Tower Group, Inc. Reports First Quarter 2012 Results

Tower Group, Inc. (NASDAQ: TWGP) today reported net income available to common shareholders of $20.6 million and diluted earnings per share of $0.52 for the first quarter 2012, compared to $25.7 million, or $0.61 per share, in the first quarter of 2011.

Operating income (1) increased 7.8% to $21.9 million in the first quarter compared to $20.3 million in the first quarter of 2011. Operating earnings per share (1) increased by 14.3% to $0.56 in the first quarter from $0.49 per share in the first quarter of 2011. The 2012 results include an after-tax charge of $8.4 million associated with prior year reserve strengthening and also reflect lower than expected property losses, as unseasonably warm weather on the East Coast of the United States resulted in lower property claims. Operating income in the first quarter of 2011 was impacted by unusually severe weather-related claims. After-tax losses from these events amounted to $9.8 million or $0.23 per share.

The effective tax rate, excluding the reciprocal exchanges, was 20.9%, a decrease of 11.5 points compared to 2011. The reduced tax rate is primarily due to a revaluation of certain tax liabilities which reduced the tax rate by 10 points and resulted in a $2.6 million benefit which is not expected to be recurring.

Highlights (all percentage increases compare first quarter 2012 results for Tower Group, Inc., excluding the reciprocal exchanges, to the results for the same period in 2011 except as noted otherwise):
  • Gross premiums written and managed increased by 20.0% to $467.4 million.
  • For the combined insurance segments, the net combined ratio was 99.2% compared to 97.6%.
    • The net loss ratio was 64.2% compared to 64.7%.
    • The net expense ratio was 35.0% compared to 32.9%.
  • Net investment income increased by 5.1% to $32.3 million.
  • Consolidated cash flows from operating activities increased by 193.7% to $30.9 million.
  • Book value per share was $26.83, an increase of 1.7% from December 31, 2011 and an increase of 6.3% from March 31, 2011. Tower Group, Inc. stockholders’ equity was $1.1 billion as of March 31, 2012.
  • Tower paid 18.75 cents per share in dividends in the first quarter 2012, compared to 12.5 cents per share in the first quarter 2011.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, “During the first quarter, we were able to achieve strong top line growth and meaningful rate increases due to improved market conditions across several areas of our business. We also continued to execute our organic growth strategy by enhancing our product offerings to drive our strong top line growth. In addition, we successfully initiated implementation of our personal lines technology platform and expect all new personal lines business to be written through this new system by the middle of this year. We expect to retire the existing system by next year. Finally, we are very pleased with our recently announced commitment to invest in Canopius Group Ltd. as well the options we will receive with this investment to access, subject to the approval of Lloyd’s and the FSA, the Lloyd's market to underwrite profitable specialty and international business and to combine Tower with a Bermuda reinsurance business currently operated by Canopius. With the improvement in our core business in the United States and the opportunities from our transaction with Canopius, we expect our operating results and return on equity to continue to improve throughout the remainder of 2012 and beyond.”
Financial Summary ($ in thousands, except per share data):
 
  Three Months Ended March 31,
2012   2011
 

 

Reciprocal
 

 

Elimina-
     

 

Reciprocal
 

 

Elimina-
 
      Tower  

 

Exchanges
 

 

tions
      Total Tower  

 

Exchanges
 

 

tions
    Total
Net premiums written   $ 387,591     $ 38,093     $ -       $ 425,684     $ 319,390     $ 40,628     $ -     $ 360,018  
Revenues
Net premiums earned $ 378,669 $ 41,489 $ - $ 420,158 $ 334,537 $ 45,258 $ - $ 379,795
Ceding commission revenue 2,078 3,085 - 5,163 6,817 1,364 - 8,181
Insurance services revenue 7,359 - (6,862 ) 497 7,297 - (6,695 ) 602
Policy billing fees 3,002 132 - 3,134 2,034 144 - 2,178
Net investment income 32,257 3,349 (1,663 ) 33,943 30,688 3,344 (1,654 ) 32,378
Total net realized investment gains     (393 )     3,976       -         3,583       8,237       (877 )     -       7,360  
Total revenues     422,972       52,031       (8,525 )       466,478       389,610       49,233       (8,349 )     430,494  
Expenses
Loss and loss adjustment expenses 243,249 24,244 - 267,493 216,448 23,728 - 240,176

Direct and ceding commission expense
71,912 7,773 - 79,685 66,029 10,574 - 76,603
Other operating expenses 72,896 12,937 (6,862 ) 78,971 61,002 12,032 (6,695 ) 66,339
Acquisition-related transaction costs 1,262 - - 1,262 12 - - 12
Interest expense     7,576       1,663       (1,663 )       7,576       8,100       1,654       (1,654 )     8,100  
Total expenses     396,895       46,617       (8,525 )       434,987       351,591       47,988       (8,349 )     391,230  
Income before income taxes 26,077 5,414 - 31,491 38,019 1,245 - 39,264
Income tax expense     5,443       (3,593 )     -         1,850       12,334       424       -       12,758  
Net income   $ 20,634     $ 9,007     $ -       $ 29,641     $ 25,685     $ 821     $ -     $ 26,506  
 
Ratios                                                  
Net calendar year loss and LAE 64.2 % 58.4 % 63.7 % 64.7 % 52.4 % 63.2 %
Net underwriting expenses 35.0 % 42.2 % 35.7 % 32.9 % 46.6 % 34.5 %
Net Combined 99.2 % 100.6 % 99.4 % 97.6 % 99.0 % 97.7 %
 
Return on Average Equity     7.9 %                         9.9 %                  
 
                                                   
Reconciliation of non-GAAP financial measures:                                                  
Net income attributable to Tower Group, Inc. $ 20,634 $ 25,685
Net realized (gains) losses on investments 393 (8,237 )
Acquisition-related transaction costs 1,262 12
Income tax (expense) benefit                         (368 )                       2,882  
Operating income attributable to Tower Group, Inc.                       $ 21,921                       $ 20,342  
 
Operating earnings per share - Basic $ 0.56 $ 0.49
Operating earnings per share - Diluted

 
$ 0.56 $ 0.49
Operating return on average equity                         8.4 %                       7.8 %
 

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