Tower Group, Inc. (NASDAQ: TWGP) today reported fourth quarter 2012 net
loss attributable to common shareholders of $52.1 million or ($1.36) per
share, compared to fourth quarter 2011 net income attributable to common
shareholders of $25.3 million or $0.64 per diluted share. For the full
year 2012, net loss attributable to common shareholders was $28.2
million or ($0.73) per share, compared to full year 2011 net income of
$60.5 million or $1.48 per diluted share.
The operating loss (1) in the fourth quarter of 2012 was
$54.9 million or ($1.43) per share, compared to operating income of
$23.5 million or $0.59 per diluted share in the fourth quarter of 2011.
For the full year 2012, the operating loss was $27.9 million or ($0.72)
per share, compared to full year 2011 operating income of $56.3 million
or $1.38 per diluted share.
As previously disclosed, Tower's results in the fourth quarter and full
year 2012 included losses from Superstorm Sandy, to which Tower had
exposure through its direct insurance operations, its assumed
reinsurance business, and certain of its alternative investments. In
aggregate, Tower's after-tax net losses in the fourth quarter and full
year 2012 from Superstorm Sandy were $80.1 million, or ($2.09) per
diluted share. This excludes $7.2 million in after-tax net losses from
the reciprocal exchanges, which are not included in net income
attributable to common shareholders. Through February 24, 2013, Tower
has closed 93.7% of the 30,511 claims that its stock companies and
reciprocal exchanges received as a result of Superstorm Sandy. Tower
received 99.0% of these claims prior to February 1, 2013. To date, Tower
has paid $164.0 million, before reinsurance collections, to personal
lines and commercial policyholders affected by Superstorm Sandy.
Full Year 2012 Highlights:
Michael H. Lee, President and Chief Executive Officer of Tower Group,
Inc., said, "2012 was disappointing for Tower from a financial
perspective as the impact of Superstorm Sandy in the fourth quarter and
the reserve charge we took in the second quarter combined to yield our
first annual operating loss since we went public in 2004. Excluding the
losses from Superstorm Sandy and reserve development, our ROE for 2012
was within our 10 to 12% near term target. While Tower's financial
results were disappointing, we made substantial progress in 2012 on
various important strategic initiatives. Tower's organic growth
initiative continued to drive premium growth by expanding our product
offerings, improving existing business units and creating new business
"Tower is also progressing well with our proposed merger transaction
with the Bermuda reinsurance business of Canopius. We received all the
necessary regulatory approvals and anticipate that we will be able to
complete this transaction by the end of the first quarter of 2013
subject to shareholder approval. This merger will create a new global
holding company that will provide us with access to the world's three
key insurance markets - the U.S., Bermuda and London. The new holding
company in Bermuda will give us an efficient business platform to
continue expanding our assumed reinsurance and specialty business in the
future. Finally, we saw positive pricing trends across all of our
product lines last year, and we expect these conditions to continue
during 2013. As a result of our progress in advancing our long-term
strategy, including the Canopius transaction, as well as the positive
signs we are observing in the marketplace, we believe we are on track to
return to profitability in 2013."
Superstorm Sandy Impact
On October 29, 2012, Superstorm Sandy made landfall in New Jersey and
caused significant property damages, with total property-casualty
insurance industry losses estimated at $25 billion. Tower's pre-tax net
loss from Superstorm Sandy was $123.2 million, including $101.0 million
in net losses incurred in Tower's direct and reinsurance businesses,
$18.0 million in reinstatement premiums and $4.2 million in losses from
Tower's investment in Canopius, but excluding $11.2 million in pre-tax
losses and reinstatement premiums from the reciprocal exchanges. Tower's
after-tax net losses were $80.1 million, including $77.4 million in net
losses incurred and reinstatement premiums in Tower's direct and
reinsurance businesses and $2.7 million in losses from Tower's
investment in Canopius, but excluding $7.2 million in after-tax losses
and reinstatement premiums from the reciprocal exchanges.
On February 21, 2013, the NY Department of Financial Services (DFS)
announced that it was investigating certain insurers, including one of
Tower's insurance company subsidiaries, for unacceptable claims
practices in New York related to Superstorm Sandy. In connection with
such investigation, the DFS issued an Insurance Law Section 308 letter
to Tower, which is a request for information to which insurers are
legally required to respond. Tower is cooperating with the DFS and
believes that any allegations in this matter do not constitute a pattern
or practice of Tower and will not have a material adverse effect on
Tower's financial condition or results of operations.
Fourth Quarter 2012 Highlights (all figures compare fourth
quarter 2012 results to the results for the same period in 2011 except
Gross premiums written and managed increased 10.8% to $481.2 million in
the fourth quarter. Excluding programs, policies in-force increased by
1.1% as of December 31, 2012, compared to December 31, 2011. For the
fourth quarter of 2012, premiums on renewed Commercial Insurance
business excluding programs increased 5.3% and premiums on renewed
Personal Insurance business increased 5.6%, resulting in an overall
premium increase on renewal business of 5.4%. In the fourth quarter of
2012, our Commercial Insurance business renewal retention rate excluding
programs was 83.7% and our Personal Insurance business renewal retention
rate was 73.5%, resulting in an overall retention rate of 77.8%.
Total revenues increased 4.4% to $475.0 million in the fourth quarter of
2012. Net premiums earned in the fourth quarter of 2012 were $410.5
million, which were reduced by $18.0 million in catastrophe reinsurance
Net investment income was $30.1 million compared to $32.1 million. The
tax equivalent book yield on our investment portfolio, excluding the
reciprocal exchanges, was 4.5% at December 31, 2012 compared to 4.7% at
December 31, 2011. Net realized investment gains were $21.0 million
compared to gains of $4.1 million. Total commission and fee income was
$13.5 million compared to $11.7 million.
The net combined ratio was 131.8%, compared with 98.4%. The net combined
ratio excluding the impact of catastrophes and reserve development was
100.5%, compared with 99.0% in the fourth quarter of 2011.
The net loss ratio was 92.7% compared to 64.9%. The loss ratio in the
fourth quarter of 2012 included 29.9 points from Superstorm Sandy.
(Excluding the business that we manage on behalf of the reciprocal
exchanges, the net loss ratio was 91.8%, including 30.0 points from
Superstorm Sandy, compared to 65.0%.)
Our net expense ratio was 39.1%, including 1.8 points related to
reinstatement premiums from Superstorm Sandy, compared to 33.5%.
(Excluding the business that we manage on behalf of the reciprocal
exchanges, the net expense ratio was 38.5%, including 1.8 points related
to reinstatement premiums from Superstorm Sandy, compared to 32.5%.)
Excluding the impact of reinstatement premiums, the increase in the net
expense ratio in the fourth quarter of 2012 is primarily due to the
increase in our assumed reinsurance business which has a higher
commission ratio than other lines of business and from an increase in
operating expenses as a result of ongoing efforts to build-out the
information technology infrastructure to support policy administration
and claims processing needs. Acquisition-related transaction costs for
the three months and year ended December 31, 2012 were $4.6 million and
$9.2 million, respectively, primarily due to expenses associated with
our proposed merger with the Bermuda reinsurance businesses of Canopius.
These costs were negligible for the same periods in 2011.
Excluding the reciprocal exchanges, Tower's effective tax rate was 40.0%
in the fourth quarter of 2012 compared to 23.5% in the fourth quarter of
2011. As we recorded a net loss in 2012, tax preference items increase
the effective tax rate, while in 2011 such items reduced the effective
Tower's Board of Directors approved a quarterly dividend on January 30,
2013, of 18.75 cents per share payable on February 28, 2013, to
stockholders of record as of February 14, 2013.
On February 6, 2013, Tower mailed a description of its proposed merger
agreement with the Bermuda businesses of Canopius Group Ltd. Tower will
have a shareholder meeting and a vote on the proposed merger agreement
on March 12, 2013.
Tower Group expects to report 2013 operating earnings per share in a
range of $2.75 to $2.95 including the effect of the proposed merger
transaction. This amount is reduced from previous guidance as Tower
expects its merger transaction to close in the first quarter 2013,
rather than at year end 2012, and as Tower has entered into a quota
share reinsurance agreement effective in January 2013 to further protect
its homeowners business from catastrophe volatility.
Tower will host a conference call and webcast to discuss these results
on February 26, 2013 at 9:00 a.m. ET. This conference call will be
broadcast live over the Internet. To access a listen-only webcast over
the Internet, please visit the Investor Information section of Tower
Group, Inc.'s website, www.twrgrp.com,
or use this link: http://investor.twrgrp.com/events.cfm
Please access the website at least 15 minutes prior to the call to
register and to download any necessary audio software. If you are unable
to participate during the live conference call, a webcast will be
archived in the Investor Information section of Tower Group, Inc.'s
website at www.twrgrp.com.
Cautionary Note 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/A for the year ended December 31, 2011 and
subsequent filings on Form 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.
Notes on Non-GAAP Financial Measures
Tower uses non-GAAP financial measures in this press release to assist
investors in analyzing the company's operating performance for the
periods presented herein. Because Tower's calculation of these measures
may differ from similar measures used by other companies, investors
should be careful when comparing Tower's non-GAAP financial measures to
those of other companies. Definitions and calculations of other
financial measures used in this press release can be found in the
(1) Operating income (loss) excludes realized gains and losses,
acquisition-related transaction costs and the results of the reciprocal
business, net of tax. Operating income 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 profitability of our insurance business. Additionally,
these measures are a key internal management performance standard.
Operating earnings (loss) per share is operating income (loss) divided
by diluted weighted average shares outstanding. Net income (loss)
attributable to Tower Group, Inc. is the most directly comparable GAAP
measure. Operating return on equity is annualized operating income
(loss) divided by average common equity, and operating return on equity
excluding the impact of catastrophes and reserve development is
calculated by eliminating the impact of catastrophes and reserve
development on operating income (loss). See footnote 2 for additional
discussion of the exclusion of catastrophes and reserve development. A
reconciliation of net income (loss) attributable to Tower Group, Inc. to
operating income (loss) and return on average equity to operating return
on average equity is provided in an accompanying table.
(2) Combined ratio excluding the impact of catastrophes and reserve
development is the sum of the loss and loss adjustment expense ratio and
the expense ratio excluding the impact of catastrophes and reserve
development. We believe this presentation enhances the understanding of
our results by eliminating what we believe are volatile and unusual
events and presenting the ratios with what we believe are the underlying
run rates of the business. A reconciliation of combined ratio to
combined ratio excluding the impact of catastrophes and reserve
development is provided in an accompanying table.
(3) Book value per share is calculated as Tower Group, Inc.
stockholders' 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. The computation of book value per share is
provided in an accompanying table.
About Tower Group, Inc.
Tower Group, Inc. offers diversified property and casualty insurance
products and services through its operating subsidiaries.
Our Commercial Insurance Segment offers a broad range of commercial
lines property and casualty insurance products to small to mid-sized
businesses distributed through a network of retail, wholesale and
program underwriting agents on both an admitted and non-admitted basis.
This segment also includes assumed reinsurance.
Our Personal Insurance Segment offers a broad range of personal lines
property and casualty insurance products to individuals distributed
through a network of retail and wholesale agents.
Our Insurance Services Segment provides underwriting, claims and
reinsurance brokerage services to insurance companies.
For more information, visit Tower's website at http://www.twrgrp.com/
Net income (loss) attributable to Tower Group, Inc.
Operating income (loss) attributable to Tower Group, Inc.
Operating EPS and ROE:
Operating earnings (loss) per share-Basic
Operating earnings (loss) per share-Diluted
Shares outstanding (in thousands)
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