Tower Group Reports Fourth Quarter and Full Year 2012 Results

Tower Group Reports Fourth Quarter and Full Year 2012 Results

NEW YORK--(BUSINESS WIRE)-- Tower Group, Inc. (NAS: 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/