Tower Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Tower Group (TWGP)

Q4 2011 Earnings Call

February 28, 2012 9:00 am ET

Executives

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

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

Analysts

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

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

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

Presentation

Operator

Good morning, ladies and gentlemen. My name is Tyrone, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Tower Group's Fourth 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 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. As we noted in our earnings release, in October 2010, the Financial Accounting Standards Board issued a new guidance concerning the accounting for costs 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 had $42.6 million. Diluted operating earnings per share for the fourth quarter 2010 and for the year ended December 31, 2010, were reduced by $0.04 and $0.31 per share respectively, as a result of this change in accounting. As a reminder, Michael and I will be speaking today and referencing the slideshow that is available on our website, www.twrgrp.com under the Investor section. Also, a replay of this call will be on the Tower website immediately following the call. Now 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 fourth quarter and 2011 operating results. Let me start on Page 2 by giving everyone a brief snapshot of our fourth quarter and 2011 results. We had an operating income of $25 million during the fourth quarter, which was in line with our expectations. We also began to see some positive market trends in the fourth quarter, especially for workers' compensation, homeowners and coastal commercial property business. We expect these trends to continue into 2012. For the year, we were pleased with our operating results.

Excluding the weather-related losses, we generated a combined ratio of 95.2% and an ROE of 9.8%. We were pleased with our accomplishments, including the successful implementation of the organic growth initiative. We were also pleased with the progress that we made with key technology projects and the integration of our acquisitions.

As shown on Page 3, our operating income for the fourth quarter was $25 million or $0.63 per diluted share compared to the operating income of $33.3 million in the same quarter of last year or $0.80 per diluted share. During the quarter, we had a $15 million favorable development from the third quarter Hurricane Irene losses. We strengthened our 2011 action year loss reserves by $15 million in the fourth quarter, consistent with our goal to maintain a more conservative loss ratio selection for the current and future action year results. We also experienced a $7 million loss from the Halloween winter storms in the fourth quarter. For the year, our operating income and earnings per share were $56 million and $1.37, respectively, compared with $97.2 million and $2.23 per share in 2010. Excluding the storm losses, our operating income and earnings per share were $104.3 million and $2.55, respectively, a slight improvement on an EPS basis from 2010. Our book value decreased by 1% to $1.034 billion from $1.045 billion due to our earnings being offset by share repurchases of $64.6 million since the fourth quarter of last year, and us making a $28 million in dividend payments. Even after the unprecedented storm losses, the significant increase in our annual dividend payment to $0.75 per share, and adjustment to our book value from adjusting our deferred acquisition costs, our book value per share increased by 5% to $26.37 in the fourth quarter from $25.19 during the same period last year.

As shown on Page 4, we continue to see great strength in our core business especially in terms of profitable growth. During the quarter, we generated $434 million in gross premiums written and managed after taking into account of $23 million in premium reduction resulting from a commutation of a reinsurance treaty that we entered into during the third quarter. Excluding this premium reduction, we increased our gross premiums written and managed by 6% over the same period last year as a result of organic growth. For the year, we increased our gross premiums written and managed by 21% to $1.8 billion from $1.5 billion last year, driven partly from the continued growth from the OneBeacon Personal Lines acquisition in 2009, as well as from organic growth. Our combined ratio excluding the reciprocals was 97.3% for the fourth quarter and 100.8% for the year, which compared favorably with the industry combined ratio for 2011, which is projected to be 107.5%. Our ROE was 9.6% for the quarter and 5.4% for the year. Excluding the storm losses, our ROE was 9.8% for the year, which is slightly below our near-term target of 10% to 12%. We believe we will be close to this near-term target in 2012 and within this range the following year as Bill will further explain later on this presentation.

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