Chairman & Chief Executive Officer
October 18, 2012
Dear Fellow Shareholders:
The sale of the OneBeacon runoff business is the final step
in the transformation of OneBeacon into a pure specialty
underwriter. It is a huge step. This is a clean exit from all
liabilities and exposures remaining from the non-specialty
legacy businesses, including most notably, all asbestos &
environmental exposures. OneBeacon is removing about $2.2
billion of gross reserves from its balance sheet. A complete
exit is achieved by the sale of the legal entities that
underwrote those liabilities/exposures. (We have agreed to
some limited seller financing if required to get to the
finish line.) The go-forward companies are essentially
clean.
The net reserves were much smaller due to extensive
third-party reinsurance covers purchased long ago. So were
the float and related investment income. We continue to
believe that the net reserves on this business are adequate.
The motivation for this transaction is to remove the drag
from this low return business and the related risks of claim
inflation, tort developments, reinsurer bankruptcies,
etc.
The $101 million GAAP cost to get out is a big number ($1.06
per OB share and $11.63 per WTM share). We usually get paid
to assume those risks, not pay to exit them. However, this
transaction has significant additional benefits, unique to
OneBeacon, that we believe clearly enhance the value of the
franchise going forward. The transaction frees up over $100
million of capital, net of the loss on sale; OneBeacon's cost
structure can be further right-sized to a competitive
specialty carrier level; OneBeacon's high performance
specialty team will no longer be immersed in the
time-consuming issues associated with running off such a
large book of business; and a clean OneBeacon will be much
more attractive to specialty teams and companies. I believe
that you will be pleased with the better ROEs that OneBeacon
will report going forward.
It has taken most of twelve years to go from a large,
generalist, broken insurance company in 2001 to a high
performance, pure specialty carrier today. (You can (re)read
our review of the first ten years in White Mountains
2010 annual management report.) This transformation is a rare
feat in the insurance business. It is the result of the hard
work, difficult choices and dedication on the part of
countless individuals. But much of the credit goes to Mike
Miller and his fine team. They have accomplished what we
thought was impossible. As Jack Byrne would say, "They have
turned chicken shxt into chicken salad."
How's that for a strategic plan? I guess I can expect the
impossible going forward. "Attaboy!" OneBeacon team.
Respectfully submitted,
Ray Barrette
Corporate Headquarters:
White Mountains Insurance Group, Ltd.
14 Wesley Street, 5th floor
Hamilton HM 11, Bermuda
Ph: 441-278-3160