Attached files
| file | filename |
|---|---|
| 8-K - FORM 8-K - Tower Group International, Ltd. | d348822d8k.htm |
 1.
First Quarter 2012
Earnings Call Presentation
Exhibit 99.1 |
 1
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This presentation 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 presentation 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.
Notes on Non-GAAP Financial Measures
Operating income excludes realized gains and losses, acquisition-related
transaction costs and the results of the reciprocal business, net of
tax. This 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 equity is
annualized operating income divided by average common stockholders' equity.
Total premiums include gross premiums written through our insurance
subsidiaries and produced as managing general agent on behalf of other
insurance companies, including the reciprocal exchanges. |
 2
Overview of the Operating Results |
 3
First Quarter Snapshot
Strong operating results, positive market trends and key accomplishments
•
Operating earnings of $21.9M
•
Positive market and pricing trends
•
Initiated successful rollout of personal lines system
Key strategic transaction with Canopius Group, Ltd. (April 25, 2012)
»
20% organic growth in premiums written and managed
»
7.8% increase from 1Q 2011
•
Investment commitment in Canopius
•
Options to accomplish two key strategic objectives:
»
Investment of $75M represents 10.7% interest in Canopius to assist in its
acquisition of Omega Insurance Holdings
»
Potentially establish a presence at Lloyd’s, subject to the approval of
Lloyd’s and the Financial Services Authority
»
Merger with Canopius’
Bermuda reinsurance subsidiary to regain the Bermuda
platform |
 4
0.56
0.49
1Q12
1Q11
Operating EPS($)
21.9
20.3
1Q12
1Q11
Operating Earnings ($ millions)
1Q12 Highlights
*Stockholders equity reduced by $77 million from stock repurchases and dividends
since 1Q11 1Q11 includes $9.8 million of winter storm losses
1Q11 includes $0.23 per share of winter storm losses
1,058
1,043
1Q12
1Q11
Stockholders' Equity ($ millions)*
26.83
25.24
1Q12
1Q11
Book Value per Share ($)* |
 5
99.2
97.6
1Q12
1Q11
Combined Ratio Excluding the Reciprocals (%)
8.4
7.8
1Q12
1Q11
Operating Return on Equity (%)
1Q12 Highlights
467
390
1Q12
1Q11
Gross Premiums Written and Managed
($ millions)
1Q11 includes $9.8 million of winter storm losses
|
 6
Organic
Growth
Initiative
–
1
st
Quarter
Update
•
Expanded into mono-line commercial property, inland marine and surety
lines of business •
Began expanding personal package policies outside Northeast focusing on
affluent clients •
Began reorganizing the personal lines department under new leadership with
national expansion plans
•
Created new business unit, National Commercial Property, to focus on
underwriting builders risk
and
mono-line
commercial
property
(as
a
standalone
product
rather
than
as
a
part
of
package policy)
•
Continued to see profitable growth from newly created assumed reinsurance and
customized solution business units ($54 million of GWP in the
first quarter) •
Continued
to
hire
talented
underwriting
managers
to
head
various
business
units
•
Established
a
new
research
department
headed
by
a
new
manager
to
research,
identify
and
analyze profitable growth opportunities
•
Hired several marketing executives to implement our organic growth
initiative Products
Develop Entrepreneurial Businesses
Improve Growth-Related Business Functions |
 7
Commercial
Personal
Insurance
General
Specialty
Services
Business Units / Products
Small Business,
Middle Market and
National Property
National Programs, E&S,
Assumed Reinsurance and
Customized Solutions
Homeowners
and private
passenger auto
Fees from
Insurance Services
1Q 12 GPW* ($ millions)
$191
$146
$130
$7**
1Q11 GPW* ($ millions)
$165
$ 98
$127
$7**
1Q12 GPW Growth
16%
49%
2%
n/a
Commercial Consolidated
Loss Ratio
67.6%
51.7%
n/a
Expense Ratio
34.3%
37.3%
n/a
Combined Ratio
101.9%
89%
n/a
Retention
77%
91%
n/a
Renewal Change
2.7
3.0%
n/a
Business Segment Results
* Gross premiums written and managed
** Total revenue for the segment |
 8
Net Loss and Loss Expense Ratio, Excluding Reciprocals
1Q12 Prior year loss development
•
Mostly
from
discontinued
commercial
business
from
2010
and
prior
accident
years
•
Slight revision to the loss development factors based on year end study
Improving loss ratio trends for the remainder of 2012
•
Improved profitability of existing businesses due to re-underwriting and
pricing actions •
Increased premium growth from newly created business units focused on
profitable specialty and property businesses
•
Declining impact of businesses terminated in 2010 and 2011
64.2
60.7
64.7
60.2
-3.56
-2.1
-2.4
1Q12
Storms
Dev.
Pro
-
Forma
1Q12
1Q11
Storms
Dev.
Pro
-
Forma
1Q11
Loss Ratio (%)
1Q12
1Q11 |
 9
Expense Ratio Excluding Reciprocals
Revised
allocation
to
claims
costs
resulted
in
1
point
year
over
year
increase
in
other underwriting expenses (OUE) expenses
Commission rate higher year over year due to assumed reinsurance, this should
trend down in second half of year
As
systems
initiatives
relating
to
personal
lines
are
completed,
we
expect
scale
advantage to drive expense ratio down
17.6%
18.4%
11.7%
12.9%
3.6%
3.7%
32.9%
35.0%
1Q11
1Q12
Commissions, net of ceding commissions
OUE, net of fees
BB&T expenses |
 10
Improving Investment Performance
Alternative
investment
commitment
remains
modest
but
assets
have
begun
to
generate positive returns in 1Q12 and should provide higher yield and
diversification from interest rate risk inherent in fixed-income
investments, and reduce capital markets volatility
Operating cash flows improved in 1Q12 as compared to 1Q11. 2011
operating
cash flows were largely invested in opportunistic repurchases of
Tower common
stock
$2,438
$2,260
3-31-2012
3-31-2011
Cash and Invested Assets
($millions)
4.7
4.8
3-31-2012
3-31-2011
Yield (%)
$32
$31
3-31-2012
3-31-2011
Net Investment Income
($millions)
Equivalent Fixed Income
Tax -
|
 11
Positive Trends and Guidance
($ in millions)
2012 Target*
1Q12
Trend
through remainder of 2012
Annual GPW Growth
5%
-
10%
20.0%
Anticipate growth on the upper end of our 5% to 10% range due to
organic growth initiatives and improving market conditions
Loss Ratio
62%
-
63%
64.2%
The loss ratio trend for 2012 should improve due to re-underwriting
and pricing actions , shift to profitable specialty and property
business and declining impact of the runoff business
Expense Ratio
33.5%
-
34.5%
35.0%
Expense ratio should benefit over remainder of year from lower
acquisition cost trends, lower systems costs at end of year and
leveling of OUE by year end
Combined Ratio
95.5%
-
97.5%
99.2%
Future improvement will be driven primarily by reduction in loss
and expense ratios expected over the balance of the year
Investment Yield
4.7%
-
5.0%
4.7%
Continued growth in invested asset base and book yield
stabilization due to alternative and strategic investments
Operating ROE & 2012
Guidance
9%
-
10%
$2.60
-
$2.70
8.4%
Consistent with prior guidance the first half of the year is expected
to remain below our 9% to 10% guidance and we expect to see
improvement to 10%-12% range occurring in second half of year
and continuing into 2013
*Excludes reciprocals |
 12
Review of the recent transaction with Canopius Group, Ltd
|
 13
Five Year Goals 2010 –
2014
Transform Tower from a Northeast insurance company into a National
insurance company
Develop a robust product platform of commercial, specialty and
personal lines products
Expand our business model to enhance profitability (fee income,
Bermuda reinsurance capacity and Lloyds platform)
Improve our systems infrastructure and redesign our organizational
structure to support our growth
Deliver ROE that exceeds our target of 10% to 12% by 2014
|
 14
Canopius Investment
Strategic Rationale:
•
Canopius transaction provides Tower with the opportunity to further
enhance our business model:
»
Obtain the assistance of Canopius with the establishment of a
presence at Lloyd’s, subject to the approval of Lloyd’s and the
Financial Services Authority
»
Possible merger with Canopius’s Bermuda reinsurance subsidiary,
which would result in the CastlePoint platform regaining its Bermuda
domicile status
Investment:
•
The $75 million investment is subject to completion of the acquisition by
Canopius of Omega Insurance Holdings Limited
•
Represents 10.7% ownership interest in Canopius
•
Funded from Tower’s existing investment portfolio
•
Investment in Canopius will be accounted by Tower using the equity
method, and therefore Tower’s pro rata portion of Canopius’
earnings will
be included in Tower’s quarterly operating results
|
 15
Background on Canopius
Canopius is a privately-owned international insurance and reinsurance
group underwriting a diversified portfolio of business from its
operations at Lloyd’s and around the world
•
2011 gross premiums written of 616 million GBP
•
Underwriting
activities
are
mainly
conducted
through
its
managed
syndicates
at
Lloyd's: Syndicate 4444 (composite) and Syndicate 260 (motor).
Tower currently provides 6% quota share reinsurance of Canopius Syndicate
4444
Tower’s investment in Canopius is contingent on its acquisition of Omega
Insurance Holdings Ltd.
•
Subject
to
necessary
regulatory
consents
and
acceptance
of
offer
by
Omega
shareholders
•
Acquisition should deliver substantial scale benefits to Canopius
|
 16
Lloyd’s option
Strategic rationale:
•
Obtains the assistance of Canopius with the establishment of a presence at
Lloyd’s, subject to the approval of Lloyd’s and the Financial
Services Authority •
Accelerates Tower’s ability to access profitable specialty and
international business underwritten through the Lloyds market
•
Gains
Canopius’s
expertise
in
the
Lloyd's
market
and
minimizes
execution
risk
of
acquiring
or
developing a standalone Lloyd’s managing agency and syndicate
Terms of the agreement:
•
As
a
condition
of
the
transaction,
Tower
will
increase
its
quota
share
reinsurance
of
Canopius’
Syndicate 4444 to 10% in 2013
»
Projected writings of approximately $100M
•
Tower
may
also
elect
to
reinsure
a
greater
portion
of
Canopius’s
Direct
and
Facultative
(D&F)
Property business
»
Potential
for
modest
additional
writings
in
2012
and
up
to
$30M
-
$40M
in
2013
•
Formation of own Corporate Member (an entity that provides funding for
Lloyd’s syndicates) and syndicate
»
Enables Tower to take full advantage of the leverage opportunities offered by
Lloyd’s |
 17
Bermuda Option
Background:
•
Tower’s acquisition of CastlePoint Holdings, Ltd. In 2009 resulted in
Tower’s Bermuda based reinsurer, CastlePoint Reinsurance Company,
becoming subject to U.S taxation •
After deploying the excess capital resulting from the CastlePoint
acquisition, Tower has been seeking a means to enhance the
profitability of CastlePoint Re •
Tower’s
merger
option
has
a
term
that
extends
18
months
following
Canopius’s
acquisition
of
Omega
Canopius’s Bermuda reinsurance company subsidiary
•
Over $300M in shareholder capital as of year-end 2011
•
Reinsures
Lloyd’s
business
from
Canopius’s
Lloyds
syndicate
as
well
as
a
small
amount
of
third
party business.
Resulting
benefits
to
Tower
if
option
is
exercised
and
merger
is
successfully
executed:
•
CastlePoint Re would cease to be a subsidiary of a U.S company
•
The capital in the Bermuda subsidiaries would represent about 50% of
Tower’s total shareholder platform
•
Tower will exercise this option only if we believe the transaction is
immediately accretive to earnings and increases ROE target above the
current10% to 12% range |