Tower Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Tower Group (TWGP)

Q2 2011 Earnings Call

August 09, 2011 9:00 am ET

Executives

Michael Lee - Chairman, Chief Executive Officer and President

William Hitselberger - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Richard Mortell - Piper Jaffray Companies

Robert Paun - Sidoti & Company, LLC

Randy Binner - FBR Capital Markets & Co.

Elizabeth Malone - Wunderlich Securities Inc.

Adam Klauber - William Blair & Company L.L.C.

Presentation

Operator

Good morning, ladies and gentlemen. My name is Tyrone, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Bill Hitselberger, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

William Hitselberger

Thank you, Tyrone, and good morning, everyone. Before I turn the call over to Tower Group President and CEO, Michael Lee, I would like to remind you that some of the statements that will be presented during this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from these projected in the 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.

As we noted in our earnings release, in October 2010, the Financial Accounting Standards Board issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. We have adopted this guidance effective January 1, 2011, and have therefore adjusted our previously issued financial information. Adoption of this guidance reduced the carrying value of our deferred acquisition costs as of December 31, 2010, by $78.7 million and Tower Group Inc.'s stockholders' equity by $42.6 million. Diluted operating earnings per share for the second quarter 2010 and for the 6 months ended June 30, 2010, were reduced by $0.06 and $0.16 per share, respectively, as a result of this change in accounting.

A replay of this call will be available on the Tower website at www.twrgrp.com. Also during the course of this call, Michael and I will be referring to slides that are available on our website in the Investor Relations section under the caption Events. Now, I'd like to turn the call over to Michael.

Michael Lee

Thank you, Bill 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. As described in last night's press release, we continued to see positive trends in our business during this quarter despite significant industry catastrophe losses and challenging market conditions. As shown on Page 2, our operating income increased by 15% to $26 million in the second quarter from $22.6 million during the same period last year. Our diluted operating EPS increased by 24% to $0.63 per share compared to $0.51 per share during the same period last year. As we previously announced, we experienced $4.6 million or $0.11 per share of losses from the tornado activity in Alabama and Massachusetts. The storm losses added 1.8 points to the second quarter 2011 loss ratio of the combined segments. Tower reported no severe weather losses in the second quarter of 2010. Excluding the cat losses, our second quarter 2011 net income and operating EPS would have been $30.6 million and $0.74, respectively. Our book value increased by 4% to $1.07 billion from $1.03 billion even after repurchasing $60.8 million of shares since the second quarter of last year and after making $23 million in dividend payments. Our book value per share increased by 8% this quarter from the second quarter of last year even after making $0.56 per share in dividend payments since the second quarter of 2010.

As shown on Page 3, we continue to see positive trends in our operating results as measured by growth, combined ratio and return on equity. The most significant positive factor that we are seeing is our ability to continue to grow our business profitably despite the challenging industry market conditions. Our gross premiums written and managed increased by 41% in the second quarter to $468 million from $332 million for the same period last year. This growth was driven primarily by the acquisition of the OneBeacon Personal Lines division and the organic growth from new business units, customized solutions and assumed reinsurance and risk sharing. I will provide more details on these initiatives later on this call. In addition to achieving an impressive top line growth rate, we were able to maintain our underwriting discipline as demonstrated by a 94.9% combined ratio this quarter compared to 94.5%...

Operator

Sure. [indiscernible] conference code is -- yes, I'm not on speakerphone. Can you hear me?

Michael Lee

Operator, you're interrupting this call.

Operator

I apologize for the disruption.

Michael Lee

In addition to achieving an impressive top line growth rate, we were able to maintain our underwriting discipline as demonstrated by a 94.9% combined ratio this quarter compared to 94.5% for the same period last year. Excluding losses from the storms, our combined ratio for the quarter was 93.1%. Finally, our return on equity was 9.9% this quarter compared to 9.4% during the same period last year. Excluding the storm losses, our return on equity was 11.7%. We project our ROE to increase gradually throughout the rest of the year, mainly driven by the lower combined ratio and higher investment income.

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