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| 8-K - FORM 8-K - Tower Group International, Ltd. | d449841d8k.htm |
 1.
Presentation |
 1
Forward-Looking Statements
This document contains certain forward-looking information about Tower
Group, Inc. (“Tower”), Canopius Holdings Bermuda Limited
(“Canopius Bermuda”) and Tower Group International, Ltd. (“Tower
Ltd.”). Forward-looking information about Tower is intended to be
covered by the safe harbor for “forward-looking statements”
provided by the Private Securities Litigation Reform Act of 1995, while
forward-looking information about Canopius Bermuda is not intended to be
covered by such safe harbor. Forward-looking statements may be made
directly in this document and may include statements for the period after the completion of the merger.
Representatives of Tower and Canopius Bermuda may also make forward-looking
statements. Forward-looking statements are statements that are not
historical facts. Words such as “expect,” “believe,” “will,” “may,” “anticipate,” “plan,” “estimate,” “intend,”
“should,” “can,” “likely,” “could” and
similar expressions are intended to identify forward-looking statements. These statements
include statements about the expected benefits of the merger, the expected
ownership of Tower Ltd., information about the combined company’s
objectives, plans and expectations, the likelihood of satisfaction of certain conditions to the completion of the
merger and whether and when the merger will be completed. Forward-looking
statements are not guarantees of performance. These statements are based
upon the current beliefs and expectations of the management of each of Tower and Canopius Bermuda and
are subject to risks and uncertainties, including the risks described in this
presentation, that could cause actual results to differ materially from
those expressed in, or implied or projected by, the forward-looking information and statements.
In light of these risks, uncertainties, assumptions and factors, the results
anticipated by the forward-looking statements discussed in this
presentation or made by representatives of Tower or Canopius Bermuda may not occur. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of
the date hereof or, in the case of statements made by representatives of
Tower or Canopius Bermuda, on the date those statements are made. All subsequent written and oral forward-
looking statements concerning the merger or the combined company or other
matters addressed in this document and attributable to Tower or Canopius
Bermuda or any person acting on their behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. Except to the extent
required by applicable law or regulation, neither Tower nor Canopius
Bermuda undertakes any obligation to update or publish revised forward-looking statements to reflect events or
circumstances after the date hereof or the date of the forward-looking
statements or to reflect the occurrence of unanticipated events.
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 equity is annualized operating income
divided by average common stockholders' equity.
(2)
Gross premiums written and managed include gross premiums written through our
insurance subsidiaries and produced as managing general agent on behalf
of other insurance companies, including the reciprocal business. |
 2
High Level Pro Forma Corporate Chart
Tower Group
Delaware Holding Company
*CP Re used solely to reinsure US Pool
Tower
Shareholders
100%
US Pool*
Castle Point Re*
(“CP Re”)
CURRENT STRUCTURE
New
Shareholders
Tower
Shareholders
Tower Group
Bermuda Holding Company
Bermuda Operations,
Lloyd’s and CP Re
business
Tower and its
Subsidiaries
U.S. Operations
EXPECTED POST MERGER STRUCTURE |
 3
Investment Highlights
Demonstrated track record of growth and profitability
•
129% total return since IPO in 2004
•
Outperformed
S&P
500
by
2.5x
and
SNL
U.S.
Insurance
P&C
Index
by
1.6x
•
Full deployment of capital from CastlePoint merger through accretive
acquisitions •
Organic growth of commercial, specialty and personal lines business to achieve
scale and greater profitability •
Increasing commission and fee income
•
Complete build-out of diversified international specialty insurance
company •
Gain access to Bermuda platform to provide efficient source of capital
Attractive entry point for new investors
•
0.63x P/B and 0.95x P/TB
•
4.3%
dividend
yield
vs.
1.4%
yield
of
the
SNL
U.S.
Insurance
P&C
Index
Significant insider ownership
•
$70 MM (approximately 8% pro forma ownership)
Source: SNL Financial. Market data as of December 4, 2012
*excludes catastrophic storm losses and adverse development.
Since 2010, Tower’s core domestic franchise has generated a stable 10%
- 12% ROE*
(15% - 17% ROTE)*
Canopius transaction expected in 2014 to result in 13% - 15%
Pro Forma ROE
(forecasted 18% - 20%
ROTE) |
 4
Overview of Tower
Diversified international specialty P&C insurance company
•
Rated “A-”
by A.M. Best
•
Top 50 P&C insurance company
•
20 offices nationwide with over 1,400 employees
Diversified product offering in U.S.
•
Commercial General: 36%*
»
Comprehensive product offering to small business owners
•
Commercial Specialty: 32%*
»
Narrowly focused specialty products
•
Personal Lines: 32%*
»
Home and auto
Canopius transaction enables further growth in international markets
•
Expands existing relationships with Lloyd’s syndicates
•
Bermuda platform provides capital to support Tower and third parties
* Percentage of total premium for the nine months ended 9/30/12
|
 5
Strong and Consistent Track Record of Profitable Growth
Source: SNL Financial. Industry data based upon SNL U.S. Insurance P&C
Index. Peers include AFG, AFSI, HCC, MKL, NAVG, RLI, SIGI, THG, UFCS, WRB. Component companies and weighting based on
SNL
U.S.
Insurance
P&C
Index
as
of
12/4/2012.
CAGR
2004
–
2011.
Note: Tower numbers for BVPS and TBVPS adjusted to reflect 1/1/2011 adoption of
new guidance for DAC reporting * 3Q12 gross premiums written and
dividends represent the nine months ended 9/30/12 annualized. Book Value
per Share Tangible Book Value per Share
Gross Written Premiums ($MM)
Dividends Per Share
6.28
6.88
8.66
12.74
13.67
22.72
25.19
26.37
27.49
-
5
10
15
20
25
30
2004
2005
2006
2007
2008
2009
2010
2011
3Q12
178
300
433
524
635
1,071
1,496
1,811
1,986
-
400
800
1,200
1,600
2,000
2,400
2004
2005
2006
2007
2008
2009
2010
2011
3Q12*
6.03
6.59
8.39
11.23
11.99
16.09
16.31
17.18
18.32
-
5
10
15
20
2004
2005
2006
2007
2008
2009
2010
2011
3Q12
0.03
0.10
0.10
0.15
0.20
0.26
0.39
0.69
0.75
-
0.20
0.40
0.60
0.80
2004
2005
2006
2007
2008
2009
2010
2011
3Q12* |
 6
Superior Underwriting Track Record
Tower has outperformed the P&C industry loss ratio by approximately 10
points Positive loss ratio trends
•
Changes to business mix
•
Corrective underwriting actions
•
Claims cost reduction
•
Improving pricing environment
2Q12 reserve charge solidifies balance sheet
•
No adverse development expected
Note: P&C Industry Data source SNL Financial
9/30/12 represents the nine months ended 9/30/12.
59.4%
72.7%
58.8%
74.4%
60.3%
65.2%
55.2%
68.0%
51.7%
77.4%
55.6%
72.3%
58.7%
73.6%
61.1%
79.4%
60.7%
72.7%
1.5%
6.5%
7.0%
60.2%
67.6%
67.7%
2004
2005
2006
2007
2008
2009
2010
2011
9/30/2012
Loss Ratio
Core Tower
Tower Catastrophe & Reserve Development
P&C Industry |
 7
Tower Phase I (2005 -
2008)
Note: Average combined ratio and average ROE metrics are premium
weighted
Strong operating performance
•
Average ROE 19.9%
•
Average combined ratio 86.6%
•
Gross premiums written & produced CAGR of 34%
Efficient use of capital
•
$805 MM in premiums written and managed with $319 MM of capital
•
Generated significant fee income through management fees and ceding
commissions Geographic and product specialization
•
Heavily concentrated in Northeast
•
Primarily focused on small commercial products |
 8
Tower Phase II (2009 -
2012)
Challenging market conditions
•
Financial crisis and prolonged economic downturn
•
Declining premium rates
•
Low interest rate environment
•
Unprecedented catastrophic events (Irene and Sandy)
Proactive plan to position Tower for success
•
Acquired CastlePoint in 2009 to strengthen capital base
»
Increased capital from $319 MM to $819 MM
–
$1 B of capital by year end 2009
•
Deployed excess capital through accretive acquisitions
•
Took corrective underwriting actions and shifted business mix to
improve underwriting results
•
Increased reserves to solidify balance sheet
•
Modified asset allocation and implemented strategic investments to increase
investment yields •
Used reciprocals and increased reinsurance protection to decrease catastrophe
exposure |
 9
Strategic Five-Year Plan
Tower began a strategic five-year plan in 2010
•
Expansion into international and specialty markets
•
Broaden product platform in U.S. to add personal and specialty lines
•
Enhance business model to grow fee income
•
Improve systems infrastructure
•
Gain access to Bermuda platform
Tower successfully diversified its revenues by geography and line of business
which should decrease risk and provide more stable, predictable
earnings Tower’s recent infrastructure investments will allow Tower
to achieve greater scale and grow profitably and efficiently without
significant future capital expenditures Merger with Canopius is final key
step in executing five-year plan |
 10
Canopius Merger Background
CHBL’s parent company, Canopius Group Limited (“CGL”), is a
privately owned (re)insurance group with operations at Lloyd’s
•
2011 GPW of approximately $1 billion
•
Quota share relationship with Tower since July 2011
Tower invested $75 MM in CGL in August 2012
•
10.7% ownership stake
•
Option to merge with subsidiary of CHBL
•
Increased existing quota share of CGL’s Lloyd’s business
•
CGL assistance in creating Tower’s Lloyd’s managing agency
Strategic benefits:
•
Bermuda platform
•
Access to profitable specialty and international business
•
Minimize acquisition or start-up related execution risk of creating a
Lloyd’s syndicate •
Take advantage of the leverage opportunities offered by Lloyd’s
Bermuda operations
•
Quota share Lloyd’s business from CGL and third parties
•
CHBL acquired for tangible book value plus the value of retained
business (~$8 MM)
»
Tower determines CHBL tangible book value and retained business as part of
pre-closing restructuring |
 11
Existing Tower*
2013 Pro Forma
Tower Phase III (2013 -
2014)
U.S.
Bermuda
Lloyd’s
•
Continue expansion of commercial,
personal and specialty businesses
•
Establish efficient platform to
support U.S. and international
business
•
Expand existing relationships with
Lloyd’s syndicates to access $38B
market
•
Expect to create Tower Lloyd’s
managing agency
* Percentage of total premium for the nine months ended 9/30/12
•
EPS accretion expected to be ~ 5% in 2013 and projected to be mid-teens in
2014 •
Expected to increase ROE to 13% -
15% within 18 months
•
Creates a global specialty insurance company
Commercial
General
36%
Personal
Lines
32%
Commercial
Specialty
32%
Commercial
General
31%
Personal
Lines
31%
Commercial
Specialty
23%
Quota share
of Lloyd's
business
15%
Merger is final key step in executing five-year plan |
 12
Organic Growth Strategy
Transitioning from acquisitions to organic growth
•
Completed deployment of excess capital by making accretive acquisitions
•
Implemented organic growth initiative in 2011
»
Develop and customize products for different industries and customer groups as
well as key clients »
Improve existing business units and create new business units
»
Improve technical expertise in functions related to generating organic growth
(ex. Product and business development) Organic growth is working
•
Newly created business units are driving organic growth
»
Assumed reinsurance and customized solutions generated $127 MM of new written
premiums in 2011 and $167MM year to date 2012
•
Talent depth
»
Recently hired highly experienced underwriting managers with national markets
and product experience to provide leadership for personal and
commercial lines businesses –
Expected expansion into affluent personal lines market and various commercial
niche markets expected in 2013 •
Currently developing a pipeline of customized products for select agents
•
Recently formed strategic alliances with Lloyd’s syndicates and key
business partners to significantly improve product and analytical
expertise in specialty markets |
 13
Improving Market Conditions
Positive pricing beginning in mid 2011
Sandy should serve as a catalyst for further pricing improvements in the
Northeast Source: The Council of Insurance Agents & Brokers
P&C Pricing Trends
15%
10%
5%
0%
5%
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
Small Commercial
Commercial
-
-
- |
  14
Sandy Losses Limited by Reinsurance and Underwriting
100% Tower
100% Reinsured
30% Tower
70% Reinsured
$925 MM
$225 MM
$150 MM
$75 MM
$0 MM
100% Reinsured
Expect future impact of catastrophe losses on Tower’s earnings to be
more limited
•
Continued geographical diversification
•
Utilization of reciprocals to reduce Tower’s earnings volatility
•
Further strengthen reinsurance program
•
Pre-tax net of reinsurance insurance losses estimated at $95 MM
•
Expect limited share of industry losses due to conservative underwriting
profile »
Irene 1% of industry loss despite 3.9% market share
•
Irene and Sandy were two of the four major windstorms to make landfall in the
Tri-state area in last 100 years
•
Losses from Sandy and Irene represent the two single largest loss events in
Tower’s history
»
Prior to Irene and Sandy, Tower’s total aggregate historical catastrophe
losses were less than Irene losses
Sandy’s after-tax estimate of loss ranges from $55 - $68 MM Limited catastrophe activity in the Northeast prior to Irene and Sandy |
 15
•
Fixed income average quality of A+
•
Duration of 4.7 years
•
Tax equivalent book yield of 4.6%
Asset Allocation
Asset Quality
Note: All numbers exclude the reciprocal exchanges.
Highly Rated Investments
Municipal bonds
29%
Corporate and other
bonds
27%
Commercial,
residential and
asset-backed
securities
24%
Equity securities
5%
Cash and cash
equivalents
7%
US Treasury
securities
5%
US Agency
securities
3%
AAA
8%
AA
41%
A
19%
BBB
9%
Below BBB
11%
Cash and cash
equivalents
7%
US Treasury
securities
5%
Our
high-quality investment portfolio
had net unrealized pre-tax gains of $157 million at September 30, 2012
attributable to Tower shareholders |
 16
Phase I
Phase II
Phase III
Achieve scale for predominately commercial
business
Fee income
Significant investments in infrastructure to
support two additional businesses
Acquisition integration
Shift in claims expense to underwriting
Leverage
infrastructure through
organic growth
Increasing fee income
Leveraging Existing Infrastructure
Premium
($MM)
335
421
608
805
1,082
1,496
1,811
1,489
2,270
2,577
Premium is gross written premium and produced
32%
29%
30%
32%
35%
35%
33%
35%
36%
34%
2005
2006
2007
2008
2009
2010
2011
2012 YTD
2013 E
2014 E
Expense Ratio Excluding Reciprocals |
 17
Earnings Outlook
Merger is expected to be ~5% accretive to 2013 EPS
Projected to be mid-teens accretive in 2014
Capital Fully
Deployed
13 -
15% ROE
12.3% ROE
Pro Forma EPS on a Tower equivalent basis. Assumes merger transaction closes
in 4Q12 $2.87
($0.69)
$0.63
$0.15
$0.09
$3.05
$3.97
Base 2013
Dilution
Bermuda
Platform
Efficiency
Additional
Investment
Income
Additional
Underwriting
Earnings
Pro Forma 2013
Pro Forma 2014 |
 18
ROE Drivers
*2013 and 2014 forecast assumes merger transaction closes in 4Q12
2012E
2013
2014
Operating Combined Ratio
95.6%
97.2%
94.5% - 96.5%
Operating Leverage
1.5x
1.4x
1.5x
Underwriting ROE
6.7%
3.8%
5.3% - 8.3%
Investment Leverage
2.3x
2.3x
2.2x
Investment Yield
4.8%
4.7%
4.7%
Investment ROE
11.1%
11.2%
10.6%
Contribution from Fee Income
1.0%
1.1%
1.0%
Contribution from Corporate Overhead & Debt
-3.7%
-2.8%
-3.2%
Pre-Tax ROE
15.1%
13.3%
14% - 17%
Tax Rate
29.4%
7.2%
7.3%
Operating ROE
10.7%
12.3%
13% - 15%
Impact of Storms and Adverse Development
-11.2%
Return on Equity
-0.5%
12.3%
13% - 15%
Operating Return on Tangible Equity
16.2%
17.5%
18% - 20%
Pro Forma Estimates
2014 forecasted ROTE is expected to be 18% - 20%
|
 19
Summary
Successfully completed investment in infrastructure to build diversified
commercial, specialty and personal lines platform
•
Since
2010,
domestic
franchise
has
generated
a
stable
10%
-
12%
ROE
(15%
to
17%
ROTE)*
Merger is a key final step to creating a diversified international specialty
insurance company •
Further expands international and specialty business
•
Gains access to Bermuda platform to provide efficient source of capital
•
Completed business platform expected to yield 13% -
15% ROE in 2014 (forecasted 18% to 20% ROTE)
Attractive entry point for new investors
•
0.63x P/B and 0.95x P/TB
•
4.3% dividend yield vs. 1.4% yield of the SNL U.S. Insurance P&C
Index
Significant insider ownership
•
$70 MM (approximately 8% pro forma ownership)
Source: SNL Financial. Market data as of December 4, 2012
*excludes catastrophic storm losses and adverse development.
|