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Tower Group, Inc. Reports First Quarter 2012 Results

Tower Group, Inc. (NASDAQ: TWGP) today reported net income available to common shareholders of $20.6 million and diluted earnings per share of $0.52 for the first quarter 2012, compared to $25.7 million, or $0.61 per share, in the first quarter of 2011.

Operating income(1) increased 7.8% to $21.9 million in the first quarter compared to $20.3 million in the first quarter of 2011. Operating earnings per share(1) increased by 14.3% to $0.56 in the first quarter from $0.49 per share in the first quarter of 2011. The 2012 results include an after-tax charge of $8.4 million associated with prior year reserve strengthening and also reflect lower than expected property losses, as unseasonably warm weather on the East Coast of the United States resulted in lower property claims. Operating income in the first quarter of 2011 was impacted by unusually severe weather-related claims. After-tax losses from these events amounted to $9.8 million or $0.23 per share.

The effective tax rate, excluding the reciprocal exchanges, was 20.9%, a decrease of 11.5 points compared to 2011. The reduced tax rate is primarily due to a revaluation of certain tax liabilities which reduced the tax rate by 10 points and resulted in a $2.6 million benefit which is not expected to be recurring.

Highlights (all percentage increases compare first quarter 2012 results for Tower Group, Inc., excluding the reciprocal exchanges, to the results for the same period in 2011 except as noted otherwise):

  • Gross premiums written and managed increased by 20.0% to $467.4 million.
  • For the combined insurance segments, the net combined ratio was 99.2% compared to 97.6%.
    • The net loss ratio was 64.2% compared to 64.7%.
    • The net expense ratio was 35.0% compared to 32.9%.
  • Net investment income increased by 5.1% to $32.3 million.
  • Consolidated cash flows from operating activities increased by 193.7% to $30.9 million.
  • Book value per share was $26.83, an increase of 1.7% from December 31, 2011 and an increase of 6.3% from March 31, 2011. Tower Group, Inc. stockholders’ equity was $1.1 billion as of March 31, 2012.
  • Tower paid 18.75 cents per share in dividends in the first quarter 2012, compared to 12.5 cents per share in the first quarter 2011.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, “During the first quarter, we were able to achieve strong top line growth and meaningful rate increases due to improved market conditions across several areas of our business. We also continued to execute our organic growth strategy by enhancing our product offerings to drive our strong top line growth. In addition, we successfully initiated implementation of our personal lines technology platform and expect all new personal lines business to be written through this new system by the middle of this year. We expect to retire the existing system by next year. Finally, we are very pleased with our recently announced commitment to invest in Canopius Group Ltd. as well the options we will receive with this investment to access, subject to the approval of Lloyd’s and the FSA, the Lloyd's market to underwrite profitable specialty and international business and to combine Tower with a Bermuda reinsurance business currently operated by Canopius. With the improvement in our core business in the United States and the opportunities from our transaction with Canopius, we expect our operating results and return on equity to continue to improve throughout the remainder of 2012 and beyond.”

Financial Summary ($ in thousands, except per share data):
 
  Three Months Ended March 31,
2012   2011
 

 

Reciprocal

 

 

Elimina-

     

 

Reciprocal

 

 

Elimina-

 
      Tower  

 

Exchanges

 

 

tions

      Total Tower  

 

Exchanges

 

 

tions

    Total
Net premiums written   $ 387,591     $ 38,093     $ -       $ 425,684     $ 319,390     $ 40,628     $ -     $ 360,018  
Revenues
Net premiums earned $ 378,669 $ 41,489 $ - $ 420,158 $ 334,537 $ 45,258 $ - $ 379,795
Ceding commission revenue 2,078 3,085 - 5,163 6,817 1,364 - 8,181
Insurance services revenue 7,359 - (6,862 ) 497 7,297 - (6,695 ) 602
Policy billing fees 3,002 132 - 3,134 2,034 144 - 2,178
Net investment income 32,257 3,349 (1,663 ) 33,943 30,688 3,344 (1,654 ) 32,378
Total net realized investment gains     (393 )     3,976       -         3,583       8,237       (877 )     -       7,360  
Total revenues     422,972       52,031       (8,525 )       466,478       389,610       49,233       (8,349 )     430,494  
Expenses
Loss and loss adjustment expenses 243,249 24,244 - 267,493 216,448 23,728 - 240,176

Direct and ceding commission expense

71,912 7,773 - 79,685 66,029 10,574 - 76,603
Other operating expenses 72,896 12,937 (6,862 ) 78,971 61,002 12,032 (6,695 ) 66,339
Acquisition-related transaction costs 1,262 - - 1,262 12 - - 12
Interest expense     7,576       1,663       (1,663 )       7,576       8,100       1,654       (1,654 )     8,100  
Total expenses     396,895       46,617       (8,525 )       434,987       351,591       47,988       (8,349 )     391,230  
Income before income taxes 26,077 5,414 - 31,491 38,019 1,245 - 39,264
Income tax expense     5,443       (3,593 )     -         1,850       12,334       424       -       12,758  
Net income   $ 20,634     $ 9,007     $ -       $ 29,641     $ 25,685     $ 821     $ -     $ 26,506  
 
Ratios                                                  
Net calendar year loss and LAE 64.2 % 58.4 % 63.7 % 64.7 % 52.4 % 63.2 %
Net underwriting expenses 35.0 % 42.2 % 35.7 % 32.9 % 46.6 % 34.5 %
Net Combined 99.2 % 100.6 % 99.4 % 97.6 % 99.0 % 97.7 %
 
Return on Average Equity     7.9 %                         9.9 %                  
 
                                                   
Reconciliation of non-GAAP financial measures:                                                  
Net income attributable to Tower Group, Inc. $ 20,634 $ 25,685
Net realized (gains) losses on investments 393 (8,237 )
Acquisition-related transaction costs 1,262 12
Income tax (expense) benefit                         (368 )                       2,882  
Operating income attributable to Tower Group, Inc.                       $ 21,921                       $ 20,342  
 
Operating earnings per share - Basic $ 0.56 $ 0.49
Operating earnings per share - Diluted

 

$ 0.56 $ 0.49
Operating return on average equity                         8.4 %                       7.8 %
 

First Quarter 2012 Highlights (unless otherwise noted, amounts exclude reciprocals)

Gross premiums written and managed increased to $467.4 million in the first quarter, 20.0% higher than in the first quarter of 2011. The increase is primarily attributable to growth in our programs and assumed reinsurance. Excluding programs, policies in-force decreased by 3.9% as of March 31, 2012, compared to March 31, 2011. For the three months ended March 31, 2012, premium rates on renewed Commercial Insurance business excluding programs increased 2.7% and premium rates increased 3.0% on renewed Personal Insurance business compared to the same period in 2011, resulting in an overall premium rate increase on renewal business of 2.8%. During the same period, our Commercial Insurance business renewal retention rate excluding programs was 77.3% compared to our Personal Insurance business renewal retention rate of 91.3%, resulting in an overall retention rate of 88.4%.

Total revenues increased 8.6% to $423.0 million from $389.6 million in the prior year's first quarter. This increase is attributed to an increase in earned premiums and net investment income partly offset by declines in ceding commission revenues and net realized investment gains. Net premiums earned represented 89.5% and 85.9% of total revenues for the three months ended March 31, 2012 and 2011, respectively.

Net investment income increased 5.1% to $32.3 million for the three months ended March 31, 2012, up from $30.7 million for the same period in 2011. The tax equivalent investment yield at amortized cost was 4.7% at March 31, 2012, compared to 4.8% at March 31, 2011. The net realized investment loss was $0.4 million for the three months ended March 31, 2012, compared to a gain of $8.2 million in the same period last year. The first quarter gains include other-than-temporarily impaired credit losses of $2.7 million, compared to $0.1 million of such losses in the first quarter of 2011.

Total commission and fee income decreased 23.0% to $12.4 million in the first quarter of 2012 compared to $16.1 million in the first quarter of 2011. This decrease is mainly due to a reduction in ceding commission revenues. We recognized a change in loss ratio on a prior year’s quota share treaty which had an unfavorable impact on our ceding commission revenue of $3.0 million during the first quarter.

The net loss ratio was 64.2% the three months ended March 31, 2012 compared to 64.7% for the same time period last year. During the quarter the Company’s actuaries completed their annual review of loss development factors to reflect loss data observed through December 31, 2011. The prior year reserve strengthening in Commercial Insurance arises from changes in estimated ultimate losses for accident years 2010 and prior based on reserve studies completed during the quarter. The majority of these changes arise from the updated loss development factors. The unfavorable development in Personal Insurance was mostly from Automobile Physical Damage and attributable to accident year 2011.

Our net expense ratio was 35.0% for the three months ended March 31, 2012 compared to the 32.9% we recorded during the same period in 2011.

The effective tax rate was 20.9% in the first quarter , a decrease of 11.5 points compared to 2011. The reduced tax rate excluding the reciprocal exchanges is primarily due to a revaluation of certain tax liabilities which reduced the tax rate by 10 points and resulted in a $2.6 million benefit that is not expected to be recurring.

Interest expense decreased by $0.5 million for the three months ended March 31, 2012, compared to the same period in 2011.

Additional Highlights and Disclosures:

Dividend Declaration

Tower’s Board of Directors approved a quarterly dividend on May 3, 2012 of $0.1875 per share payable on June 22, 2012 to stockholders of record as of June 11, 2012.

2012 Guidance

Tower expects full year 2012 operating earnings per share to be in a range of $2.60 to $2.70

Notes on Non-GAAP Financial Measures

(1) Operating income (loss) excludes realized gains and losses, acquisition-related transaction costs and the results of the reciprocal business, net of tax. Operating income is a common measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, these measures are a key internal management performance standard. Operating earnings (loss) per share is operating income (loss) divided by diluted weighted average shares outstanding. Operating return on equity is annualized operating income (loss) divided by average common stockholders' equity.

Conference Call

Tower will host a conference call and webcast to discuss these results on May 8, 2012 at 9:00 a.m. ET. This conference call will be broadcast live over the Internet. To access a listen-only webcast over the Internet, please visit the Investor Information section of Tower Group, Inc.’s website, www.twrgrp.com, or use this link: http://investor.twrgrp.com/events.cfm

Please access the website at least 15 minutes prior to the call to register and to download any necessary audio software. If you are unable to participate during the live conference call, a webcast will be archived in the Investor Information section of Tower Group, Inc.'s website at www.twrgrp.com.

About Tower Group, Inc.

Tower Group, Inc. offers diversified property and casualty insurance products and services through its operating subsidiaries. Its insurance company subsidiaries offer insurance products to individuals and small to medium-sized businesses through its network of retail and wholesale agents and specialty business through program underwriting agents. Tower's insurance services subsidiaries provide underwriting, claims and reinsurance brokerage services to other insurance companies.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This press release and any other written or oral statements made by or on behalf of Tower may include forward-looking statements that reflect Tower's current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "plan," "expect," "project," "intend," "estimate," "anticipate," "believe" and "continue" or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the actual results of Tower to differ materially from those indicated in these statements. Please refer to Tower’s filings with the SEC, including among others Tower’s Annual Report on Form 10-K for the year ended December 31, 2011, for a description of the important factors that could cause the actual results of Tower to differ materially from those indicated in these statements. Forward-looking statements speak only as of the date on which they are made, and Tower undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

For more information, visit Tower's website at http://www.twrgrp.com/.

Our Commercial Insurance Segment offers a broad range of commercial lines property and casualty insurance products to small to mid-sized businesses distributed through a network of retail and wholesale agents on both an admitted and non-admitted basis. This segment also includes reinsurance solutions provided primarily to small insurance companies;

Our Personal Insurance Segment offers a broad range of personal lines property and casualty insurance products to individuals distributed through a network of retail and wholesale agents; and

Our Insurance Services Segment provides underwriting, claims and reinsurance brokerage services to insurance companies.

Commercial Insurance & Personal Insurance Combined
($ in thousands)
(Unaudited)
 
  Three Months Ended March 31,
2012   2011   Change(%)
Net premiums written $ 425,684   $ 360,018   18.2 %
 
Revenues
Net premiums earned $ 420,158 $ 379,795 10.6 %
Ceding commission revenue 5,163 8,181 -36.9 %
Policy billing fees 3,134   2,178   43.9 %
Total revenues 428,455 390,154 9.8 %
Expenses
Net loss and loss adjustment expenses 267,493   240,176   11.4 %
Underwriting expenses
Direct commission expense 79,684 76,348 4.4 %
Other underwriting expenses 78,510   65,153   20.5 %
Total underwriting expenses 158,194   141,501   11.8 %
Underwriting profit $ 2,768   $ 8,477   -67.3 %
 
Underwriting Ratios
Net loss ratio 63.7 % 63.2 %
Net expense ratio 35.7 % 34.5 %
Net combined ratio 99.4 % 97.7 %
 

Commercial Insurance Segment Information
($ in thousands)
(Unaudited)
  Three Months Ended
March 31,
2012   2011
Net premiums written $ 320,205   $ 251,121  
 
Revenues
Net premiums earned $ 297,835 $ 251,768
Ceding commission revenue 10 4,018
Policy billing fees 1,513   764  
Total revenues 299,358 256,550
Expenses
Net loss and loss adjustment expenses 201,438 164,490
Underwriting expenses
Direct commission expenses 55,549 50,478
Other underwriting expenses 48,247   36,750  
Total underwriting expenses 103,796   87,228  
Underwriting profit $ (5,876 ) $ 4,832  
 
Underwriting Ratios
Net loss ratio 67.6 % 65.3 %
Net expense ratio 34.3 % 32.7 %
Net combined ratio 101.9 % 98.0 %
 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
 
  Three Months Ended March 31,
2012   2011
  Reciprocal     Reciprocal  
      Tower     Exchanges     Total     Tower     Exchanges     Total
Net premiums written $ 67,386   $ 38,093   $ 105,479   $ 68,269   40,628   108,897  
 
Revenues
Net premiums earned $ 80,834 $ 41,489 $ 122,323 $ 82,769 $ 45,258 $ 128,027
Ceding commission revenue 2,068 3,085 5,153 2,800 1,363 4,163
Policy billing fees 1,489   132   1,621   1,270   144   1,414  
Total revenues 84,391 44,706 129,097 86,839 46,765 133,604
Expenses
Net loss and loss adjustment expenses 41,811 24,244 66,055 51,958 23,728 75,686
Underwriting expenses
Direct commission expense 16,362 7,773 24,135 15,296 10,574 25,870
Other underwriting expenses 17,326   12,937   30,263   16,371   12,032   28,403  
Total underwriting expenses 33,688   20,710   54,398   31,667   22,606   54,273  
Underwriting profit $ 8,892   $ (248 ) $ 8,644   $ 3,214   431   3,645  
 
Underwriting Ratios
Net loss ratio 51.7 % 58.4 % 54.0 % 62.8 % 52.4 % 59.1 %
Net expense ratio 37.3 % 42.2 % 38.9 % 33.3 % 46.6 % 38.0 %
Net combined ratio 89.0 % 100.6 % 92.9 % 96.1 % 99.0 % 97.1 %
 

Insurance Services Segment Results of Operations
($ in thousands)
(Unaudited)
 
  Three Months Ended
March 31,
2012   2011
Revenue
Management fee income $ 6,862 $ 6,695
Other revenue 497 602
Total revenue 7,359 7,297
Expenses
Other expenses 4,463 5,041
Total expenses 4,463 5,041
Insurance services pre-tax income $ 2,896 $ 2,256
 
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
 

 

March 31,

 

 

December 31,

($ in thousands, except par value and share amounts)  

 

2012

 

 

2011

Assets
Investments - Tower
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $2,035,235 and $2,046,932) $ 2,154,771 $ 2,153,620
Equity securities (cost of $111,100 and $91,069) 111,840 87,479
Other invested assets 47,839 44,347
Investments - Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $277,406 and $288,180) 292,793 300,054
Equity securities (cost of $6,092 and $1,965)     6,781       1,866  
Total investments 2,614,024 2,587,366
Cash and cash equivalents (includes $19,899 and $666 relating to Reciprocal Exchanges) 143,081 114,098
Investment income receivable (includes $3,042 and $2,978 relating to Reciprocal Exchanges) 29,605 26,782
Premiums receivable (includes $38,954 and $41,290 relating to Reciprocal Exchanges) 415,933 408,626
Reinsurance recoverable on paid losses (includes $3,366 and $5,670 relating to Reciprocal Exchanges) 24,859 23,903
Reinsurance recoverable on unpaid losses (includes $22,905 and $11,253 relating to Reciprocal Exchanges) 285,381 319,664
Prepaid reinsurance premiums (includes $14,997 and $14,685 relating to Reciprocal Exchanges) 52,739 54,037
Deferred acquisition costs, net (includes $11,672 and $11,866 relating to Reciprocal Exchanges) 171,651 168,858
Intangible assets (includes $7,293 and $4,839 relating to Reciprocal Exchanges) 111,038 114,920
Goodwill 250,103 250,103
Other assets (includes $4,342 and $2,685 relating to Reciprocal Exchanges)     357,136       373,838  
Total assets   $ 4,455,550     $ 4,442,195  
Liabilities
Loss and loss adjustment expenses (includes $142,618 and $136,274 relating to Reciprocal Exchanges) $ 1,597,439 $ 1,632,113
Unearned premium (includes $99,907 and $102,991 relating to Reciprocal Exchanges) 897,402 893,176
Reinsurance balances payable (includes $5,479 and $3,466 relating to Reciprocal Exchanges) 19,354 20,794
Funds held under reinsurance agreements 95,731 96,726
Other liabilities (includes $25,252 and $7,154 relating to Reciprocal Exchanges) 272,799 266,155
Deferred income taxes (includes $(1,635) and $4,511 relating to Reciprocal Exchanges) 32,148 29,337
Debt     427,590       426,901  
Total liabilities 3,342,463 3,365,202
Stockholders' equity

Common stock ($0.01 par value; 100,000,000 shares authorized, 46,769,519 and 46,448,341 shares issued, and 39,441,136 and 39,221,102 shares outstanding)

468 465
Treasury stock (7,328,383 and 7,227,239 shares) (160,327 ) (158,185 )
Paid-in-capital 774,963 772,938
Accumulated other comprehensive income 73,369 62,244
Retained earnings     369,916       356,680  
Tower Group, Inc. stockholders' equity     1,058,389       1,034,142  
Noncontrolling interests     54,698       42,851  
Total stockholders' equity     1,113,087       1,076,993  
Total liabilities and stockholders' equity   $ 4,455,550     $ 4,442,195  
 

Tower Group, Inc.
Consolidated Statements of Income
(Unaudited)   Three Months Ended
March 31,
(in thousands, except per share amounts)     2012     2011
Revenues  
Net premiums earned $ 420,158 $ 379,795
Ceding commission revenue 5,163 8,181
Insurance services revenue 497 602
Policy billing fees 3,134 2,178
Net investment income 33,943 32,378
Net realized investment gains (losses):
Other-than-temporary impairments (2,721 ) (168 )
Portion of loss recognized in other comprehensive income - 24
Other net realized investment gains     6,304       7,504  
Total net realized investment gains (losses)     3,583       7,360  
Total revenues 466,478 430,494
Expenses
Loss and loss adjustment expenses 267,493 240,176
Direct and ceding commission expense 79,685 76,603
Other operating expenses 78,971 66,339
Acquisition-related transaction costs 1,262 12
Interest expense     7,576       8,100  
Total expenses     434,987       391,230  
Income before income taxes 31,491 39,264
Income tax expense     1,850       12,758  
Net income $ 29,641 $ 26,506
Less: Net income attributable to Noncontrolling interests     9,007       821  
Net income attributable to Tower Group, Inc.   $ 20,634     $ 25,685  
Earnings per share attributable to Tower Group, Inc. stockholders:
Basic $ 0.53 $ 0.61
Diluted   $ 0.52     $ 0.61  
Weighted average common shares outstanding:
Basic 39,233 41,794
Diluted     39,307       41,930  
Dividends declared and paid per common share   $ 0.19     $ 0.13  

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