Tower Group, Inc. (TWGP)
Q2 2010 Earnings Call Transcript
August 9, 2010 10:00 am ET
Thomas Song – Managing VP
Michael Lee – Chairman, President and CEO
Bill Hitselberger – SVP and CFO
Beth Malone – Wunderlich Securities
Adam Klauber – Macquarie
Mike Grasher – Piper Jaffray
Bijan Moazami – FBR Capital Markets
Robert Farnam – KBW
Previous Statements by TWGP
» Tower Group, Inc. Q1 2010 Earnings Call Transcript
» Tower Group, Inc. Q4 2008 Earnings Call Transcript
» Tower Group, Inc. Q3 2008 Earnings Call Transcript
Good morning, ladies and gentlemen. My name is Ally and I will be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Second Quarter 2010 Earnings Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers there will be question-and-answer period.
It is now my pleasure to turn the floor over to your host, Managing Vice President, Mr. Thomas Song. Please go ahead, sir.
Thank you, operator. Good morning. Before I turn the call over to Tower Group President and CEO, Michael Lee and the company's Senior Vice President and CFO, Bill Hitselberger, I would remind you that some of the statements that will be made during the call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in these forward-looking statements. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time.
Also, I want to remind everyone that a replay of this call will be available in the Investor Relations section at Tower's website.
Now I’d like to turn the call over to Michael.
Thank you, Tom and good morning everyone. I’d like to thank all of you for joining us on this conference call to discuss our second quarter operating results. Our operating income, which excludes realized capital gains on investment and transaction related expenses was $25.3 million or $0.57 per diluted share compared with $29.5 million or $0.73 per diluted share during the same period last year. Including the realized capital gains and transaction related expenses, our net income and diluted earnings per share were $28.3 million or $0.63 per diluted share respectively.
Our June 30, 2010 book value per share of $24.81 exhibited strong growth with sequential growth of 3.9% during the quarter, 6.3% since year-end and 18.5% on a year-over-year basis. During the second quarter, our total premiums increased by 26.7% to $331 million from $261 million during the same period last year with a combined ratio of 93% comprised of a loss ratio of 58.6% and an expense ratio of 34.4%. As Bill will explain later, the expense ratio is anticipated to decline during the second half of the year.
On this morning's call, I will provide you with updates in several areas of our business, including our views on the current market conditions, our business strategies and the acquisition of OneBeacon's Personal Lines Division which we closed on July 1. Bill will then provide a detailed overview of our financial performance and earnings guidance. We will conclude this call with a question-and-answer session.
As we’ve been mentioning in prior quarters, we continue to see soft insurance market conditions across the industry. In fact, the challenging market conditions in our industry, combined with weak economic conditions that continued this quarter, validated our strategy over the past two years of building a larger, diversified company focusing on the consolidation of profitable business through acquisitions and maintaining underwriting and cost discipline.
During the last several quarters, our operating performance, as measured by earnings per share was adversely affected while we were deploying the capital that that we acquired from CastlePoint and integrating acquisitions, as well as by the need to adjust our expected loss ratio upward to reflect the competitive underwriting environment.
During our earnings call last quarter, we indicated that our operating performance in 2010 would improve in the second half of the year, especially after we closed on the OneBeacon acquisition. Based on the strong operating results this quarter and the anticipated benefits from the OneBeacon transaction on July 1, we are confident on our outlook for the remainder of the year and for 2011.
In response to challenging market conditions, we have utilized our diversified business platform and allocated capital to profitable markets while aggressively re-underwriting unprofitable segments of our renewal business. Through acquisitions we have also successfully broadened our commercial business, added to our specialty business and with the OneBeacon acquisition, we have substantially expanded our Personal Lines product offerings and capabilities.
In addition, we have successfully grown our business by consolidating renewal business rather than competing for new business in competitive market segments. During the quarter we have continued to successfully implement our underwriting strategy to focus on growing our small premium size commercial policies, while reducing our volume of middle market commercial lines policies. We have implemented this strategy as we believe the pricing and retention on the small account business is better than the middle and large account business.
As a result, we are seeing higher retention rates and relatively more favorable pricing on our commercial business. In addition to focusing on underwriting small premium size policies, we have revised our strategy for the specialty business this quarter by consolidating the specialty division with our commercial lines operations. We have made this change to allow our regional offices to develop and market specialty niche products through our selected retail and wholesale agents, which offsets the reduced premium volume from the middle and large commercial accounts.