Attached files
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| 8-K - FORM 8-K - Tower Group International, Ltd. | d534315d8k.htm |
 1
First Quarter 2013
Earnings Call Presentation
May 9, 2013
Exhibit 99.1 |
 2
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, 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.
Notes on Non-GAAP Financial Measures
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 International, Ltd. 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 International, Ltd. to operating
income (loss) and return on average equity to operating return on average equity is provided in an
accompanying table.
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.
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.
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.
|
 3
First Quarter 2013 Snapshot
•
Completion of Canopius Bermuda merger on March 13
–
Achieved long term vision of creating a global diversified insurance
company with access to U.S, Bermuda and London markets
–
Due to successful restructuring, Tower Reinsurance, Ltd. (newly-
established Bermuda reinsurance company) generated significant
portion of group’s net income
•
Strong growth in premiums and profits
–
Operating income of $25.9 million or 56 cents per share, up from
$20.6
million or 46 cents per share in 1Q 2012
•
Operating income excludes $19.1 million in pre-tax acquisition costs
–
Premium growth up 18% to $550.4 million driven by organic growth
initiative and positive pricing trends
•
Positive outlook
–
Continued benefits from the Canopius Bermuda merger, profitable
expansion into specialty and international business and improving
market conditions |
 4
Canopius Bermuda Merger Highlights
•
Transaction summary
–
Canopius Group was successful in selling their shares in Canopius Bermuda to third
party investors raising approximately $206 million
–
After this placement, Tower merged with Canopius Bermuda on March 13, creating a
new holding company called Tower Group International, Ltd. listed under the
same TWGP symbol –
Tower Group considered as accounting acquirer, and therefore prior year results
are only those of Tower Group, Inc.
•
Merger impact on shares
(in 000's)
Shares Outstanding at 12-31-2012 (pre-merger)
38,406
Shares Outstanding at 12-31-2012 (post-merger) *
43,514
Restricted Stock granted and vested
-107
New Shares Issued in Merger
14,026
Shares Outstanding at 3-31-2013
57,432
*Adjusted for merger conversion ratio of 1.133 to 1 |
 5
High Level Corporate Structure
Tower Group, Inc.
Delaware Holding Company
*CP Re used solely to reinsure US Pool
Tower
Stockholders
100%
US Pool*
Castle Point Re*
(“CP Re”)
PRE MERGER
Post Merger New
Stockholders
Pre Merger Tower
Stockholders
Tower Group International, Ltd.
Bermuda Holding Company
Bermuda Operations
Tower Reinsurance, Ltd to
assume CP Re’s
operations
U.S. Operations
Tower and its
Subsidiaries
POST MERGER |
 6
Pre-Merger Tower*
2013 Pro Forma
Global Diversified Insurance Company
U.S.
Bermuda
Lloyd’s
•
Continue expansion of commercial,
personal and specialty businesses
•
Establish Tower Reinsurance Ltd. as
efficient reinsurance platform to
support U.S. and international
business
•
Expand existing relationships with
Lloyd’s syndicates to access $38B
market
•
Expect to acquire or develop Tower’s
own Lloyd’s syndicate
* Percentage of total premium for the year ended 12/31/12
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% |
 7
Impact of Post Merger Restructuring
•
Bermuda:
–
Established Tower Reinsurance, Ltd. to replace CastlePoint Re (CP Re)
–
Strong earnings expected from affiliated and third party reinsurance
business •
Expect $850 million to $950 million in GPW in 2013 from affiliated reinsurance
from U.S pool and third party reinsurance
–
Strong balance sheet
•
Total
capitalization
of
$506
million
($206
million
from
Canopius
Bermuda
and
$300
million from restructuring of CP Re)
•
Strong
reserve
position
with
additional
risk
premium
on
Canopius
Bermuda
carried
reserves
•
U.S.:
–
Reduced level of profitability due to expenses associated with significant
investment in technology and elimination of assumed reinsurance business.
•
Impact on operating results:
–
Higher than expected earnings in Bermuda offset by weaker operating results
in U.S. due to restructuring
–
Results in lower taxes in U.S. until U.S. operations gradually improve
profitability from increased premium production and lower expenses
|
 8
1Q 2013 Business Segment Results
Commercial Lines
Personal
Insurance
General
Specialty
Lines*
Services
Business Units / Products
Small business;
Middle market
National Programs, E&S,
Customized Solutions,
Transportation and
Assumed Reinsurance
Homeowners and
private passenger
auto
1Q 2013 GPW ($ millions)
$173
$234
$144
$7.3**
1Q 2012 GPW ($ millions)
191
146
130
7.4**
2013 % of total GPW
31%
43%
26%
n/a
Commercial Consolidated
Loss Ratio
63.8%
60.1%
n/a
Expense Ratio
35.1%
40.1%
n/a
Combined Ratio
98.9%
100.2%
n/a
Retention
82%
90%
n/a
Renewal Premium Change
6.4%
4.6%
n/a
•
Personal Lines GPW includes reciprocals,
Personal Lines ratios exclude reciprocals.
** Insurance services total revenue. |
 9
Business Segment Summary
•
Personal
–
Premium growth of 10.7% due to higher renewal retention and strong
growth in new business.
–
Pricing increases of 4.6% occurring in first quarter
–
Higher expenses are related to the system conversion
–
Management fee from managing reciprocal exchanges was $7.3M in
1Q and will be included in personal lines segment reporting beginning
in 2Q
•
Commercial
–
General
–
Small Business up 4% due to strong renewals
–
Middle Market down in line with plan
–
California workers compensation business down 41% overall with
Middle Market down approximately 60% |
 10
Business Segment Summary
•
Commercial
–
Specialty
Insurance
–
Continued focus on re-underwriting programs positioned in competitive
markets and shift towards specialty programs in profit niche markets
–
Focus on growing risk-bearing program underwriting agents or joint
venturing with agents positioned in specialty markets
–
Expansion into specialty businesses in 2013 by focusing on acquiring
underwriting teams or program agencies
•
Commercial
–
Specialty
Reinsurance
–
Moved assumed reinsurance department from U.S to Bermuda in 1Q
–
Significant growth rate in assumed reinsurance primarily from
relationship with Lloyd’s syndicates, including Canopius
–
Expect significant growth from various sources, including continued
growth of business from Lloyds’
syndicates, introduction of risk sharing
solutions with a focus on small insurance companies and risk bearing
managing general agencies
–
Results will
be
reported
in
a
new
business
segment
–
Specialty
Reinsurance beginning in 2Q |
 11
(in 000's except per share data)
Three months ended
3/31/2013
3/31/2012
Operating income
$25,900
$20,618
26%
Operating EPS
$0.56
$0.46
22%
WASO
45,984
44,535
3%
Operating ROE
9.8%
7.9%
Insurance Ratios
Loss ratio
63.1%
64.2%
Expense ratio
36.0%
34.6%
Combined ratio
99.1%
98.8%
Financial Highlights (Tower
only
–
excludes
reciprocals) |
 12
Balance Sheet Highlights
(in millions except per share data)
3/31/2013
3/31/2012
Total assets
$6,395
$4,749
35%
Debt
451
450
0%
Tower Stockholders' equity
1,197
981
22%
Tower Capital
$1,648
$1,431
15%
Tower debt to capital ratio
27%
31%
Book value per share
$20.85
$22.54
-7%
Shares outstanding
57,432
43,515
32% |
 13
1Q 2013 Consolidated Loss Ratio
•
No adverse development in first quarter 2013
•
Currently accident year 2012 is developing better than original expectations
•
Acquisitions reserved at high end of the actuarial range; Canopius Bermuda
risk premium of $20 million included in loss reserves
•
Major events have consistently been reserved conservatively (Irene, Sandy)
with no adverse development noted
(Tower only –
excludes reciprocals)
63.1
64.2
1Q 2013
1Q 2012
Loss Ratio (%) |
 14
1Q 2013 Expense Ratio
•
As systems initiatives relating to personal lines are completed,
we expect scale advantage to drive expense ratio down
18.2%
18.6%
14.0%
12.3%
3.8%
3.7%
36.0%
34.6%
1Q13
1Q12
Commissions, net of ceding commissions
OUE, net of fees
BB&T expenses
(Tower only –
excludes reciprocals) |
 15
1Q 2013 Investment Performance
•
Portfolio yield impacted at 1Q 2013 by large cash balances obtained
through merger and by portfolio sales to fund Sandy losses
•
Bermuda platform will provide a better after tax return environment on
reinsurance portfolio assets
•
Continuing to look at real estate and alternative investments as
classes to
enhance investment returns
Note: Cash & Invested Assets, Tax–Equivalent Fixed Income Yield and Net Investment
Income exclude reciprocals $2,589
$2,359
03-31-2013
03-31-2012
Cash and Invested Assets ($millions)
4.1
4.5
1Q 2013
1Q 2012
Tax-
Equivalent Fixed Income
Yield (%)
$30
$32
03-31-2013
03-31-2012
Net Investment Income
($millions) |
 16
Capital Management Strategy
•
Capital increase due to $206 million from the merger and should also
increase from anticipated 2013 earnings growth
•
Capital management strategy will be utilized to balance support of
business production and to achieve targeted return on equity
•
Dividends
–
Maintained 1Q 2013 dividend at pre-merger level of 16.5 cents
(adjusted for merger conversion ratio)
•
Share repurchase plan
–
$50 million authorization approved |
 17
Positive Outlook for Remainder of 2013
Original Forecast
1Q13
2013 Target*
1
st
quarter analysis and outlook for the rest of 2013
GPW & Managed
Growth Rate
5% -
10%
18.0%
5% -
10%
Higher than expected growth rate in 1Q due to continued
growth from specialty reinsurance business in Bermuda.
Loss Ratio
62.3%
63.1%
62% -
63%
Overall loss ratio slightly higher due restructuring of business
segments that increased loss ratio in U.S offset partially by lower loss
ratio in Bermuda.
Expense Ratio
35.5%
36.0%
34.5% -
35.5%
Higher expense ratio in U.S due to technology costs. Expense should
gradually trend lower as technology projected are completed.
Combined Ratio
97.8%
99.1%
96.5% -
98.5%
Higher gross premiums written offset by higher combined ratio from higher
expense and loss ratios
Investment Yield
4.6%
4.1%
4.3% -
4.6%
Investment returns lower due to payout for Sandy claims and higher
capital from merger.
Tax Rate
Operating ROE
Operating EPS
11.5%
12%
$2.40 -
$2.60
(12.5%)
9.8%
$0.56
2% -
4%
10% -
12%
$2.40 -
$2.60
Lower tax rate due to restructuring of business in U.S and Bermuda. ROE
should improve close to target as full impact of merger is realized
throughout 2013.
*Excludes reciprocals |