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TMCNet:  Tower Group Reports Fourth Quarter and Full Year 2012 Results

[February 25, 2013]

Tower Group Reports Fourth Quarter and Full Year 2012 Results

NEW YORK --(Business Wire)--

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:

  • Net premiums earned increased 8.0% to $1.72 billion from $1.59 billion in 2011.
  • Gross premiums written and managed increased 8.8% to $1.97 billion from $1.81 billion in 2011.
  • Consolidated net combined ratio was 109.2%, compared with 100.3% in 2011.
  • Consolidated net combined ratio excluding the impact of catastrophes and reserve development(2) was 97.4%, compared with 96.6% in 2011.
  • Net investment income was $127.2 million, compared with $126.5 million in 2011.
  • Book value per share(3) was $25.54 at December 31, 2012, compared with $26.36 at December 31, 2011. Tower Group, Inc. stockholders' equity was $980.8 million at December 31, 2012, compared with $1.03 billion at December 31, 2011.
  • Operating return on average equity (ROE) excluding the impact of catastrophes and reserve development(2) was 10.1% in 2012 compared to 11.0% in 2011.
  • Tower paid cash dividends of 75 cents per share in 2012.

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 units.

"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 as noted):

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 reinstatement premiums.

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 tax rate.

Dividend Declaration

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.

Shareholder Vote

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.

Guidance

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.

Conference Call

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 footnotes below.

(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/




 
Financial Summary ($ in thousands, except per share data):
 
          Three Months Ended December 31,
2012     2011
  Reciprocal     Elimina-     Reciprocal     Elimina-  
              Tower   Exchanges     tions     Total   Tower   Exchanges     tions     Total
Net premiums written           $ 366,755     $ 36,223       $ -       $ 402,978     $ 342,084     $ 38,788       $ -       $ 380,872  
Revenues
Net premiums earned $ 373,511 $ 37,007 $ - $ 410,518 $ 362,488 $ 44,590 $ - $ 407,078
Ceding commission revenue 4,814 5,064 (489 ) 9,389 6,296 1,869 - 8,165
Insurance services revenue 8,209 - (7,453 ) 756 7,888 - (7,260 ) 628
Policy billing fees 3,048 300 - 3,348 2,727 140 - 2,867
Net investment income 29,460 2,906 (2,314 ) 30,052 30,334 3,183 (1,455 ) 32,062
Total net realized investment gains
(losses)             11,137       9,847         -         20,984       2,735       1,386         -         4,121  
Total revenues             430,179       55,124         (10,256 )       475,047       412,468       51,168         (8,715 )       454,921  
Expenses
Loss and loss adjustment expenses 342,769 37,727 - 380,496 235,750 28,440 - 264,190
Direct and ceding
commission expense 87,036 10,065 (489 ) 96,612 69,247

8,314

 

- 77,561
Other operating expenses 71,684 11,839 (7,453 ) 76,070 65,068

12,473

(7,260 ) 70,282
Acquisition-related transaction costs 4,568 - - 4,568 (77 ) - - (77 )
Interest expense             8,531       1,676         (2,314 )   7,893       9,408       1,455         (1,455 )   9,408  
Total expenses             514,588       61,307         (10,256 )       565,639       379,396      

50,682

        (8,715 )       421,364  
Other income (expense) (84,409 ) (6,183 ) - (90,592 ) 33,072

486

 

- 33,557
Equity in income (loss) of unconsolidated affiliate             (2,534 )     -         -         (2,534 )     -       -         -         -  
Income (loss) before income taxes (86,943 ) (6,183 ) - (93,126 ) 33,071 486 - 33,557
Income tax expense (benefit)             (34,804 )     (1,236 )       -         (36,040 )     7,785       (162 )       -         7,623  
Net income (loss)           $ (52,139 )   $ (4,947 )     $ -       $ (57,086 )   $ 25,286     $ 648       $ -       $ 25,934  
 
Ratios                                                                
Net calendar year loss and LAE 91.8 % 101.9 % 92.7 % 65.0 % 63.8 % 64.9 %
Net underwriting expenses

38.5

% 44.7 %

39.1

%

32.5

% 42.1 %

33.5

%
Net Combined

130.3

% 146.6 %

131.8

%

97.5

% 105.9 %

98.4

%
 
Return on Average Equity             -20.3 %                           9.7 %                      
 

 
Financial Summary ($ in thousands, except per share data):
 
      Year Ended December 31,
December 31, 2012     December 31, 2011
  Reciprocal     Elimina-     Reciprocal     Elimina-  
          Tower   Exchanges     tions     Total   Tower   Exchanges     tions     Total
Net premiums written       $ 1,578,614     $ 160,767       $ -       $ 1,739,381     $ 1,469,152     $ 169,437       $ -       $ 1,638,589  
Revenues
Net premiums earned $ 1,557,882 $ 163,660 $ - $ 1,721,542 $ 1,406,689 $ 187,161 $ - $ 1,593,850
Ceding commission revenue 18,737 14,564 (966 ) 32,335 27,194 6,774 - 33,968
Insurance services revenue 33,570 - (30,150 ) 3,420 30,873 - (29,303 ) 1,570
Policy billing fees 11,901 714 - 12,615 9,961 573 - 10,534
Net investment income 121,908 12,574 (7,317 ) 127,165 120,083 12,846 (6,455 ) 126,474
Total net realized investment gains
(losses)         12,245       13,231         -         25,476       6,980       2,414         -         9,394  
Total revenues         1,756,243       204,743         (38,433 )       1,922,553       1,601,780       209,768         (35,758 )       1,775,790  
Expenses
Loss and loss adjustment expenses 1,144,642 109,218 - 1,253,860 950,830 104,419 - 1,055,249
Direct and ceding
commission expense 326,309 34,367 (966 ) 359,710 277,285 32,541 - 309,826
Other operating expenses 292,898 53,897 (30,150 ) 316,645 257,573 52,177 (29,303 ) 280,447
Acquisition-related transaction costs 9,229 - - 9,229 360 - - 360
Interest expense         33,268       6,679         (7,317 )   32,630       34,290       6,455         (6,455 )   34,290  
Total expenses         1,806,346       204,161         (38,433 )       1,972,074       1,520,338       195,592         (35,758 )       1,680,172  
Other income (expense)
Equity in income (loss) of unconsolidated affiliate         (2,534 )     -         -         (2,534 )     -       -         -         -  
Income before income taxes (52,637 ) 582 - (52,055 ) 81,441 14,177 - 95,618
Income tax expense (benefit)         (24,483 )     (2,237 )       -         (26,720 )     20,960       3,182         -         24,142  
Net income       $ (28,154 )   $ 2,819       $ -       $ (25,335 )   $ 60,481     $ 10,995       $ -       $ 71,476  
 
Ratios                                                            
Net calendar year loss and LAE 73.5 % 66.7 % 72.8 % 67.6 % 55.8 % 66.2 %
Net underwriting expenses 35.5 % 44.6 % 36.4 % 33.2 % 41.3 % 34.1 %
Net Combined 109.0 % 111.3 % 109.2 % 100.8 % 97.1 % 100.3 %
 
Return on Average Equity         -2.7 %                           5.8 %                      
 

 
Commercial Insurance & Personal Insurance Combined
($ in thousands)
(Unaudited)
             
Three Months Ended December 31, Year Ended December 31
2012       2011       Change(%) 2012       2011       Change(%)
Key Measures
Premiums written
Gross premiums written $ 481,241 $ 434,261 10.8 % $ 1,971,072 $ 1,810,923 8.8 %
Less: ceded premiums written (78,263 ) (53,388 ) 46.6 % (231,691 ) (172,333 ) 34.4 %
Net premiums written $ 402,978   $ 380,873   5.8 % $ 1,739,381   $ 1,638,590   6.2 %
 
Revenues
Net premiums earned 410,518 407,078 5.8 % 1,721,542 1,593,850 6.2 %
Ceding commission revenue 9,389 8,165 15.0 % 32,335 33,968 -4.8 %
Policy billing fees 3,348   2,867   16.8 % 12,615   10,534   19.8 %
Total revenues 423,255 418,110 1.2 % 1,766,492 1,638,352 7.8 %
Expenses
Net loss and loss adjustment expenses 380,496   264,191   44.0 % 1,253,860   1,055,249   18.8 %
Underwriting expenses
Direct commission expense 96,612 77,562 24.6 % 359,710 309,826 16.1 %
Other underwriting expenses 76,622   69,946   10.8 % 311,498   278,900   11.9 %
Total underwriting expenses 173,234   147,508   17.4 % 671,208   588,726   14.0 %
Underwriting profit $ (130,475 ) $ 6,411   NM   $ (158,576 ) $ (5,623 ) NM  
 
Underwriting Ratios
Net loss ratio 92.7 % 64.9 % 72.8 % 66.2 %
Net expense ratio 39.1 % 33.5 % 36.4 % 34.1 %
Net combined ratio 131.8 % 98.4 % 109.2 % 100.3 %
 

 
Commercial Insurance Segment Information
($ in thousands)
(Unaudited)
        Three Months Ended       Year Ended
December 31, December 31,
2012       2011 2012       2011
Key Measures
Premiums written
Gross premiums written $ 309,168 $ 279,686 $ 1,327,906 $ 1,225,305
Less: ceded premiums written (33,890 ) (24,237 ) (102,282 ) (73,006 )
Net premiums written $ 275,278   $ 255,449   $ 1,225,624   $ 1,152,299  
 
Revenues
Net premiums earned 292,212 282,295 1,224,303 1,087,911
Ceding commission revenue 1,352 4,603 7,702 14,786
Policy billing fees 1,206   1,272   5,467   4,345  
Total revenues 294,770 288,170 1,237,472 1,107,042
Expenses
Net loss and loss adjustment expenses 240,084 183,847 902,784 736,474
Underwriting expenses
Direct commission expenses 64,669 52,084 248,480 208,676
Other underwriting expenses 44,540   39,511   184,180   153,214  
Total underwriting expenses 109,209   91,595   432,660   361,890  
Underwriting profit $ (54,523 ) $ 12,728   $ (97,972 ) $ 8,678  
 
Underwriting Ratios
Net loss ratio 82.2 % 65.1 % 73.7 % 67.7 %
Net expense ratio 36.5 % 30.4 % 34.3 % 31.5 %
Net combined ratio 118.7 % 95.5 % 108.0 % 99.2 %
 

 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
 
        Three Months Ended December 31,
2012         2011
      Reciprocal               Reciprocal      
            Tower         Exchanges         Total         Tower         Exchanges         Total
Key Measures
Premiums written
Gross premiums written $ 126,018 $ 46,055 $ 172,073 $ 102,712

$

51,863

$

154,575
Less: ceded premiums written (30,760 ) (13,613 ) (44,373 ) (16,076 ) (13,075 ) (29,151 )
Net premiums written $ 95,258   $ 32,442   $ 127,700   $ 86,636  

$

38,788  

$

125,424  
 
Revenues
Net premiums earned 81,299 37,007 118,306 80,192 44,591 124,783
Ceding commission revenue 2,973 5,064 8,037 1,693 1,869 3,562
Policy billing fees 1,842   300   2,142   1,455   140   1,595  
Total revenues 86,114 42,371 128,485 83,340 46,600 129,940
Expenses
Net loss and loss adjustment expenses 102,685 37,727 140,412 51,902 28,441 80,343
Underwriting expenses
Direct commission expense 21,878 10,065 31,943 17,164 8,314 25,478
Other underwriting expenses 20,242   11,840   32,082   17,970   12,465   30,435  
Total underwriting expenses 42,120   21,905   64,025   35,134   20,779   55,913  
Underwriting profit $ (58,691 ) $ (17,261 ) $ (75,952 ) $ (3,696 )

$

(2,620 )

$

(6,316 )
 
Underwriting Ratios
Net loss ratio 126.3 % 101.9 % 118.7 % 64.7 % 63.8 % 64.4 %
Net expense ratio 45.9 % 44.7 % 45.5 % 39.9 % 42.1 % 40.7 %
Net combined ratio 172.2 % 146.6 % 164.2 % 104.6 % 105.9 % 105.1 %
 

 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
 
        Year Ended December 31,
2012         2011
      Reciprocal               Reciprocal      
            Tower         Exchanges         Total         Tower         Exchanges         Total
Key Measures
Premiums written
Gross premiums written $ 439,622 $ 203,544 $ 643,166 $ 376,309

$

209,309

$

585,618
Less: ceded premiums written (82,851 ) (46,558 ) (129,409 ) (59,455 ) (39,872 ) (99,327 )
Net premiums written $ 356,771   $ 156,986   $ 513,757   $ 316,854  

$

169,437  

$

486,291  
 
Revenues
Net premiums earned 333,579 163,660 497,239 318,777 187,162 505,939
Ceding commission revenue 10,069 14,564 24,633 12,408 6,774 19,182
Policy billing fees 6,434   714   7,148   5,616   573   6,189  
Total revenues 350,082 178,938 529,020 336,801 194,509 531,310
Expenses
Net loss and loss adjustment expenses 241,858 109,218 351,076 214,355 104,420 318,775
Underwriting expenses
Direct commission expense 76,863 34,367 111,230 68,609 32,541 101,150
Other underwriting expenses 73,421   53,897   127,318   73,518   52,168   125,686  
Total underwriting expenses 150,284   88,264   238,548   142,127   84,709   226,836  
Underwriting profit $ (42,060 ) $ (18,544 ) $ (60,604 ) $ (19,681 )

$

5,380  

$

(14,301 )
 
Underwriting Ratios
Net loss ratio 72.5 % 66.7 % 70.6 % 67.2 % 55.8 % 63.0 %
Net expense ratio 40.1 % 44.6 % 41.6 % 38.9 % 41.4 % 39.8 %
Net combined ratio 112.6 % 111.3 % 112.2 % 106.1 % 97.2 % 102.8 %
 

 
Insurance Services Segment Results of Operations
($ in thousands)
(Unaudited)
 
      Three Months Ended     Year Ended
December 31, December 31,
2012     2011 2012     2011
Revenue
Management fee income $ 7,453 $ 7,260 $ 30,150 $ 29,303
Other revenue 756 628 3,420 1,570
Total revenue 8,209 7,888 33,570 30,873
Expenses
Other expenses 4,575 4,327 23,695 19,331
Total expenses 4,575 4,327 23,695 19,331
Insurance services pre-tax income $ 3,634 $ 3,561 $ 9,875 $ 11,542
 

 
Tower Group, Inc.
Consolidated Balance Sheets
 
        December 31,
($ in thousands, except par value and share amounts)         2012       2011
Assets      
Investments - Tower
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $1,926,236 and $2,046,932) $ 2,065,148 $ 2,153,620
Equity securities (cost of $144,204 and $91,069) 140,695 87,479
Short-term investments (cost of $4,749 and $0) 4,750 -
Other invested assets 57,786 44,347
Investments - Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $263,950 and $288,180) 280,563 300,054
Equity securities (cost of $5,144 and $1,965)           5,563           1,866  
Total investments 2,554,505 2,587,366
Cash and cash equivalents (includes $9,782 and $666 relating to Reciprocal Exchanges) 100,293 114,098
Investment income receivable (includes $2,610 and $2,978 relating to Reciprocal Exchanges) 25,332 26,782
Investment in unconsolidated affiliate 70,830 -
Premiums receivable (includes $44,285 and $44,171 relating to Reciprocal Exchanges) 422,112 426,432
Reinsurance recoverable on paid losses (includes $682 and $5,670 relating to Reciprocal Exchanges) 17,609 23,903
Reinsurance recoverable on unpaid losses (includes $52,389 and $11,253 relating to Reciprocal Exchanges) 496,192 319,664
Prepaid reinsurance premiums (includes $17,803 and $14,685 relating to Reciprocal Exchanges) 63,923 54,037
Deferred acquisition costs, net (includes $11,364 and $11,866 relating to Reciprocal Exchanges) 180,941 168,858
Intangible assets (includes $6,854 and $4,839 relating to Reciprocal Exchanges) 106,768 114,920
Goodwill 241,458 241,458
Funds held by reinsured companies 137,545 69,755
Other assets (includes $2,042 and $2,685 relating to Reciprocal Exchanges)           325,265           306,295  
Total assets         $ 4,742,773         $ 4,453,568  
Liabilities
Loss and loss adjustment expenses (includes $135,791 and $136,274 relating to Reciprocal Exchanges) $ 1,895,073 $ 1,632,113
Unearned premium (includes $103,216 and $102,991 relating to Reciprocal Exchanges) 920,859 893,176
Reinsurance balances payable (includes $6,979 and $3,466 relating to Reciprocal Exchanges) 40,569 20,794
Funds held under reinsurance agreements (includes $500 and $0 relating to Reciprocal Exchanges) 98,581 96,726
Other liabilities (includes $21,054 and $10,035 relating to Reciprocal Exchanges) 285,998 289,394
Deferred income taxes (includes $19,818 and $18,906 relating to Reciprocal Exchanges) 36,464 33,285
Debt           449,731           426,901  
Total liabilities 3,727,275 3,392,389
Stockholders' equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 46,820,959 and
46,448,341 shares issued, and 38,405,837 and 39,221,102 shares outstanding) 469 465
Treasury stock (8,415,122 and 7,227,239 shares) (181,435 ) (158,185 )
Paid-in-capital 780,097 772,938
Accumulated other comprehensive income 83,406 63,053
Retained earnings           298,299           355,528  
Tower Group, Inc. stockholders' equity           980,836           1,033,799  
Noncontrolling interests           34,662           27,380  
Total stockholders' equity           1,015,498           1,061,179  
Total liabilities and stockholders' equity         $ 4,742,773         $ 4,453,568  
 

 
Tower Group, Inc.
Consolidated Statements of Operations
      Three Months Ended     Year Ended
December 31, December 31,
(in thousands, except per share amounts)         2012       2011       2012       2011
Revenues        
Net premiums earned $ 410,518 $ 407,078 $ 1,721,542 $ 1,593,850
Ceding commission revenue 9,389 8,165 32,335 33,968
Insurance services revenue 756 628 3,420 1,570
Policy billing fees 3,348 2,867 12,615 10,534
Net investment income 30,052 32,062 127,165 126,474
Net realized investment gains (losses):
Other-than-temporary impairments (2,946 ) (176 ) (9,919 ) (3,509 )
Portion of loss recognized in other comprehensive income - 84 286 264
Other net realized investment gains         23,930         4,213         35,109         12,639  
Total net realized investment gains (losses)         20,984         4,121         25,476         9,394  
Total revenues 475,047 454,921 1,922,553 1,775,790
Expenses
Loss and loss adjustment expenses 380,496 264,190 1,253,860 1,055,249
Direct and ceding commission expense 96,612 77,561 359,710 309,826
Other operating expenses 76,070 70,282 316,645 280,447
Acquisition-related transaction costs 4,568 (77 ) 9,229 360
Interest expense         7,893         9,408         32,630         34,290  
Total expenses 565,639 421,364 1,972,074 1,680,172
Other income (expense)
Equity in income (loss) of unconsolidated affiliate         (2,534 )       -         (2,534 )       -  
Income (loss) before income taxes (93,126 ) 33,557 (52,055 ) 95,618
Income tax expense (benefit)         (36,040 )       7,623         (26,720 )       24,142  
Net income (loss) $ (57,086 ) $ 25,934 $ (25,335 ) $ 71,476
Less: Net income (loss) attributable to Reciprocal Exchanges         (4,947 )       648         2,819         10,995  
Net income (loss) attributable to Tower Group, Inc.       $ (52,139 )     $ 25,286       $ (28,154 )     $ 60,481  
Earnings (loss) per share attributable to Tower Group, Inc. stockholders:
Basic $ (1.36 ) $ 0.64 $ (0.73 ) $ 1.48
Diluted       $ (1.36 )     $ 0.64       $ (0.73 )     $ 1.48  
Weighted average common shares outstanding:
Basic 38,385 39,733 38,795 40,833
Diluted         38,385         39,806         38,795         40,931  
Dividends declared and paid per common share       $ 0.19       $ 0.19       $ 0.75       $ 0.69  
 

 
        Three Months Ended       Year Ended
December 31, December 31,
Reconciliation of non-GAAP financial measures: 2012       2011 2012       2011

Net income (loss) attributable to Tower Group, Inc.

$

(52,139 )

$

25,286 $ (28,154 ) $ 60,481
Net realized gains (losses) on investments 11,137 2,735 12,245 6,980
Acquisition-related transaction costs (4,568 ) 77 (9,229 ) (360 )
Income tax (3,777 ) (1,016 ) (3,316 ) (2,470 )

Operating income (loss) attributable to Tower Group, Inc.

$ (54,931 ) $ 23,490   $ (27,854 ) $ 56,331  
 

Operating EPS and ROE:

Operating earnings (loss) per share-Basic

$ (1.43 ) $ 0.59 $ (0.72 ) $ 1.38

Operating earnings (loss) per share-Diluted

$ (1.43 ) $ 0.59 $ (0.72 ) $ 1.38
Operating return on average equity -21.4 % 9.0 % -2.7 % 5.4 %
 
Operating return on average equity excluding the impact of catastrophes
and reserve development
Operating return on average equity -21.4 % 9.0 % -2.7 % 5.4 %
Impact of catastrophes and reserve development 31.0 % 1.6 % 12.8 % 5.6 %
Operating return on average equity excluding the impact of catastrophes
and reserve development 9.6 % 10.6 % 10.1 % 11.0 %
 
Combined ratio excluding the impact of catastrophes and
reserve development
Combined ratio 131.8 % 98.4 % 109.2 % 100.4 %
Impact of catastrophes and reserve development 31.3 % -0.6 % 11.8 % 3.8 %
Combined ratio excluding the impact of catastrophes
and reserve development 100.5 % 99.0 % 97.4 % 96.6 %
 
Book Value Per Share
Tower Group, Inc. Stockholders' equity

$

980,836

$

1,033,799

Shares outstanding (in thousands)

38,406   39,221  
Book Value Per Share $ 25.54   $ 26.36  
 


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