Tower Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Tower Group (TWGP)

Q3 2011 Earnings Call

November 08, 2011 9:00 am ET

Executives

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

Michael H. Lee - Chairman, Chief Executive Officer and President

Analysts

Adam Klauber - William Blair & Company L.L.C., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Robert Farnam - Keefe, Bruyette, & Woods, Inc., Research Division

Richard W. Mortell - Piper Jaffray Companies, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. My name is Tyrone, I'll be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Third 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 E. 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 those presented 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.

As we noted in our earnings release, in October 2010, the Financial Accounting Standards Board issued new guidance concerning the accounting per cost associated with acquiring or renewing insurance contracts. We adopted this guidance effective January 1, 2011, and 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 earnings per share for the third quarter 2010 and for the 9-month ended September 30, 2010, were reduced by $0.12 and $0.27 per share, respectively as a result of this change in accounting.

As a reminder, Michael and I will be speaking today and referencing a slide show that is available on our website at www.twrgrp.com under the Investors section. Also a replay of this call will be on the Tower website immediately following the call.

With that I'd like to turn the call over to Michael.

Michael H. 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 third quarter operating results. Let me start on Page 2 by giving everyone a brief snapshot of our third quarter results. We had a $15.3 million operating loss during the third quarter due to the $60 million loss from Hurricane Irene and net after-tax loss reserve strengthening of $6.3 million, primarily from terminated business. Excluding these 2 items, we had a strong operating results with a year-to-date, 93.6% combined ratio and 10.8% return on equity.

For the first time in several years, our growth was driven almost exclusively by organic growth rather than external growth from acquisitions. We're also seeing positive pricing trends, which bode well for our business going into the fourth quarter and 2012.

As shown on Page 3, our operating loss was $15.3 million or $0.38 per diluted share compared to operating income of $27.9 million in the same quarter last year or $0.65 per diluted share. Operating income was impacted by catastrophe losses, primarily related to Hurricane Irene of $39.1 million after tax or $0.96 per diluted share. The storm losses added 16.4 points to the third quarter 2011 loss ratio for the combined segments, excluding the Reciprocal Exchanges. Tower recorded no severe weather losses in the third quarter of 2010.

In addition, we conducted a comprehensive review of our reserves during the quarter, including the reserves that we have established from various companies that we have acquired during the last few years. Based on this review, we recorded a pretax net increase to loss reserves, excluding Reciprocal Exchanges, of $9.7 million or $6.3 million after tax or $0.15 per diluted share, primarily due to prior accident year development from various program business that the company discontinued in 2010 and early 2011. Excluding the catastrophe losses and the reserve strengthening, our third quarter operating income net operating EPS would have been $30.1 million and $0.73, respectively.

Our book value decreased by 4% to $1.01 billion from $1.053 billion due to our earnings being offset by share repurchases of $54.6 million through the third quarter of last year and making $25.6 million in dividend payments. Our book value per share increased slightly from the third quarter of last year, even after taking into account the severe weather losses and making $0.625 per share in dividend payments since third quarter of 2010.

As shown on Page 4, despite the unprecedented losses from Irene, we continue to see great strength in our core business. While our growth during the last few years has resulted primarily from acquisitions, our 16% premium growth during this quarter was driven primarily by organic growth from 2 newly created business units, Customized Solutions and Assumed Reinsurance. For the 9-month period, our premiums grew by 38% to $1.377 billion from $1.063 billion during the same period last year. Our combined ratio was 109.9% this quarter compared to 96.8% during the same period last year.

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