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Tower Group Reports Second Quarter Results

Tower Group, Inc. (NASDAQ: TWGP) today reported a net loss attributable to common shareholders in the second quarter of 2012 of $15.1 million, or ($0.39) per diluted share. Net income attributable to common shareholders in the second quarter of 2011 was $24.1 million, or $0.58 per diluted share.

Operating loss (1) was $15.5 million in the second quarter of 2012, or ($0.39) per diluted share, compared to operating income of $26.0 million in the second quarter of 2011, or $0.63 per diluted share. The 2012 operating loss included an after-tax charge of $42.3 million, or $1.08 per share, associated with prior year reserve strengthening compared to $0.3 million or $0.01 per share of favorable reserve development in the second quarter of 2011. The reserve strengthening relates primarily to unfavorable development in the company’s Commercial Insurance segment arising from changes in estimated ultimate losses for accident years 2011 and prior. During the quarter Tower conducted detailed reserve studies for all lines using loss data through the first quarter of 2012 as well as reported claims during the second quarter, including analysis of the source of unusually high reported loss emergence for certain casualty lines, primarily workers’ compensation and commercial automobile, observed during the first and second quarters of 2012. In the second quarter 2012 we also experienced $3.3 million in after-tax severe weather losses or $0.08 per share, compared to after-tax severe weather losses of $4.6 million or $0.11 per share in the same time period last year. Excluding the business managed by reciprocals, the storm losses added 1.2 points to the second quarter 2012 loss ratio compared to 2.1 points in the same time period last year.

Highlights (all figures compare second quarter 2012 results to the results for the same period in 2011 except as noted):

  • Gross premiums written and managed increased by 14.9% to $537.6 million.
  • For the combined insurance segments, the net combined ratio rose to 110.8% from 94.9%. (Excluding the business that Tower manages on behalf of the reciprocal exchanges, the net combined ratio was 110.9% for the second quarter of 2012.)
    • The net loss ratio increased to 76.0% from 61.2%. The net loss ratio excluding the reciprocal exchanges increased to 77.3% from 62.4%, with the reserve adjustment adding 15.6 points to the second quarter 2012 net loss ratio.
    • The net expense ratio was 34.8 % compared to 33.7%.
  • Net investment income was flat at $31.8 million.
  • Book value per share was $26.53 at June 30, 2012 compared to $26.37 at December 31, 2011. During the quarter, Tower paid cash dividends of 18.75 cents per share, and year to date Tower has paid cash dividends of 37.50 cents per share.
  • Tower Group, Inc. stockholders’ equity was $1.0 billion at June 30, 2012.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, “During the quarter, we took an important step to establishing a diversified global specialty insurance company by entering into an agreement with Canopius to merge Tower with Canopius’ Bermuda operations. We believe this transaction will allow us to access U.S., Bermuda and Lloyd’s markets to enhance our profitability and create new business opportunities. As part of our strategic review during the second quarter, we conducted a comprehensive review of our prior accident year and strengthened our prior accident year reserves. We believe we have taken decisive actions to address our reserve position from prior accident years, so that our future results should better reflect the underwriting profitability of our ongoing business. Excluding this reserve development, our operating results continue to be strong, and in the second quarter we experienced 15% top line growth and a 95.3% combined ratio. During the quarter, we continued to successfully implement our organic growth initiative to expand into new products, and improve existing and create new business units. We also continue to see signs of improving market conditions which are allowing us to continue to drive rate increases to further improve our underwriting profitability. In summary, due to our transaction with Canopius, actions that we have taken this quarter with respect to our reserve position, the success of the organic growth initiative and improving market conditions, we have a positive outlook for the remainder of 2012 and 2013.”

Financial Summary ($ in thousands, except per share data):
                 
Three Months Ended June 30,
2012 2011
Reciprocal Elimina- Reciprocal Elimina-
    Tower   Exchanges   tions   Total   Tower   Exchanges   tions   Total
Net premiums written   $ 441,613     $ 44,620     $ -     $ 486,233     $ 383,865     $ 45,130     $ -     $ 428,995  
Revenues
Net premiums earned $ 417,612 $ 42,541 $ - $ 460,153 $ 342,789 $ 50,741 $ - $ 393,530
Ceding commission revenue 6,855 3,225 - 10,080 9,107 1,548 - 10,655
Insurance services revenue 9,324 - (7,965 ) 1,359 7,631 - (7,704 ) (73 )
Policy billing fees 2,871 129 - 3,000 2,512 147 - 2,659
Net investment income 30,268 3,177 (1,664 ) 31,781 30,419 3,051 (1,672 ) 31,798
Total net realized investment gains
  (losses)     1,421       (1,657 )     -       (236 )     (2,857 )     543       -       (2,314 )
  Total revenues     468,351       47,415       (9,629 )     506,137       389,601       56,030       (9,376 )     436,255  
Expenses
Loss and loss adjustment expenses 322,842 26,933 - 349,775 213,970 26,876 - 240,846
Direct and ceding
commission expense 87,024 8,162 - 95,186 69,726 6,484 - 76,210
Other operating expenses 71,459 14,606 (7,965 ) 78,100 62,812 14,641 (7,704 ) 69,749
Acquisition-related transaction costs 720 - - 720 - - - -
Interest expense     7,902       1,664       (1,664 )     7,902       8,257       1,672       (1,672 )     8,257  
  Total expenses     489,947       51,365       (9,629 )     531,683       354,765       49,673       (9,376 )     395,062  
Income (loss) before income taxes (21,596 ) (3,950 ) - (25,546 ) 34,836 6,357 - 41,193
Income tax expense (benefit)     (6,483 )     (756 )     -       (7,239 )     10,715       2,162       -       12,877  
Net income (loss)   $ (15,113 )   $ (3,194 )   $ -     $ (18,307 )   $ 24,121     $ 4,195     $ -     $ 28,316  
 
Ratios                                
Net calendar year loss and LAE 77.3 % 63.3 % 76.0 % 62.4 % 53.0 % 61.2 %
Net underwriting expenses 33.6 % 45.6 % 34.8 % 33.0 % 38.3 % 33.7 %
Net Combined 110.9 % 108.9 % 110.8 % 95.4 % 91.3 % 94.9 %
 
Return on Average Equity     -5.8 %                 9.2 %            

Financial Summary ($ in thousands, except per share data):
                 
Six Months Ended June 30,
2012 2011
Reciprocal Elimina- Reciprocal Elimina-
    Tower   Exchanges   tions   Total   Tower   Exchanges   tions   Total
Net premiums written   $ 829,204     $ 82,713     $ -     $ 911,917     $ 703,255     $ 85,758     $ -     $ 789,013  
Revenues
Net premiums earned $ 796,281 $ 84,030 $ - $ 880,311 $ 677,326 $ 95,999 $ - $ 773,325
Ceding commission revenue 8,933 6,310 - 15,243 15,924 2,912 - 18,836
Insurance services revenue 16,683 - (14,827 ) 1,856 14,928 - (14,399 ) 529
Policy billing fees 5,873 261 - 6,134 4,546 291 - 4,837
Net investment income 62,525 6,526 (3,327 ) 65,724 61,107 6,395 (3,326 ) 64,176

Total net realized investment gains (losses)

    1,028       2,319       -       3,347       5,380       (334 )     -       5,046  
  Total revenues     891,323       99,446       (18,154 )     972,615       779,211       105,263       (17,725 )     866,749  
Expenses
Loss and loss adjustment expenses 566,091 51,177 - 617,268 430,418 50,604 - 481,022

Direct and ceding commission expense

158,936 15,935 - 174,871 135,755 17,058 - 152,813
Other operating expenses 144,355 27,543 (14,827 ) 157,071 123,814 26,673 (14,399 ) 136,088
Acquisition-related transaction costs 1,982 - - 1,982 12 - - 12
Interest expense     15,478       3,327       (3,327 )     15,478       16,357       3,326       (3,326 )     16,357  
  Total expenses     886,842       97,982       (18,154 )     966,670       706,356       97,661       (17,725 )     786,292  
Income before income taxes 4,481 1,464 - 5,945 72,855 7,602 - 80,457
Income tax expense (benefit)     (1,040 )     (4,349 )     -       (5,389 )     23,049       2,586       -       25,635  
Net income   $ 5,521     $ 5,813     $ -     $ 11,334     $ 49,806     $ 5,016     $ -     $ 54,822  
 
Ratios                                
Net calendar year loss and LAE 71.1 % 60.9 % 70.1 % 63.5 % 52.7 % 62.2 %
Net underwriting expenses 34.3 % 43.9 % 35.2 % 33.0 % 42.2 % 34.1 %
Net Combined 105.4 % 104.8 % 105.3 % 96.5 % 94.9 % 96.3 %
 
Return on Average Equity     1.1 %                 9.5 %            

 

Reconciliation of non-GAAP financial measures ($ in thousands, except per share data):

           
Three Months Ended Six Months Ended
June 30, June 30,
    2012   2011   2012   2011
Net income (loss) attributable to Tower Group, Inc. $ (15,113 ) $ 24,121 $ 5,521 $ 49,806
Net realized (gains) losses on investments (1,421 ) 2,857 (1,028 ) (5,380 )
Acquisition-related transaction costs 720 - 1,982 12
  Income tax     363       (1,000 )     (5 )     1,882  
  Operating income (loss) attributable to Tower Group, Inc.   $ (15,451 )   $ 25,978     $ 6,470     $ 46,320  
 
Ratios                
Operating earnings (loss) per share - Basic $ (0.39 ) $ 0.63 $ 0.17 $ 1.12
Operating earnings (loss) per share - Diluted $ (0.39 ) $ 0.63 $ 0.16 $ 1.12
  Operating return on average equity     -5.9 %     9.9 %     1.2 %     8.8 %
 




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