Tower Group International, Ltd. Reports Third Quarter 2013 Results

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HAMILTON, Bermuda--(BUSINESS WIRE)--

Tower Group International, Ltd. TWGP today announced financial results for the third quarter and first nine months of 2013. These results reflect the third reported quarter of results following the March 13, 2013 merger between Tower Group, Inc. (TGI) and Canopius Holdings Bermuda Limited (Canopius Bermuda), which was renamed Tower Group International, Ltd. (Tower or the Company) upon completion of the merger and became the ultimate parent company. Since the merger transaction was accounted for as a reverse acquisition and recapitalization, under which TGI was identified and treated as the accounting acquirer, historical results prior to the first quarter of 2013 reflect only the financial results reported by TGI, with equity accounts and earnings per share restated to reflect Tower's new capitalization.

Adverse loss reserve charges of $143.7 million in the third quarter of 2013 exceeded the previous estimate of $75 million to $105 million announced on December 17, 2013, principally as a result of additional loss emergence information associated with prior accident years that was not available to Tower on December 17, 2013, but became available in the period between December 18, 2013 and the date of the release of this financial information. The Company's reserve strengthening in the third quarter arose primarily from accident years 2008-2011 within the workers' compensation, commercial multi-peril liability, other liability and commercial auto liability lines of business.

The reserve strengthening was viewed by Tower as an event or circumstance that required the Company to perform, in the third quarter of 2013, a detailed quantitative analysis of whether its recorded goodwill was impaired. As a result of this analysis, Tower reported a non-cash goodwill impairment charge of $57.4 million for the third quarter of 2013, including all $55.5 million of goodwill associated with its Personal Insurance reporting unit and $1.9 million of goodwill resulting from the acquisition of ANV's marine and energy business in July of 2013. As of September 30, 2013, the Company had no goodwill reported on its consolidated balance sheet. Additionally, in the third quarter of 2013, the Company impaired $125.8 million of fixed assets, primarily related to capitalized software, including internally developed software.

During the three months ended September 30, 2013, Tower's U.S. taxed subsidiaries (excluding the Reciprocal Exchanges) recognized pre-tax losses of $(358.0) million. This resulted in a net deferred tax asset, before any valuation allowance, as of September 30, 2013. The Company concluded that a full valuation allowance was required for Tower's U.S. taxed subsidiaries. For the three months ended September 30, 2013, $100.9 million of the valuation allowance was recorded in income tax expense (benefit) in the statement of operations and $(4.3) million was recorded in other comprehensive income as a direct charge to Tower's shareholders' equity.

Net loss attributable to common shareholders for the third quarter of 2013 was $(347.6) million, or $(6.08) per diluted share, compared to net income attributable to common shareholders of $21.6 million, or $0.50 per diluted share, in the third quarter of 2012.

Operating loss (1) in the third quarter of 2013 was $(176.9) million, or $(3.10) per share, compared to operating income of $23.8 million, or $0.56 per share, in the third quarter of 2012. Earnings per share for both periods reflect Tower's post-merger shares, with diluted weighted average shares outstanding of 57.1 million in the third quarter of 2013 and 42.5 million in the third quarter of 2012.

Tower shareholders' equity was $207.8 million at September 30, 2013, compared with $950.1 million at December 31, 2012. Book value per share (2) at September 30, 2013 was $3.62, compared with $21.83 at December 31, 2012. Tangible book value per share (2) at September 30, 2013 was $2.33, compared with $13.99 at December 31, 2012. Book value per share and tangible book value per share for both periods reflect Tower's new shares, with 57,427,243 shares outstanding at September 30, 2013, compared with 43,513,678 shares outstanding at December 31, 2012.

Segment Reporting

In the second quarter of 2013, Tower changed the presentation of its business results to reflect the way management organized the company for operating decisions and assessing profitability after the closing of the merger of TGI with Canopius Bermuda. In the third quarter of 2013, as a result of the significant business developments affecting the Company in the second and third quarters of 2013, the Company again changed the presentation of its business results by reporting its specialty business with its commercial business in the Commercial Insurance segment, and reporting its international assumed reinsurance business and certain U.S. based assumed reinsurance in a new Assumed Reinsurance segment. No changes were made to the Personal Insurance segment in the third quarter of 2013. Tower now operates and reports in three business segments: Commercial Insurance, Assumed Reinsurance and Personal Insurance, which includes its management companies that provide certain services to the Reciprocal Exchanges for a management fee. Prior period segment disclosures have been restated to conform to the current presentation, and these realignments have no impact on consolidated operating results.

Third Quarter 2013 Details (all figures compare results in the third quarter of 2013 to the results for the third quarter of 2012 except as noted otherwise):

Gross premiums written and managed were $489.9 million, compared to $484.8 million. Net premiums earned were $368.3 million, compared to $430.7 million, reflecting increased premium cessions in commercial insurance and homeowners' insurance.

Total revenues were $442.9 million compared to $474.9 million, reflecting lower earned premiums and investment income offset by increased ceding commissions and net realized investment gains. Net investment income was $25.6 million compared to $31.4 million. Net realized investment gains were $18.1 million, compared to $1.1 million.

Proposed Merger with ACP Re

On January 6, 2014, Tower announced that on January 3, 2014 it entered into an Agreement and Plan of Merger (Merger Agreement) with ACP Re, Ltd. (ACP Re), and a wholly-owned subsidiary of ACP Re, pursuant to which Tower would become a wholly-owned subsidiary of ACP Re. As previously announced, the transaction is expected to close, subject to the satisfaction or waiver of the closing conditions in the Merger Agreement, by the summer of 2014. On January 30, 2014, Tower was granted early termination of the Hart-Scott-Rodino waiting period.

ACP Re is a Bermuda based reinsurance company. The controlling shareholder of ACP Re is a trust established by the founder of AmTrust Financial Services, Inc. (AmTrust), National General Holdings Corporation (NGHC) and Maiden Holdings, Ltd. Concurrently with the execution of the Merger Agreement, the controlling shareholder of ACP Re provided to Tower a guarantee for the payment of the merger consideration.

Concurrently with the execution of the Merger Agreement, several subsidiaries of Tower entered into Cut Through Reinsurance Agreements, pursuant to which a subsidiary of AmTrust and a subsidiary of NGHC will provide 100% quota share reinsurance and a cut through endorsement to cover all eligible new and renewal commercial and personal lines business, respectively, and at their option, losses incurred on or after January 1, 2014 on not less than 60% of the in-force business. Tower received confirmation on January 16, 2014 from AmTrust and NGIC that they would exercise such option to reinsure on a cut through basis losses incurred on or after January 1, 2014 under in-force policies with respect to (1) in the case of AmTrust, a significant majority of Tower's unearned premium reserves as of December 31, 2013 with respect to its ongoing commercial lines business, and (2) in the case of NGIC, 100% of Tower's unearned premium reserves as of December 31, 2013 with respect to its personal lines segment business. The Cut Through Reinsurance Agreements are effective as of January 1, 2014 for losses occurring on or after January 1, 2014. Tower will receive a 20% ceding commission from AmTrust or NGHC on all Tower premiums that are subject to the Cut Through Reinsurance Agreements.

Appointment of New Chairman and New Chief Executive Officer

On February 9, 2014, Tower's Board of Directors appointed Jan R. Van Gorder as Chairman of the Board, and William W. Fox, Jr. as President and Chief Executive Officer, to succeed Michael H. Lee, who resigned as Tower's Chairman, President and Chief Executive Officer on February 6, 2014. Mr. Van Gorder's appointment was effective immediately, and Mr. Fox will succeed Mr. Lee as President and Chief Executive Officer of Tower immediately after the filing of Tower's Form 10-Q for the period ended September 30, 2013. Following Mr. Lee's resignation and prior to the filing of the Form 10-Q for the period ended September 30, 2013, William E. Hitselberger is the person performing functions of or similar to that of President and Chief Executive Officer of Tower.

Notes on Non-GAAP Financial Measures

(1) Operating results exclude realized gains and losses, goodwill impairment, acquisition-related transaction costs and the results of the reciprocal business, net of tax. Operating income (loss) is a common measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying operating results of our insurance business. Additionally, these measures are a key internal management performance standard. Operating results per share is operating income (loss) divided by diluted weighted average shares outstanding. The computation of operating income (loss) and operating earnings (loss) per share is provided in an accompanying table.

(2) Book value per share is calculated as Tower Group International, Ltd. shareholders' equity divided by the number of shares outstanding. We believe that book value per share is an important measure of our ability to grow shareholder value. Tangible book value per share is calculated as Tower Group International, Ltd. shareholders' equity, less intangible assets, divided by the number of shares outstanding. The computation of book value per share and tangible book value per share is provided in an accompanying table.

About Tower Group International, Ltd.

Tower Group International, Ltd. is a Bermuda-based global diversified insurance and reinsurance holding company and is listed on the NASDAQ Global Select Market under the symbol TWGP. Through our insurance and reinsurance subsidiaries in the U.S. and Bermuda, collectively referred to as Tower Group Companies, we deliver a broad range of commercial, personal and specialty insurance products and services in the U.S. and specialty reinsurance products globally through our distribution and underwriting partners.

For more information, visit Tower's website at http://www.twrgrpintl.com.

Additional Information and Where to Find It

This communication is not a solicitation of a proxy from any shareholder of Tower. In connection with the Merger Agreement, Tower intends to file a proxy statement with the United States Securities and Exchange Commission (SEC). Investors and shareholders are urged to read the proxy statement and other relevant materials filed with the SEC when they become available because they will contain important information about Tower, ACP Re and the proposed transaction. The proxy statement and other relevant materials (when they become available), and any other documents filed by Tower or ACP Re with the SEC, may be obtained free of charge at the SEC's website at www.sec.gov. In addition, investors and shareholders may obtain free copies of the documents filed by Tower with the SEC by directing a written request to “Investor Relations,” Tower Group International, Ltd., Bermuda Commercial Bank Building, 2nd Floor, 19 Par-la-Ville Road, Hamilton, HM 11, Bermuda, or by email to Bernard Kilkelly, Managing Vice President, Investor Relations (bkilkelly@twrgrp.com).

The directors, executive officers and other members of management and employees of Tower may be deemed participants in the solicitation of proxies from its stockholders in favor of the transactions. Information concerning persons who may be considered participants in the solicitation of Tower's stockholders under the rules of the SEC is set forth in public filings filed by Tower with the SEC and will be set forth in the proxy statement/prospectus when it is filed with the SEC. Information concerning Tower's participants in the solicitation is contained in Tower's Proxy Statement on Schedule 14A, filed with the SEC on March 25, 2013.

Cautionary Statement Regarding Forward−Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This press release and any other written or oral statements made by or on behalf of Tower may include forward-looking statements that reflect Tower's current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “plan,” “expect,” “project,” “intend,” “estimate,” “anticipate,” “believe” and “continue” or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the actual results of Tower to differ materially from those indicated in these statements. Please refer to Tower's filings with the SEC, including among others Tower's Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent filings on Forms 10-K/A, 10-Q and 10-Q/A, for a description of the important factors that could cause the actual results of Tower to differ materially from those indicated in these statements. Forward-looking statements speak only as of the date on which they are made, and Tower undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Risks that could adversely affect the proposed merger include, but are not limited to, the following:

  • governmental approvals of the merger may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger;
  • the Board of Directors of Tower may withdraw its recommendation and support a competing acquisition proposal; and
  • Tower's shareholders may fail to approve the merger.

The following important factors are among those that could affect the actual outcome of other future events:

  • changes in Tower's financial strength or credit ratings could impact its ability to write new business, the cost of, and its ability to obtain, capital or its ability to attract and retain brokers, agents and customers;
  • decreases in the capital and surplus of Tower's insurance subsidiaries and their ability to meet minimum capital and surplus requirements;
  • changes in Tower's ability to raise additional capital;
  • the implementation and effectiveness of Tower's capital improvement strategy;
  • Tower's ability to continue operating as a going concern;
  • changes in Tower's ability to meet ongoing cash requirements and pay dividends;
  • greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than Tower's underwriting, reserving or investment practices anticipate based on historical experience or industry data;
  • changes in the availability, cost or quality of reinsurance and failure of Tower's reinsurers to pay claims timely or at all;
  • changes in the availability, cost or quality of reinsurance or retrocessional coverage;
  • decreased demand for Tower's insurance or reinsurance products;
  • increased competition on the basis of pricing, capacity, coverage terms or other factors;
  • ineffectiveness or obsolescence of Tower's business strategy due to changes in current or future market conditions;
  • currently pending or future litigation or governmental proceedings;
  • developments that may delay or limit Tower's ability to enter new markets as quickly as it anticipates;
  • loss of the services of any of Tower's executive officers or other key personnel;
  • changes in acceptance of Tower's products and services, including new products and services;
  • developments in the world's financial and capital markets that could adversely affect the performance of Tower's investments;
  • the effects of acts of terrorism or war;
  • changes in general economic conditions, including inflation, interest rates and other factors which could impact Tower's performance and the performance of Tower's investment portfolio;
  • changes in accounting policies or practices;
  • changes in legal theories of liability under Tower's insurance policies;
  • changes in rating agency policies or practices;
  • declining demand for reinsurance due to increased retentions by cedents and other factors;
  • a lack of opportunities to increase writings in Tower's reinsurance lines of business and in specific areas of the reinsurance market;
  • changes in the percentage of our premiums written that Tower cedes to reinsurers;
  • changes in regulations or laws applicable to Tower, its subsidiaries, brokers or customers, including regulatory limitations and restrictions on the declaration and payment of dividends and capital adequacy standards;
  • the Bermudian regulatory system, and potential changes thereto;
  • risks and uncertainties associated with technology, data security or outsourced services that could negatively impact Tower's ability to conduct its business or adversely impact its reputation;
  • the effects of mergers, acquisitions or divestitures; and
  • disruptions in Tower's business arising from the integration of acquired businesses into Tower and the anticipation of potential or pending acquisitions or mergers.

Additional risk factors that may cause outcomes that differ from our expectations or projections are described in various documents filed by Tower with the Securities and Exchange Commission, such as current reports on Form 8−K, and regular reports on Forms 10−K and 10−Q, particularly in “Item 1A, Risk Factors.”

         

Financial Summary ($ in thousands):

     
Three Months Ended September 30,
2013 2012
Reciprocal Elimina- Reciprocal Elimina-

 

  Tower   Exchanges   tions     Total     Tower   Exchanges   tions     Total
Net premiums written $ 192,986   $ 44,601   $ -     $ 237,587   $ 382,655   $ 41,831   $ -     $ 424,486
Revenues
Net premiums earned $ 329,047 $ 39,246 $ - $ 368,293 $ 388,090 $ 42,623 $ - $ 430,713
Ceding commission revenue 24,247 4,391 (443) 28,195 4,990 3,190 (477) 7,703
Insurance services revenue 8,581 - (8,723) (142) 8,678 - (7,870) 808
Policy billing fees 2,798 (2) - 2,796 2,980 153 - 3,133
Net investment income 24,899 2,418 (1,685) 25,632 29,924 3,141 (1,676) 31,389
Total net realized investment gains
(losses)   17,093     1,035     -       18,128     80     1,065     -       1,145
Total revenues   406,665     47,088     (10,851)       442,902     434,742     50,172     (10,023)       474,891
Expenses
Loss and loss adjustment expenses 362,571 21,207 - 383,778 235,782 20,314 - 256,096
Direct and ceding
commission expense 93,644 8,541 (443) 101,742 79,637 8,367 (477) 87,527
Other operating expenses 106,656 12,254 (8,723) 110,187 78,760 14,514 (7,870) 85,404
Acquisition-related transaction costs 559 - - 559 2,679 - - 2,679
Interest expense   8,008     1,685     (1,685)   8,008     8,224     1,676     (1,676)   8,224
Total expenses   571,438     43,687     (10,851)       604,274     405,082     44,871     (10,023)       439,930
Other income (expense)
Equity in income (loss)
of unconsolidated affiliate (3,194) - - (3,194) - - - - -
Goodwill and fixed asset impairment (183,162) - - - (183,162) - - - - -
Other   5,000     -   - -       5,000     -     -   - -       -
Income (loss) before income taxes (346,129) 3,401 - (342,728) 29,660 5,301 - 34,961
Income tax expense (benefit)   1,505     (101)     -       1,404     8,031     983     -       9,014
Net income (loss) $ (347,634)   $ 3,502   $ -     $ (344,132)   $ 21,629   $ 4,318   $ -     $ 25,947
 
Ratios                                                  
Net loss ratio 110.2% 54.0% 104.2% 60.8% 47.7% 59.5%
Net expense ratio 48.3% 41.8% 47.6% 34.7% 45.8% 35.8%
Net combined ratio 158.5% 95.8% 151.8% 95.5% 93.5% 95.3%
 
Return on Average Equity   -176.9%                         8.5%                    
 

         

Financial Summary ($ in thousands):

       
Nine Months Ended September 30,
2013 2012
Reciprocal Elimina- Reciprocal Elimina-
        Tower   Exchanges   tions     Total     Tower   Exchanges   tions     Total
Net premiums written   $ 968,864   $ 124,503   $ -     $ 1,093,367   $ 1,211,859   $ 124,544   $ -     $ 1,336,403
Revenues
Net premiums earned $ 1,086,485 $ 122,058 $ - $ 1,208,543 $ 1,184,371 $ 126,653 $ - $ 1,311,024
Ceding commission revenue 42,666 12,010 (397) 54,279 13,923 9,500 (477) 22,946
Insurance services revenue 24,674 - (24,156) 518 25,361 - (22,697) 2,664
Policy billing fees 8,932 335 - 9,267 8,853 414 - 9,267
Net investment income 82,094 7,257 (5,000) 84,351 92,448 9,668 (5,003) 97,113
Total net realized investment gains
(losses)     21,083     1,862     -       22,945     1,108     3,384     -       4,492
Total revenues     1,265,934     143,522     (29,553)       1,379,903     1,326,064     149,619     (28,177)       1,447,506
Expenses
Loss and loss adjustment expenses 1,140,340 79,062 - 1,219,402 801,873 71,491 - 873,364
Commission expense 272,452 25,541 (397) 297,596 239,273 24,302 (477) 263,098
Other operating expenses 266,147 40,897 (24,156) 282,888 221,214 42,058 (22,697) 240,575
Acquisition-related transaction costs 20,280 - - 20,280 4,661 - - 4,661
Interest expense     23,451     5,000     (5,000)   23,451     24,737     5,003     (5,003)   24,737
Total expenses     1,722,670     150,500     (29,553)       1,843,617     1,291,758     142,854     (28,177)       1,406,435

Other income (expense)

Equity in income (loss)
of unconsolidated affiliate 4,772 - - 4,772 - - - -
Goodwill and fixed asset impairment (397,211) - - (397,211) - - - -
Other     5,000     -     -       5,000     -     -     -       -
Income (loss) before income taxes (844,175) (6,978) - (851,153) 34,306 6,765 - 41,071
Income tax expense (benefit)     (2,116)     -     -       (2,116)     10,321     (1,001)     -       9,320
Net income   $ (842,059)   $ (6,978)   $ -     $ (849,037)   $ 23,985   $ 7,766   $ -     $ 31,751
 
Ratios                                                
Net loss ratio 105.0% 64.8% 100.9% 67.7% 56.4% 66.6%
Net expense ratio 41.5% 44.3% 41.8% 33.9% 44.6% 34.9%
Net combined ratio 146.5% 109.1% 142.7% 101.6% 101.0% 101.5%
 
Return on Average Equity     -142.9%                         3.2%                    
 

 
Commercial Insurance Segment Information
($ in thousands)
(Unaudited)
          Three Months Ended     Nine Months Ended
September 30, September 30,
2013     2012       Change(%) 2013     2012       Change(%)
Key Measures
Premiums written
Gross premiums written $ 283,722 $ 277,012 2.4% $ 847,303 $ 889,469 -4.7%
Less: ceded premiums written (211,412) (25,473) 729.9% (268,627) (68,308) 293.3%
Net premiums written $ 72,310 $ 251,539 -71.3% $ 578,676 $ 821,161 -29.5%
 
Revenues
Net premiums earned

$

201,597

$

272,595 -26.0% $ 707,510 $ 847,610 -16.5%
Ceding commission revenue 21,374 2,446 773.8% 19,888 6,350 213.2%
Policy billing fees 1,406 1,358 3.5% 4,198 4,261 -1.5%
Total revenues 224,377 276,399 -18.8% 731,596 858,221 -14.8%
Expenses
Net loss and loss adjustment expenses 303,958 171,246 77.5% 951,245 632,231 50.5%
Underwriting expenses
Direct commission expenses 68,063 52,111 30.6% 160,494 154,350 4.0%
Other underwriting expenses 68,700 44,855 53.2% 167,377 138,588 20.8%
Total underwriting expenses 136,763 96,966 41.0% 327,871 292,938 11.9%
Underwriting profit (loss) $ (216,344) $ 8,187 -2742.5% $ (547,520) $ (66,948) 717.8%
 
Underwriting Ratios
Net loss ratio 150.8% 62.8% 134.4% 74.6%
Net expense ratio 56.5% 34.2% 42.9% 33.3%
Net combined ratio 207.3% 97.0% 177.3% 107.9%
 

 
Assumed Reinsurance Segment Information
($ in thousands)
(Unaudited)
          Three Months Ended     Nine Months Ended
September 30, September 30,
2013     2012       Change(%) 2013     2012       Change(%)
Key Measures
Premiums written
Gross premiums written $ 31,415 $ 34,938 -10.1% $ 175,115 $ 129,269 35.5%
Less: ceded premiums written 6,164 (84) -7438.1% 6,044 (84) -7295.2%
Net premiums written $ 37,579 $ 34,854 7.8% $ 181,159 $ 129,185 40.2%
 
Revenues
Net premiums earned $ 51,005 $ 24,011 112.4% $ 145,918 $ 84,481 72.7%
Total revenues 51,005 24,011 112.4% 145,918 84,481 72.7%
Expenses
Net loss and loss adjustment expenses 17,216 8,807 95.5% 64,664 30,469 112.2%
Underwriting expenses
Direct commission expenses 10,469 9,031 15.9% 53,514 29,461 81.6%
Other underwriting expenses 2,412 358 573.7% 4,556 1,052 333.1%
Total underwriting expenses 12,881 9,389 37.2% 58,070 30,513 90.3%
Underwriting profit (loss) $ 20,908 $ 5,815 259.6% $ 23,184 $ 23,499 -1.3%
 
Underwriting Ratios
Net loss ratio 33.8% 36.7% 44.3% 36.1%
Net expense ratio 25.3% 39.1% 39.8% 36.1%
Net combined ratio 59.1% 75.8% 84.1% 72.2%
 

 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
                             
Three Months Ended September 30,
2013 2012
Reciprocal Reciprocal
              Tower       Exchanges       Total       Tower       Exchanges       Total
Key Measures
Premiums written
Gross premiums written $ 115,518 $ 59,240 $ 174,758 $ 117,220

$

55,675

$

172,895
Less: ceded premiums written (32,423) (14,638) (47,061) (20,958) (13,844) (34,802)
Net premiums written $ 83,095 $ 44,602 $ 127,697 $ 96,262

$

41,831

$

138,093
 
Revenues
Net premiums earned

$

76,445

$

39,246

$

115,691

$

91,484

$

42,623

$

134,107
Ceding commission revenue 7,535 3,948 11,483 2,067 3,190 5,257
Policy billing fees 1,392 (2) 1,390 1,622 153 1,775
Total revenues 85,372 43,192 128,564 95,173 45,966 141,139
Expenses
Net loss and loss adjustment expenses 41,397 21,207 62,604 55,729 20,314 76,043
Underwriting expenses
Direct commission expense 19,776 8,098 27,874 18,018 8,367 26,385
Other underwriting expenses 21,067 12,255 33,322 17,922 14,513 32,435
Total underwriting expenses 40,843 20,353 61,196 35,940 22,880 58,820
Underwriting profit (loss) $ 3,132 $ 1,632 $ 4,764 $ 3,504

$

2,772

$

6,276
 
Underwriting Ratios
Net loss ratio 54.2% 54.0% 54.1% 60.9% 47.7% 56.7%
Net expense ratio 41.8% 41.8% 41.8% 35.3% 45.8% 38.6%
Net combined ratio 96.0% 95.8% 95.9% 96.2% 93.5% 95.3%
 

 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
                             
Nine Months Ended September 30,
2013 2012
Reciprocal Reciprocal
              Tower       Exchanges       Total       Tower       Exchanges       Total
Key Measures
Premiums written
Gross premiums written $ 329,340 $ 163,794 $ 493,134 $ 313,604

$

157,489

$

471,093
Less: ceded premiums written (120,312) (39,291) (159,603) (52,091) (32,945) (85,036)
Net premiums written $ 209,028 $ 124,503 $ 333,531 $ 261,513

$

124,544

$

386,057
 
Revenues
Net premiums earned $ 233,057 $ 122,058 $ 355,115 $ 252,280 $ 126,653 $ 378,933
Ceding commission revenue 22,778 11,613 34,391 7,096 9,500 16,596
Policy billing fees 4,734 335 5,069 4,592 414 5,006
Total revenues 260,569 134,006 394,575 263,968 136,567 400,535
Expenses
Net loss and loss adjustment expenses 124,431 79,062 203,493 139,173 71,491 210,664
Underwriting expenses
Direct commission expense 58,444 25,144 83,588 54,985 24,302 79,287
Other underwriting expenses 58,406 40,898 99,304 45,093 42,057 87,150
Total underwriting expenses 116,850 66,042 182,892 100,078 66,359 166,437
Underwriting profit (loss) $ 19,288 $ (11,098) $ 8,190 $ 24,717

$

(1,283)

$

23,434
 
Underwriting Ratios
Net loss ratio 53.4% 64.8% 57.3% 55.2% 56.4% 55.6%
Net expense ratio 38.3% 44.3% 40.4% 35.0% 44.6% 38.2%
Net combined ratio 91.7% 109.1% 97.7% 90.2% 101.0% 93.8%
 

 
Tower Group International, Ltd.
Consolidated Balance Sheets
   
September 30, December 31,
($ in thousands, except par value and share amounts) 2013   2012
Assets
Investments - Tower
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $1,585,624 and $1,926,236) $ 1,624,312 $ 2,064,148
Equity securities (cost of $100,907 and $144,204) 105,383 140,695
Short-term investments (cost of $5,925 and $4,749) 5,889 4,750
Other invested assets 97,559 57,786
Investments - Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $246,340 and $263,950) 249,821 280,563
Equity securities (cost of $2,751 and $5,144)   2,524     5,563
Total investments 2,085,488 2,553,505
Cash and cash equivalents (includes $11,656 and $9,782 relating to Reciprocal Exchanges) 379,608 102,269
Investment income receivable (includes $2,428 and $2,610 relating to Reciprocal Exchanges) 19,965 25,332
Investment in unconsolidated affiliate 76,785 71,894
Premiums receivable (includes $48,756 and $44,285 relating to Reciprocal Exchanges) 387,658 412,045
Reinsurance recoverable on paid losses (includes $4,460 and $682 relating to Reciprocal Exchanges) 85,668 17,609
Reinsurance recoverable on unpaid losses (includes $22,152 and $52,389 relating to Reciprocal Exchanges) 594,763 459,457
Prepaid reinsurance premiums (includes $22,503 and $17,803 relating to Reciprocal Exchanges) 217,916 63,923
Deferred acquisition costs, net (includes $10,796 and $11,364 relating to Reciprocal Exchanges) 149,836 181,198
Intangible assets (includes $6,467 and $6,854 relating to Reciprocal Exchanges) 80,215 106,768
Goodwill - 241,458
Funds held by reinsured companies 191,901 137,545
Other assets (includes $1,877 and $1,559 relating to Reciprocal Exchanges)   362,757     338,769
Total assets $ 4,632,560   $ 4,711,772
Liabilities
Loss and loss adjustment expenses (includes $111,940 and $135,791 relating to Reciprocal Exchanges) $ 2,098,481 $ 1,895,679
Unearned premium (includes $110,361 and $103,216 relating to Reciprocal Exchanges) 959,675 921,271
Reinsurance balances payable (includes $4,095 and $6,979 relating to Reciprocal Exchanges) 385,123 40,569
Funds held under reinsurance agreements (includes $0 and $500 relating to Reciprocal Exchanges) 215,953 98,581
Other liabilities (includes $17,855 and $21,346 relating to Reciprocal Exchanges) 278,635 296,960
Deferred income taxes (includes $19,720 and $19,719 relating to Reciprocal Exchanges) 20,050 24,763
Debt   451,991     449,731
Total liabilities 4,409,908 3,727,554
Shareholders' equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 57,437,157 and
53,048,011 shares issued, and 57,427,243 and 43,513,678 shares outstanding) 574 530
Treasury stock (9,914 and 9,534,333 shares) (23) (181,435)
Paid-in-capital 814,927 780,036
Accumulated other comprehensive income (7,685) 82,756
Retained earnings (accumulated deficit)   (600,039)     268,171
Tower Group International, Ltd. shareholders' equity   207,754     950,058
Noncontrolling interests   14,898     34,160
Total shareholders' equity   222,652     984,218
Total liabilities and shareholders' equity $ 4,632,560   $ 4,711,772
 

     
Tower Group International, Ltd.
Consolidated Statements of Operations
    Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands, except per share amounts)   2013     2012     2013     2012
Revenues
Net premiums earned $ 368,293 $ 430,713 $ 1,208,543 $ 1,311,024
Ceding commission revenue 28,195 7,703 54,279 22,946
Insurance services revenue (142) 808 518 2,664
Policy billing fees 2,796 3,133 9,267 9,267
Net investment income 25,632 31,389 84,351 97,113
Net realized investment gains (losses):
Other-than-temporary impairments (4,527) (1,727) (9,672) (6,973)
Portion of loss recognized in other comprehensive income 335 - 335 286
Other net realized investment gains   22,320     2,872     32,282     11,179

Total net realized investment gains (losses)

  18,128     1,145     22,945     4,492
Total revenues 442,902 474,891 1,379,903 1,447,506
Expenses
Loss and loss adjustment expenses 383,778 256,096 1,219,402 873,364
Commission expense 101,742 87,527 297,596 263,098
Other operating expenses 110,187 85,404 282,888 240,575
Acquisition-related transaction costs 559 2,679 20,280 4,661
Interest expense   8,008     8,224     23,451     24,737
Total expenses 604,274 439,930 1,843,617 1,406,435
Other income (expense)
Equity in income (loss) of unconsolidated affiliate (3,194) - 4,772 -
Goodwill and fixed asset impairment (183,162) - (397,211) -
Other   5,000     -     5,000     -
Income (loss) before income taxes (342,728) 34,961 (851,153) 41,071
Income tax expense (benefit)   1,404     9,014     (2,116)     9,320
Net income (loss) $ (344,132) $ 25,947 $ (849,037) $ 31,751
Less: Net (loss) income attributable to Noncontrolling interests   3,502     4,318     (6,978)     7,766
Net income (loss) attributable to Tower Group International, Ltd. $ (347,634)   $ 21,629   $ (842,059)   $ 23,985
Earnings (loss) per share attributable to Tower Group International, Ltd. shareholders:
Basic $ (6.08) $ 0.50 $ (15.79) $ 0.54
Diluted $ (6.08)   $ 0.50   $ (15.79)   $ 0.54
Weighted average common shares outstanding:
Basic 57,138 42,449 53,338 43,045
Diluted   57,138     42,476     53,338     43,130
Dividends declared and paid per common share $ 0.17   $ 0.17   $ 0.50   $ 0.50
 

           
Three Months Ended Nine Months Ended
($ in thousands except per share amounts)         September 30, September 30,
Reconciliation of non-GAAP financial measures: 2013     2012 2013   2012
Net income (loss) attributable to Tower Group International, Ltd. $ (347,634) $ 21,629 $ (842,059) $ 23,985
Net realized gains (losses) on investments 17,093 80 21,083 1,108
Acquisition-related transaction costs (559) (2,679) (20,280) (4,661)
Goodwill and fixed asset impairment (183,162) - (397,211) -
Income tax (4,060) 456 (1,486) 461
Operating income (loss) attributable to        
Tower Group International, Ltd. $ (176,946) $ 23,772 $ (444,165) $ 27,077
 
Operating EPS and ROE:
Operating earnings (loss) per share - Basic $ (3.10) $ 0.56 $ (8.33) $ 0.63
Operating earnings (loss) per share - Diluted $ (3.10) $ 0.56 $ (8.33) $ 0.63
Operating return on average equity -90.1% 9.4% -75.4% 3.6%
 
Book Value Per Share and Tangible Book Value Per Share     Sept. 30, 2013       Dec. 31, 2012
Tower Group International, Ltd. Shareholders' equity 207,754 950,058
Goodwill and intangible assets     73,748       341,372

Tower Group International, Ltd. Shareholders' equity excluding goodwill and

intangible assets

134,006 608,686
Shares outstanding   57,427     43,514
Book Value Per Share $ 3.62 $   21.83
Tangible Book Value Per Share $ 2.33 $   13.99

Tower Group International, Ltd.
Bernie Kilkelly, 212-655-8943
Managing Vice President, Investor Relations
bkilkelly@twrgrp.com

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