Nasdaq:TWGP) for $180.5 million is completed sometime in the second quarter. The divestiture has the twin effect of reducing its catastrophic loss exposure while freeing up $500 million in undeployed capital.

In addition, it sold the renewal rights for its non-specialty commercial lines in December to Hanover Insurance Group (NYSE:THG). Hanover paid $23.25 million for the $490 million book of business with an additional payment of 10% for any premiums renewed above $200 million. Once the two deals are completed, OneBeacon will sell nothing but specialty insurance. That's a good thing because in 2009, its specialty insurance division increased premiums by 13% producing an 84% combined ratio, which is excellent, compared to 101% for its commercial lines and 107% for its personal lines. Thanks to the two deals discussed earlier, the restructured company will be more specialized, not to mention more profitable.

OneBeacon and Peers

Company P/E P/B P/S P/CF
OneBeacon Insurance (NYSE:OB) 4.4 1.0 0.6 7.0
W.R. Berkley (NYSE:WRB) 10.3 1.2 1.0 13.1
Cincinnati Financial (Nasdaq:CINF) 9.8 0.9 1.2 7.6
Selective Insurance (Nasdaq:SIGI) 8.6 0.8 0.4 2.7
Markel (NYSE:MKL) 14.9 1.2 1.6 12.3

Cons
The only possible red flag is OneBeacon's level of debt. For instance, Hanover Insurance Group and Tower Group, the two companies OneBeacon sold its businesses to have shareholders-equity-to-total-asset ratios of 28.5% and 32.1% respectively. In OneBeacon's first quarter, it was 18.7%. Put another way, OneBeacon's long-term debt to equity is 42.1%, while Hanover's is 27.5% and Tower's 21.9%. It's a little high for my liking. Hopefully, with the reduced risk profile of its ongoing businesses, it can generate consistent profits for the next few years, bringing its debt levels back in line with its peers.

Bottom Line
The insurance industry strikes me as one of those businesses where you either have to specialize or be massive, making a little from a lot of areas. OneBeacon has chosen to specialize and that's clearly the right call. It's too small to compete with the Allstate's of the world. Taking the road less traveled will bring far more success than it could ever have achieved competing in auto and home insurance. I like the changes its making and I thank the reader for bringing this little company to my attention. It has a bright future and the price is indeed right. (Use these simple ideas to save money and get better coverage for your house. For more information, see Insurance Tips For Homeowners.)

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