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Tower Group Reports Third Quarter Results

Stocks in this article: TWGP

Tower Group, Inc. (NASDAQ: TWGP) today reported net loss attributable to common shareholders in the third quarter of 2011 of $16.4 million, or ($0.40) per diluted share. Net income attributable to common shareholders in the third quarter of 2010 was $28.6 million, or $0.66 per diluted share.

Operating loss (1) was $15.3 million in the third quarter of 2011, or ($0.38) per diluted share compared to operating income of $27.9 million in the third quarter of 2010, or $0.65 per diluted share. The 2011 operating loss included catastrophe losses from Hurricane Irene of $60.1 million ($39.1 million after-tax, or $0.96 per diluted share). In addition, as a result of the Company's regular review of reserves in the third quarter of 2011, including the reserves of the companies acquired during the last few years, the Company recorded a pretax net increase to loss reserves of $9.7 million ($6.3 million after-tax or $0.15 per diluted share) as a result of increases in the Commercial segment of $23.5 million partially offset by favorable development in the Personal segment of $13.8 million. The pre-tax net increase to loss reserves included $10.7 million in increases from certain programs that the Company discontinued in 2010 and early 2011.

In October 2010, the Financial Accounting Standards Board issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. Tower adopted this guidance early, effective January 1, 2011, and has retrospectively adjusted its previously issued financial information, reducing previously reported diluted earnings per share for the third quarter 2010 by $0.12 per share.

Highlights (all figures compare third quarter 2011 results to the results for the same period in 2010 except as noted):

  • Gross premiums written increased by 16.0% to $519.1 million.
  • For the combined insurance segments, the net combined ratio rose to 109.9% from 96.8%. (Excluding the business that Tower manages on behalf of the Reciprocal Exchanges, the net combined ratio was 112.0% for the third quarter of 2011.)
    • The net loss ratio increased to 75.0% from 61.1%. The net loss ratio excluding the Reciprocal Exchanges increased to 77.6% from 59.1%. The catastrophe losses added 16.1 points to the third quarter 2011 net loss ratio, and 16.4 points to the third quarter 2011 net loss ratio excluding the Reciprocal Exchanges
    • The net expense ratio improved to 34.9% from 35.7%.
  • Net investment income increased 7.2% to $31.4 million.
  • Book value per share was $25.42 at September 30, 2011 compared to $25.19 at December 31, 2010. During the quarter, Tower paid cash dividends of 18.75 cents per share, and year to date Tower has paid cash dividends of 50 cents per share.
  • Tower Group, Inc. stockholders’ equity was $1.0 billion at September 30, 2011.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, “Irene delivered the single largest loss event in our twenty-year history, and led to our first quarterly loss since going public in 2004. In addition, we conducted a comprehensive review of our loss and loss expense reserves, including the reserves of the companies that we have acquired during the last few years. Based on this review, we made an adjustment to our reserves to reflect adverse development in commercial lines, including certain discontinued program business, which was partially offset by a release in reserves from the personal lines business. Despite these losses, we continue to see great strength in our core business, as reflected by the favorable combined ratio excluding these losses, strong organic growth from the newly created businesses, positive pricing trends and our declining expense ratio. During the quarter, we also implemented a product innovation initiative to identify and develop new products in profitable market segments. As part of this initiative, we strengthened our business development, product development and marketing capabilities by making several key senior-level hires. As a result of this initiative and the success of the newly created business units, we expect to generate strong organic growth for the remainder of this year and throughout next year.”

 

Financial Summary ($ in thousands, except per share data):

    Three Months Ended   Nine Months Ended
September 30, September 30,
2011   2010 2011   2010
Gross premiums written $ 519,130 $ 447,599 $ 1,376,662 $ 1,062,511
Net premiums written 468,704 389,661 1,257,717 929,397
Total commission and fee income 10,210 13,928 34,412 35,156
Net investment income 31,411 29,294 95,587 76,400
Net realized investment gains 227 1,717 5,273 7,623
Total revenues 455,295 423,718 1,322,044 1,038,971
Net income (loss) attributable to Tower Group, Inc. (16,439 ) 28,563 33,367 67,257
Earnings (loss) per share—Basic $ (0.40 ) $ 0.67 $ 0.82 $ 1.52
Earnings (loss) per share—Diluted $ (0.40 ) $ 0.66 $ 0.81 $ 1.52
Return on average equity (-6.3 %) 11.3 % 4.3 % 8.9 %
 
Combined Commercial and Personal Segments
Net premiums earned $ 413,447 $ 378,779 $ 1,186,772 $ 919,792
Net loss ratio 75.0 % 61.1 % 66.7 % 61.0 %
Net expense ratio(2) 34.9 % 35.7 % 34.4 % 35.9 %
 
Commercial Insurance Segment
Net premiums earned $ 290,113 $ 237,584 $ 805,616 $ 701,159
Net loss ratio 76.4 % 62.4 % 68.6 % 61.3 %
Net expense ratio 32.5 % 34.8 % 32.0 % 35.1 %
 
Personal Insurance Segment
Net premiums earned $ 123,334 $ 141,195 $ 381,156 $ 218,633
Net loss ratio 71.8 % 58.9 % 62.6 % 59.8 %
Net expense ratio 40.6 % 37.1 % 39.5 % 38.4 %
 
Reconciliation of non-GAAP financial measures:
Net income (loss) attributable to Tower Group, Inc. $ (16,439 ) $ 28,563 $ 33,367 $ 67,257
Less: net realized gains (losses) on investments attributable to Tower Group, Inc. (1,135 ) 1,292 4,245 7,198
Add: acquisition-related transaction costs (425 ) (148 ) (437 ) (1,398 )
Add: income tax effects on above items 428   (441 ) (1,454 ) (2,417 )
Operating income (loss) attributable to Tower Group, Inc. $ (15,307 ) $ 27,860   $ 31,013   $ 63,874  
 
Operating earnings (loss) per share—Basic $ (0.38 ) $ 0.65 $ 0.75 $ 1.45
Operating earnings (loss) per share—Diluted $ (0.38 ) $ 0.65 $ 0.75 $ 1.44
Operating return on average equity (-5.9 %) 11.0 % 4.0 % 8.4 %
 

Third Quarter 2011 Highlights

Consolidated

Gross premiums written increased to $519.1 million in the third quarter, 16.0% higher than in the third quarter of 2010. Excluding programs, policies in-force decreased by 8.2% as of September 30, 2011, compared to September 30, 2010. The decline resulted from Tower’s decision to not renew certain business obtained in the OneBeacon Personal Lines (OBPL) acquisition.

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