Tower Group International, Ltd. Reports First Quarter 2013 Results
Tower Group International, Ltd. Reports First Quarter 2013 Results
- First Quarterly Results Since Merger with Canopius Holdings Bermuda Limited
- Gross Premiums Written and Managed of $550.4 Million
- Operating Income of $25.9 Million; Operating EPS of $0.56
- Book Value per Share of $20.85; Tower Stockholders' Equity of $1.20 Billion
- First Quarter Dividend Declared of $0.165 per Share, Equal to Pre-Merger Payout Adjusted for Share Conversion Ratio
- Tower's Board of Directors Approves $50 Million Share Repurchase Program
HAMILTON, Bermuda--(BUSINESS WIRE)-- Tower Group International, Ltd. (NAS: TWGP) today announced financial results for the first quarter of 2013. These results reflect the first quarter results following the completion on March 13, 2013 of the merger between Tower Group, Inc. (TGI) and Canopius Holdings Bermuda Limited (Canopius Bermuda), which was renamed Tower Group International, Ltd. (Tower) upon completion of the merger and became the ultimate parent company. Since the merger transaction was accounted for as a reverse acquisition and recapitalization, under which TGI was identified and treated as the accounting acquirer, historical results prior to the first quarter of 2013 reflect only the financial results reported by TGI, with equity accounts and earnings per share restated to reflect Tower's new capitalization.
Michael H. Lee, President and Chief Executive Officer, said, "Tower is off to a strong start in 2013, marked by solid financial performance in the first quarter and the successful completion of our transformational merger. The merger enables us to realize our long-term vision of creating a global diversified insurance and reinsurance company with access to the world's three key insurance markets - the U.S., Bermuda and London. It also fulfills an important strategic goal to enhance our business model by merging with a Bermuda-based international holding company and reinsurer to increase our profitability. We are already beginning to realize the benefit of this merger by operating our assumed reinsurance business from Bermuda as well as utilizing our Bermuda reinsurance company to provide an efficient source of reinsurance to support our growth in the U.S. We are also reviewing new growth opportunities utilizing our Bermuda reinsurance platform to develop new products and businesses to generate growth in the specialty insurance and reinsurance markets. In the U.S., we continued to implement changes to improve the performance of commercial and personal lines businesses and benefited from continued positive pricing trends across all of our product lines. We were also able to generate profitable organic growth by successfully implementing our organic growth initiative to develop new products, form new business units and identify new growth opportunities. With our new and improved business model resulting from the Canopius Bermuda merger, we are well positioned to continue making progress in successfully implementing our long-term business plan, including achieving higher returns in the remainder of 2013 and beyond."
Net income attributable to common stockholders for the first quarter of 2013 was $15.1 million, or $0.33 per diluted share, compared to $19.2 million, or $0.43 per diluted share, in the first quarter of 2012. Net income attributable to common stockholders is lower than operating income in the first quarter of 2013 principally due to $19.1 million of acquisition-related transaction costs associated with the Canopius Bermuda merger. For a reconciliation of net income attributable to common stockholders to operating income, please see the accompanying "Reconciliation of non-GAAP financial measures" table.
Operating income (1) was $25.9 million, or $0.56 per share, in the first quarter of 2013, compared to $20.6 million, or $0.46 per share, in the first quarter of 2012. Earnings per share for both periods reflects Tower's new shares, with diluted weighted average shares outstanding of 45,983,837 in the first quarter of 2013 and 44,535,344 in the first quarter of 2012. Operating return on average equity (ROE) (1) was 9.8% in first quarter of 2013, compared to 7.9% in the first quarter of 2012.
Tower stockholders' equity was $1.20 billion as of March 31, 2013, compared with $980.8 million at December 31, 2012. This increase resulted primarily from the merger transaction on March 13, 2013, in which Tower received $205.9 million in net proceeds from the issuance of 14,025,737 common shares to the owners of Canopius Bermuda. Book value per share (2) as of March 31, 2013 was $20.85, compared with $22.54 at December 31, 2012. Book value per share for both periods reflects Tower's new shares, with 57,432,150 shares outstanding at March 31, 2013, compared with 43,513,678 shares outstanding at December 31, 2012.
First Quarter 2013 Highlights (all figures compare results in the first quarter of 2013 to the results for the first quarter of 2012 except as noted otherwise):
Gross premiums written and managed increased 18% to $550.4 million, driven primarily by growth in assumed reinsurance. Excluding programs, policies in-force increased 1.5% as of March 31, 2013. Premium rates on renewed Commercial Insurance business excluding programs increased 6.4% and premium rates on renewed Personal Insurance business increased 4.6%, resulting in an overall premium rate increase on renewal business of 5.3%. Our Commercial Insurance business renewal retention rate excluding programs increased to 82.2% from 77.3%, while our Personal Insurance business renewal retention rate increased to 90.0% from 87.1%. This resulted in an overall retention rate of 88.3%, up from 85.0%. Net premiums earned were $420.5 million in the first quarter of 2013, compared to $420.2 million in the first quarter of 2012, as growth in assumed reinsurance was offset by increased premium cessions to the homeowners' quota share reinsurance treaty.
Total revenues increased 1.9% to $475.3 million, resulting from increased ceding commissions from a previously announced quota share reinsurance treaty effective in January 2013 for Tower's homeowners business and higher net realized investment gains partly offset by declines in net investment income. Net investment income decreased 10.7% to $30.3 million. Net investment income in the first quarter of 2013 excludes $1.2 million in income from Tower's investment in Canopius Group Limited, which is reported separately as "Equity income in unconsolidated affiliate." The tax equivalent investment yield at amortized cost was 4.1% at March 31, 2013, compared to 4.7% at March 31, 2012. Net realized investment gains were $7.1 million, compared to gains of $3.3 million. The gains in the first quarter of 2013 included other-than-temporarily impaired credit losses of $0.5 million, compared to $3.0 million of such losses in the first quarter of 2012.
Total commission and fee income increased 98.2% to $17.4 million, due primarily to higher ceding commission revenue from increased reinsurance cessions.
The net loss ratio, excluding the business we manage on behalf of the reciprocal exchanges, was 63.1% compared to 64.2%. The first quarter 2012 results were adversely impacted by 3.5 percentage points of prior year development. The net expense ratio, excluding the reciprocal exchanges, was 36.0% compared to 34.6%. The increase in the net expense ratio in the first quarter of 2013 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 our information technology infrastructure to support policy administration and claims processing needs. The net combined ratio, excluding the reciprocal exchanges, was 99.1% compared to 98.8%.
Acquisition-related transaction costs for the first quarter of 2013 were $19.1 million, primarily due to expenses associated with the Canopius Bermuda merger, compared to $1.3 million in the first quarter of 2012. The expenses in the first quarter of 2013 included $11.4 million in compensation expenses (of which $10.3 million were associated with accelerated vesting of restricted stock awards) and $7.7 million in legal and accounting fees.
Tower's effective tax rate was (12.5%) compared to 31.0%. Such rate was reduced in the first quarter of 2013 by the decrease in U.S. sourced pre-tax operating income and by Tower's acquisition-related transaction costs associated with the Canopius Bermuda merger. For full-year 2013, Tower expects the majority of its operating income to come from its Bermuda operations, and its tax rate on U.S. operating earnings to be between 8% and 12%, as tax-exempt investment income will be a substantially larger portion of U.S. taxable income than in 2012.
Interest expense decreased 9.3% to $7.8 million.
Tower's Board of Directors approved a quarterly dividend on May 7, 2013 of $0.165 per share payable on June 21, 2013 to stockholders of record as of June 10, 2013. The quarterly dividend of $0.165 per share is equivalent to Tower Group, Inc.'s historical quarterly dividend of $0.1875 per share adjusted for the conversion ratio of 1.1330 resulting from the Merger Transaction.
Share Repurchase Program
As part of Tower's capital management strategy, Tower's Board of Directors approved on May 7, 2013 a $50 million share repurchase program. Purchases will be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations.
Tower expects full year 2013 operating earnings per share to be in a range of $2.40 to $2.60.
Notes on Non-GAAP Financial Measures
(1) Operating income 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 per share is operating income divided by diluted weighted average shares outstanding. Operating return on average equity (ROE) is annualized operating income divided by average common stockholders' equity.
(2) Book value per share is calculated as Tower Group International, Ltd. 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.
Tower will host a conference call and webcast to discuss these results on May 9, 2013 at 9:00 a.m. Eastern Time. To access a live, listen-only webcast over the Internet, please visit the Investors section of Tower's website at www.twrgrpintl.com, or use this link at: http://investors.twrgrpintl.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 Investors section of Tower's website at: http://investors.twrgrpintl.com/events.cfm.
About Tower Group International, Ltd.
Tower Group International, Ltd. is a Bermuda-based global diversified insurance and reinsurance holding company. Tower's insurance subsidiaries are focused on providing commercial, personal and specialty insurance and reinsurance products and are rated A- (Excellent) by A.M. Best. Through our insurance subsidiaries in the U.S., collectively referred to as Tower Group Companies, Tower is one of the 50 largest providers of property and casualty insurance products and services in the U.S. Tower provides personal insurance products to individuals and commercial insurance products to small to medium-sized businesses through a dedicated team of retail and wholesale agents. We also offer specialty products on an admitted and non-admitted basis, as well as through a network of program underwriting agents.
For more information, visit Tower's website at http://www.twrgrpintl.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 for the year ended December 31, 2012, 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.
|Financial Summary ($ in thousands, except per share data):|
|Three Months Ended March 31,|
|($ in thousands)||Tower||Exchanges||tions||Total||Tower||Exchanges||tions||Total|
|Net premiums written||$||415,265||$||37,126||$||-||$||452,391||$||387,591||$||38,093||$||-||$||425,684|
|Net premiums earned||$||379,484||$||41,002||$||-||$||420,486||$||378,669||$||41,489||$||-||$||420,158|
|Ceding commission revenue||12,453||2,991||(1,293||)||14,151||2,078||3,085||-||5,163|
|Insurance services revenue||7,289||-||(7,161||)||128||7,359||-||(6,862||)||497|
|Policy billing fees||2,847||303||-||3,150||3,002||132||-||3,134|
|Net investment income||29,584||2,380||(1,647||)||30,317||32,257||3,349||(1,663||)||33,943|
|Total net realized investment gains|
|Loss and loss adjustment expenses||239,282||35,398||-||274,680||243,249||24,244||-||267,493|
|Direct and ceding|
|Other operating expenses||78,331||13,223||(7,161||)||84,393||70,996||12,937||(6,862||)||77,071|
|Acquisition-related transaction costs||19,056||-||-||19,056||1,262||-||-||1,262|
|Other income (expense)|
|Equity in income (loss)|
|of unconsolidated affiliate||1,192||-||(-||)||-||1,192||-||-|
|Income (loss) before income taxes||13,421||(11,281||)||-||2,140||27,773||3,628||-||31,401|
|Income tax expense (benefit)||(1,673||)||-||-||(1,673||)||8,607||617||-||9,224|
|Net income (loss)||$||15,094||$||(11,281||)||$||-||$||3,813||$||19,166||$||3,011||$||-||$||22,177|
|Net calendar year loss and LAE||63.1||%||86.3||%||65.3||
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