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TMCNet:  Tower Group Reports Third Quarter Results

[November 07, 2012]

Tower Group Reports Third Quarter Results

NEW YORK --(Business Wire)--

Tower Group, Inc. (NASDAQ: TWGP) today reported third quarter 2012 net income attributable to common shareholders of $21.6 million, or $0.56 per diluted share. Net loss attributable to common shareholders in the third quarter of 2011 was $16.4 million, or ($0.40) per diluted share.

Operating income(1) was $23.8 million in the third quarter of 2012, or $0.62 per diluted share, compared to an operating loss of $15.3 million in the third quarter of 2011, or ($0.38) per diluted share. The operating loss in the third quarter of 2011 included losses from Hurricane Irene which were estimated at $60.1 million ($39.1 million after-tax, or $0.96 per diluted share) in the third quarter 2011 and revised to $45.0 million ($29.2 million after tax, or $0.72 per diluted share) in the fourth quarter of 2011. The Company experienced $15.1 million of favorable development from Hurricane Irene claims in the fourth quarter of 2011.

During the quarter, Tower settled its previously disclosed litigation with Munich Reinsurance America, Inc. ("Munich") for $2.9 million after-tax ($0.08 per share), which is included as a charge against its third quarter 2012 operating results. This settlement pertained to business that was sourced prior to 2001 from Tower's Insurance Services segment.

Highlights (all figures compare third quarter 2012 results to the results for the same period in 2011 except as noted):

  • Net premiums earned increased by 4.2% from $413.4 million to $430.7 million.
  • Gross premiums written and managed decreased by 6.6% to $484.8 million primarily due to our termination of a program in the third quarter 2012 which generated $51.7 million of written premiums in the third quarter of 2011. The third quarter of 2011 also included written premiums of $23.3 million from an assumed reinsurance treaty which was commuted in the fourth quarter of 2011. Excluding these two actions, gross premiums written and managed increased by 8.2%.
  • For the combined insurance segments, the net combined ratio improved to 96.0% from 109.9%. (Excluding the business that Tower manages on behalf of the reciprocal exchanges, the net combined ratio improved to 96.3% from 112.0 %.)
    • The net loss ratio improved to 59.5% from 75.0%. The net loss ratio excluding the reciprocal exchanges improved to 60.8% from 77.6%.
    • The net expense ratio was 36.5% compared to 34.9%.
  • Net investment income was flat at $31.4 million.
  • Book value per share was $27.49 at September 30, 2012 compared to $26.37 at December 31, 2011. During the quarter, Tower paid cash dividends of 18.75 cents per share, and year to date Tower has paid cash dividends of 56.25 cents per share.
  • Tower Group, Inc. stockholders' equity was $1.1 billion at September 30, 2012.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, "During the quarter, we continued to see positive trends in our business in terms of growth and underwriting profitability as well as improving market conditions. Our growth during the quarter was driven by our organic initiatives which are focused on expanding our products, improving existing business units and creating new business units and improving the various operating processes associated with generating growth. We saw continued strength in our assumed reinsurance business and are beginning to see significant demand for customized product solutions with key distribution sources. In addition to seeing robust growth opportunities, we made significant progress in non-renewing unprofitable business and continued to drive rate increases across all business units. Because of this, we are confident about the profitability of our on-going business and remain well positioned to take advantage of the improving market conditions. We are also progressing well with our proposed merger transaction with the Bermuda reinsurance business of Canopius. Our fourth quarter operating results will be adversely affected by Superstorm Sandy, which will easily cause the largest catastrophic event in our history. Our sympathies go out to those who have been severely impacted by this event, including our policyholders, agents and employees situated in the affected areas. While it is premature to estimate the full extent of our insured losses, we are confident that our capital position for the year will not be materially impaired based on the claims reporting pattern thus far, our underwriting profile and robust reinsurance program, which was substantially strengthened after Hurricane Irene last year. Despite the obvious challenges arising from this event, we are proud of the performance and the dedication of our staff, who have been working around the clock to service our customers and agents."

On October 29, 2012, Superstorm Sandy made landfall in New Jersey and caused significant property damages which are still being determined. Tower has exposure to Superstorm Sandy through its direct insurance operations and its reinsurance assumed and ceded businesses. Losses from its insurance operations are covered by reinsurance after certain loss thresholds are incurred by the company. For Tower's companies, excluding the reciprocal exchanges, losses incurred in excess of $75 million are ceded to Tower's reinsurance program up to a gross loss of $150 million. Tower also maintains reinsurance for losses in excess of $150 million to $925 million; in these reinsured programs, Tower retains 30% of the losses between $150 million and $225 million. Tower expects its direct insurance losses to be contained within the first layer of its reinsurance program based on currently available information. Tower expects its pre-tax net loss from its direct insurance business to be between $90 million and $95 million pre-tax including reinstatement premiums. Tower's assumed reinsurance business expects its losses to be between $15 million and $20 million pre-tax, based on its evaluation of currently available information. Tower also expects to recover $10 million if industry losses exceed $10 billion and an additional $10 million if industry losses exceed $15 billion through industry loss warranties that its ceded reinsurance business put in place in July 2012 to manage risk associated with its exposure in the Northeast. Tower believes that its alternative investments will not be materially affected by the losses associated with Superstorm Sandy. In aggregate, Tower's current estimate of loss ranges from $55.3 million to $68.3 million, after-tax, based on its estimate of an industry loss between $10 billion and $15 billion. Tower expects that the reciprocal exchanges will have a net loss between $6.2 million and $7.5 million, after-tax, but such loss will not be included in Net Income Available to Tower Shareholders.




               
 
Financial Summary ($ in thousands, except per share data):
       
Three Months Ended September 30,
2012 2011
Reciprocal Elimina- Reciprocal Elimina-
        Tower   Exchanges     tions     Total Tower   Exchanges     tions     Total
Net premiums written     $ 382,655     $ 41,831       $ -       $ 424,486     $ 423,813     $ 44,891       $ -       $ 468,704  
Revenues
Net premiums earned $ 388,090 $ 42,623 $ - $ 430,713 $ 366,874 $ 46,573 $ - $ 413,447
Ceding commission revenue 4,990 3,190 (477 ) 7,703 4,956 2,011 - 6,967
Insurance services revenue 8,678 - (7,870 ) 808 8,057 - (7,644 ) 413
Policy billing fees 2,980 153 - 3,133 2,688 142 - 2,830
Net investment income 29,924 3,141 (1,676 ) 31,389 29,817 3,268 (1,674 ) 31,411
Total net realized investment gains
(losses)       80       1,065         -         1,145       (1,135 )     1,362         -         227  
Total revenues       434,742       50,172         (10,023 )       474,891       411,257       53,356         (9,318 )       455,295  
Expenses
Loss and loss adjustment expenses 235,782 20,314 - 256,096 284,661 25,376 - 310,037
Direct and ceding
commission expense 79,637 8,367 (477 ) 87,527 73,066 7,188 - 80,254
Other operating expenses 78,760 14,514 (7,870 ) 85,404 68,498 13,029 (7,644 ) 73,883
Acquisition-related transaction costs 2,679 - - 2,679 425 - - 425
Interest expense       8,224       1,676         (1,676 )   8,224       8,633       1,674         (1,674 )   8,633  
Total expenses       405,082       44,871         (10,023 )       439,930       435,283       47,267         (9,318 )       473,232  
Income (loss) before income taxes 29,660 5,301 - 34,961 (24,026 ) 6,089 - (17,937 )
Income tax expense (benefit)       8,031       1,469         -         9,500       (7,587 )     1,606         -         (5,981 )
Net income (loss)     $ 21,629     $ 3,832       $ -       $ 25,461     $ (16,439 )   $ 4,483       $ -       $ (11,956 )
 
Ratios                                                      
Net calendar year loss and LAE 60.8 % 47.7 % 59.5 % 77.6 % 54.5 % 75.0 %
Net underwriting expenses 35.5 % 45.8 % 36.5 % 34.4 % 38.8 % 34.9 %
Net Combined 96.3 % 93.5 % 96.0 % 112.0 % 93.3 % 109.9 %
 
Return on Average Equity       8.4 %                           -6.3 %                      
 
 

           
 
Financial Summary ($ in thousands, except per share data):
           
Nine Months Ended September 30,
2012 2011
Reciprocal Elimina- Reciprocal Elimina-
        Tower   Exchanges     tions     Total   Tower   Exchanges     tions     Total
Net premiums written     $ 1,211,859     $ 124,544       $ -       $ 1,336,403     $ 1,127,068     $ 130,649       $ -       $ 1,257,717  
Revenues
Net premiums earned $ 1,184,371 $ 126,653 $ - $ 1,311,024 $ 1,044,201 $ 142,571 $ - $ 1,186,772
Ceding commission revenue 13,923 9,500 (477 ) 22,946 20,898 4,905 - 25,803
Insurance services revenue 25,361 - (22,697 ) 2,664 22,985 - (22,043 ) 942
Policy billing fees 8,853 414 - 9,267 7,234 433 - 7,667
Net investment income 92,448 9,668 (5,003 ) 97,113 90,924 9,663 (5,000 ) 95,587
Total net realized investment gains
(losses)       1,108       3,384         -         4,492       4,245       1,028         -         5,273  
Total revenues       1,326,064       149,619         (28,177 )       1,447,506       1,190,487       158,600         (27,043 )       1,322,044  
Expenses
Loss and loss adjustment expenses 801,873 71,491 - 873,364 715,080 75,979 - 791,059
Direct and ceding
commission expense 238,573 24,302 (477 ) 262,398 208,840 24,227 - 233,067
Other operating expenses 223,114 42,058 (22,697 ) 242,475 192,311 39,703 (22,043 ) 209,971
Acquisition-related transaction costs 4,661 - - 4,661 437 - - 437
Interest expense       23,702       5,003         (5,003 )   23,702       24,990       5,000         (5,000 )   24,990  
Total expenses       1,291,923       142,854         (28,177 )       1,406,600       1,141,658       144,909         (27,043 )       1,259,524  
Income before income taxes 34,141 6,765 - 40,906 48,829 13,691 - 62,520
Income tax expense (benefit)       6,991       (2,880 )       -         4,111       15,462       4,192         -         19,654  
Net income     $ 27,150     $ 9,645       $ -       $ 36,795     $ 33,367     $ 9,499       $ -       $ 42,866  
 
Ratios                                                      
Net calendar year loss and LAE 67.7 % 56.4 % 66.6 % 68.5 % 53.3 % 66.7 %
Net underwriting expenses 34.7 % 44.6 % 35.6 % 33.5 % 41.1 % 34.4 %
Net Combined 102.4 % 101.0 % 102.2 % 102.0 % 94.4 % 101.1 %
 
Return on Average Equity       3.5 %                           4.3 %                      
 
 

 
 
Reconciliation of non-GAAP financial measures ($ in thousands, except per share data):
               
Three Months Ended Nine Months Ended
September 30, September 30,
        2012   2011   2012   2011
Net income (loss) attributable to Tower Group, Inc. $ 21,629 $ (16,439 ) $ 27,150 $ 33,367
Net realized (gains) losses on investments (80 ) 1,135 (1,108 ) (4,245 )
Acquisition-related transaction costs 2,679 425 4,661 437
  Income tax         (456 )     (428 )     (461 )     1,454  
  Operating income (loss) attributable to Tower Group, Inc.       $ 23,772     $ (15,307 )   $ 30,242     $ 31,013  
 
Ratios                            
Operating earnings (loss) per share - Basic $ 0.62 $ (0.38 ) $ 0.78 $ 0.75
Operating earnings (loss) per share - Diluted $ 0.62 $ (0.38 ) $ 0.78 $ 0.75
  Operating return on average equity         9.2 %     -5.9 %     3.9 %     4.0 %
 
 

Third Quarter 2012 Highlights

Consolidated

Gross premiums written and managed decreased to $484.8 million in the third quarter, 6.6% lower than in the third quarter of 2011. The decrease in the three months ended September 30, 2012 is primarily attributable to the non-renewal of one program that generated $51.7 million of gross written premium in the third quarter in 2011. The third quarter 2011 also included $23.3 million of premium from an assumed reinsurance treaty that was commuted in the fourth quarter 2011. Excluding these two actions, gross premiums written and managed increased by 8.2%. Policies in-force decreased by 0.8% as of September 30, 2012, compared to September 30, 2011, without programs. For the three months ended September 30, 2012, premiums on renewed Commercial Insurance business excluding programs increased 4.0% and premiums on renewed Personal Insurance business increased 4.5%, resulting in an overall premium increase on renewal business of 4.3%. During the same time period, our Commercial Insurance business renewal retention rate excluding programs was 83.7% and our Personal Insurance business renewal retention rate was 88.9%, resulting in an overall retention rate of 88.0%.

Total revenues increased 4.3% to $474.9 million in the third quarter of 2012 as compared to $455.3 million in the prior year's third quarter. The growth was primarily due to increased net premiums earned. Net premiums earned represented 90.7% of total revenues for the three months ended September 30, 2012 compared to 90.8% for 2011.

Net investment income was flat at $31.4 million. The tax equivalent book yield on our investment portfolio, excluding the reciprocal exchanges, was 4.6% at September 30, 2012 compared to 4.5% at September 30, 2011. Net realized investment gains were $1.1 million for the quarter ended September 30, 2012 compared to gains of $0.2 million in the same period last year. Total commission and fee income increased 14.0% to $11.6 million in the third quarter of 2012 compared to $10.2 million in the third quarter of 2011.

The net loss ratio was 59.5% for the three months ended September 30, 2012 compared to 75.0% for the same period in 2011. (Excluding the business that we manage on behalf of the reciprocal exchanges, the net loss ratio was 60.8% for the third quarter of 2012 compared to 77.6% for the third quarter of 2011.) Included in the third quarter loss ratio were 12.5 points associated with Hurricane Irene (12.3 points excluding the business that we manage on behalf of the reciprocal exchanges). Our net expense ratio was 36.5% for the three months ended September 30, 2012 compared to 34.9% for the same period in 2011. (Excluding the business that we manage on behalf of the reciprocal exchanges, the net expense ratio was 35.5% for the third quarter of 2012 compared to 34.4% for the third quarter of 2011.) The increase in the three months ended September 30, 2012 is primarily due to the assumed reinsurance business which has a higher commission ratio than other lines of business and an increase in the OUE ratio 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 and nine months ended September 30, 2012 were $2.7 million and $4.7 million, respectively, primarily attributed to the acquisition of our equity interest in Canopius Group and expenses associated with our recently announced proposed merger. These costs were negligible for the same periods in 2011.

Excluding the reciprocal exchanges, for the three months ended September 30, 2012, Tower's effective tax rate was 27.1% in the third quarter 2012 compared to 31.6% in the same period in the prior year. Interest expense decreased by $0.4 million for the three months ended September 30, 2012, compared to the same period in 2011.

Additional Highlights and Disclosures

Dividend Declaration

Tower's Board of Directors approved a quarterly dividend on November 6, 2012, of 18.75 cents per share payable on December 21, 2012, to stockholders of record as of December 10, 2012.

Guidance

Tower expects full year 2013 operating earnings per share to be in a range of $2.85 to $3.05 excluding any benefits of the proposed merger transaction.

Notes on Non-GAAP Financial Measures

(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. Operating return on equity is annualized operating income (loss) divided by average common stockholders' equity.

Conference Call

Tower will host a conference call and webcast to discuss these results on November 8, 2012 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.

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 reinsurance solutions provided primarily to small insurance companies;

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; and

Our Insurance Services Segment provides underwriting, claims and reinsurance brokerage services to insurance companies.

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 for the year ended December 31, 2011 and subsequent filings on Form 10-Q, 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.

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

 
 
Commercial Insurance & Personal Insurance Combined
($ in thousands)
(Unaudited)
               
Three Months Ended September 30, Nine Months Ended September 30,

 

2012

    2011     Change(%) 2012     2011     Change( %)
Key Measures
Premiums written
Gross premiums written $ 484,845 $ 519,130 -6.6 % $ 1,489,831 $ 1,376,662 8.2 %
Less: ceded premiums written (60,359 ) (50,426 ) 19.7 % (153,428 ) (118,945 ) 29.0 %
Net premiums written $ 424,486   $ 468,704   -9.4 % $ 1,336,403   $ 1,257,717   6.3 %
 
Revenues
Net premiums earned 430,713 413,447 4.2 % $ 1,311,024 $ 1,186,772 10.5 %
Ceding commission revenue 7,703 6,967 10.6 % 22,946 25,803 -11.1 %
Policy billing fees 3,133   2,830   10.7 % 9,267   7,667   20.9 %
Total revenues 441,549 423,244 4.3 % 1,343,237 1,220,242 10.1 %
Expenses
Net loss and loss adjustment expenses 256,096   310,037   -17.4 % 873,364   791,059   10.4 %
Underwriting expenses
Direct commission expense 87,527 80,150 9.2 % 262,398 233,066 12.6 %
Other underwriting expenses 80,440   74,050   8.6 % 236,776   208,518   13.6 %
Total underwriting expenses 167,967   154,200   8.9 % 499,174   441,584   13.0 %
Underwriting profit (loss) $ 17,486   $ (40,993 ) 142.7 % $ (29,301 ) $ (12,401 ) -136.3 %
 
Underwriting Ratios
Net loss ratio 59.5 % 75.0 % 66.6 % 66.7 %
Net expense ratio 36.5 % 34.9 % 35.6 % 34.4 %
Net combined ratio 96.0 % 109.9 % 102.2 % 101.1 %
 
 

 
 
Commercial Insurance Segment Information
($ in thousands)
(Unaudited)
            Three Months Ended Nine Months Ended
September 30, September 30,
2012     2011   2012     2011  
Key Measures
Premiums written
Gross premiums written $ 311,950 $ 366,740 $ 1,018,738 $ 945,619
Less: ceded premiums written (25,557 ) (16,533 ) (68,392 ) (48,769 )
Net premiums written $ 286,393   $ 350,207   $ 950,346   $ 896,850  
 
Revenues
Net premiums earned 296,606 290,113 $ 932,091 $ 805,616
Ceding commission revenue 2,446 1,455 6,350 10,183
Policy billing fees 1,358   1,195   4,261   3,073  
Total revenues 300,410 292,763 942,702 818,872
Expenses
Net loss and loss adjustment expenses 180,053 221,540 662,700 552,627
Underwriting expenses
Direct commission expenses 61,142 57,146 183,230 157,394
Other underwriting expenses 45,213   39,854   140,875   113,467  
Total underwriting expenses 106,355   97,000   324,105   270,861  
Underwriting profit (loss) $ 14,002   $ (25,777 ) $ (44,103 ) $ (4,616 )
 
Underwriting Ratios
Net loss ratio 60.7 % 76.4 % 71.1 % 68.6 %
Net expense ratio 34.6 % 32.5 % 33.6 % 32.0 %
Net combined ratio 95.3 % 108.9 % 104.7 % 100.6 %
 
 

 
 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
                         
Three Months Ended September 30,
2012   2011  
Reciprocal Reciprocal
                Tower     Exchanges     Total     Tower     Exchanges     Total
Key Measures
Premiums written
Gross premiums written $ 117,220 $ 55,675 $ 172,895 $ 97,793 54,596 152,389
Less: ceded premiums written (20,958 ) (13,844 ) (34,802 ) (24,188 ) (9,705 ) (33,893 )
Net premiums written $ 96,262   $ 41,831   $ 138,093   $ 73,605   44,891   118,496  
 
Revenues
Net premiums earned 91,484 42,623 134,107 76,761 46,573 123,334
Ceding commission revenue 2,067 3,190 5,257 3,501 2,011 5,512
Policy billing fees 1,622   153   1,775   1,493   142   1,635  
Total revenues 95,173 45,966 141,139 81,755 48,726 130,481
Expenses
Net loss and loss adjustment expenses 55,729 20,314 76,043 63,122 25,375 88,497
Underwriting expenses
Direct commission expense 18,018 8,367 26,385 15,816 7,188 23,004
Other underwriting expenses 20,714   14,513   35,227   21,166   13,030   34,196  
Total underwriting expenses 38,732   22,880   61,612   36,982   20,218   57,200  
Underwriting profit (loss) $ 712   $ 2,772   $ 3,484   $ (18,349 ) 3,133   (15,216 )
 
Underwriting Ratios
Net loss ratio 60.9 % 47.7 % 56.7 % 82.2 % 54.5 % 71.8 %
Net expense ratio 38.3 % 45.8 % 40.7 % 41.7 % 38.8 % 40.6 %
Net combined ratio 99.2 % 93.5 % 97.4 % 123.9 % 93.3 % 112.4 %
 
 

 
 
Personal Insurance Segment Information
($ in thousands)
(Unaudited)
                     
Nine Months Ended September 30,
2012   2011  
Reciprocal Reciprocal
                Tower     Exchanges     Total     Tower     Exchanges     Total
Key Measures
Premiums written
Gross premiums written $ 313,604 $ 157,489 $ 471,093 $ 273,597 157,446 431,043
Less: ceded premiums written (52,091 ) (32,945 ) (85,036 ) (43,379 ) (26,797 ) (70,176 )
Net premiums written $ 261,513   $ 124,544   $ 386,057   $ 230,218   130,649   360,867  
 
Revenues
Net premiums earned $ 252,280 $ 126,653 $ 378,933 $ 238,585 $ 142,571 $ 381,156
Ceding commission revenue 7,096 9,500 16,596 10,715 4,905 15,620
Policy billing fees 4,592   414   5,006   4,161   433   4,594  
Total revenues 263,968 136,567 400,535 253,461 147,909 401,370
Expenses
Net loss and loss adjustment expenses 139,173 71,491 210,664 162,453 75,979 238,432
Underwriting expenses
Direct commission expense 54,866 24,302 79,168 51,445 24,227 75,672
Other underwriting expenses 53,844   42,057   95,901   55,348   39,703   95,051  
Total underwriting expenses 108,710   66,359   175,069   106,793   63,930   170,723  
Underwriting profit (loss) $ 16,085   $ (1,283 ) $ 14,802   $ (15,785 ) 8,000   (7,785 )
 
Underwriting Ratios
Net loss ratio 55.2 % 56.4 % 55.6 % 68.1 % 53.3 % 62.6 %
Net expense ratio 38.5 % 44.6 % 40.5 % 38.5 % 41.1 % 39.5 %
Net combined ratio 93.7 % 101.0 % 96.1 % 106.6 % 94.4 % 102.1 %
 
 

 
 
Insurance Services Segment Results of Operations
($ in thousands)
(Unaudited)
                 
Three Months Ended Nine Months Ended
September 30, September 30,
2012   2011 2012 2011
Revenue
Management fee income $ 7,870 $ 7,644 $ 22,697 $ 22,043
Other revenue 808   413 2,664 942
Total revenue 8,678   8,057 25,361 22,985
Expenses
Other expenses 9,578   4,986 19,120 15,004
Total expenses 9,578   4,986 19,120 15,004
Insurance services pre-tax income $ (900 ) $ 3,071 $ 6,241 $ 7,981
 
 

 
 
Tower Group, Inc.
Consolidated Balance Sheets
   
September 30, 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 $1,978,624 and $2,046,932) $ 2,133,676 $ 2,153,620
Equity securities (cost of $121,339 and $91,069) 123,614 87,479
Short-term investments (cost of $4,748 and $0) 4,748 -
Other invested assets 54,365 44,347
Investments - Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $277,787 and $288,180) 303,172 300,054
Equity securities (cost of $5,144 and $1,965)   5,654       1,866  
Total investments 2,625,229 2,587,366
Cash and cash equivalents (includes $11,383 and $666 relating to Reciprocal Exchanges) 179,414 114,098
Investment income receivable (includes $3,443 and $2,978 relating to Reciprocal Exchanges) 30,188 26,782
Investment in unconsolidated affiliate 71,512 -
Premiums receivable (includes $40,400 and $41,290 relating to Reciprocal Exchanges) 367,489 408,626
Reinsurance recoverable on paid losses (includes $2,248 and $5,670 relating to Reciprocal Exchanges) 19,873 23,903
Reinsurance recoverable on unpaid losses (includes $19,138 and $11,253 relating to Reciprocal Exchanges) 313,626 319,664
Prepaid reinsurance premiums (includes $17,944 and $14,685 relating to Reciprocal Exchanges) 62,820 54,037
Deferred acquisition costs, net (includes $12,503 and $11,866 relating to Reciprocal Exchanges) 189,589 168,858
Intangible assets (includes $7,000 and $4,839 relating to Reciprocal Exchanges) 108,806 114,920
Goodwill 250,103 250,103
Funds held by reinsured companies 124,353 69,755
Other assets (includes $4,086 and $2,685 relating to Reciprocal Exchanges)   321,167       304,083  
Total assets $ 4,664,169     $ 4,442,195  
Liabilities
Loss and loss adjustment expenses (includes $123,073 and $136,274 relating to Reciprocal Exchanges) $ 1,694,666 $ 1,632,113
Unearned premium (includes $104,140 and $102,991 relating to Reciprocal Exchanges) 927,295 893,176
Reinsurance balances payable (includes $3,685 and $3,466 relating to Reciprocal Exchanges) 20,850 20,794
Funds held under reinsurance agreements 88,810 96,726
Other liabilities (includes $46,889 and $7,154 relating to Reciprocal Exchanges) 316,073 266,155
Deferred income taxes (includes $7,445 and $4,511 relating to Reciprocal Exchanges) 48,896 29,337
Debt   449,005       426,901  
Total liabilities 3,545,595 3,365,202
Stockholders' equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 46,781,251 and
46,448,341 shares issued, and 38,376,845 and 39,221,102 shares outstanding) 468 465
Treasury stock (8,404,406 and 7,227,239 shares) (181,432 ) (158,185 )
Paid-in-capital 777,864 772,938
Accumulated other comprehensive income 96,125 62,244
Retained earnings   361,956       356,680  
Tower Group, Inc. stockholders' equity   1,054,981       1,034,142  
Noncontrolling interests   63,593       42,851  
Total stockholders' equity   1,118,574       1,076,993  
Total liabilities and stockholders' equity $ 4,664,169     $ 4,442,195  
 
 

Tower Group, Inc.            
Consolidated Statements of Operations
    Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts)         2012       2011       2012       2011  
Revenues
Net premiums earned $ 430,713 $ 413,447 $ 1,311,024 $ 1,186,772
Ceding commission revenue 7,703 6,967 22,946 25,803
Insurance services revenue 808 413 2,664 942
Policy billing fees 3,133 2,830 9,267 7,667
Net investment income 31,389 31,411 97,113 95,587
Net realized investment gains (losses):
Other-than-temporary impairments (1,727 ) (2,955 ) (6,973 ) (3,333 )
Portion of loss recognized in other comprehensive income - 156 286 180
Other net realized investment gains         2,872       3,026       11,179       8,426  
Total net realized investment gains (losses)         1,145       227       4,492       5,273  
Total revenues 474,891 455,295 1,447,506 1,322,044
Expenses
Loss and loss adjustment expenses 256,096 310,037 873,364 791,059
Direct and ceding commission expense 87,527 80,254 262,398 233,067
Other operating expenses 85,404 73,883 242,475 209,971
Acquisition-related transaction costs 2,679 425 4,661 437
Interest expense         8,224       8,633       23,702       24,990  
Total expenses         439,930       473,232       1,406,600       1,259,524  
Income before income taxes 34,961 (17,937 ) 40,906 62,520
Income tax expense         9,500       (5,981 )     4,111       19,654  
Net income $ 25,461 $ (11,956 ) $ 36,795 $ 42,866
Less: Net income attributable to Noncontrolling interests         3,832       4,483       9,645       9,499  
Net income attributable to Tower Group, Inc.       $ 21,629     $ (16,439 )   $ 27,150     $ 33,367  
Earnings per share attributable to Tower Group, Inc. stockholders:
Basic $ 0.56 $ (0.40 ) $ 0.70 $ 0.82
Diluted       $ 0.56     $ (0.40 )   $ 0.70     $ 0.81  
Weighted average common shares outstanding:
Basic 38,371 40,814 38,929 41,207
Diluted         38,395       40,814       38,979       41,312  
Dividends declared and paid per common share       $ 0.19     $ 0.19     $ 0.56     $ 0.50  


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