Attached files
| file | filename |
|---|---|
| EX-2.1 - AGREEMENT AND PLAN OF MERGER - Tower Group International, Ltd. | d387770dex21.htm |
| EX-2.2 - LETTER AGREEMENT - Tower Group International, Ltd. | d387770dex22.htm |
| EX-99.1 - PRESS RELEASE - Tower Group International, Ltd. | d387770dex991.htm |
| 8-K - FORM 8-K - Tower Group International, Ltd. | d387770d8k.htm |
 1.
July 30, 2012
Strategic Initiative and Second Quarter Earnings Pre-
Announcement
Exhibit 99.2 |
 1
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, 2011 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
(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. Operating return on equity is annualized operating income (loss)
divided by average common stockholders' equity. Second quarter realized gains
and losses, net of tax, are expected to be about $900,000 and second
quarter acquisition-related transaction costs, net of tax, are
expected to be about $700,000, and the net loss per share to Tower
shareholders is expected to be the same as the operating loss per
share.
(2)
Total premiums include gross premiums written through our insurance
subsidiaries and produced as managing general agent on behalf of other
insurance companies. |
 2
Announcement Summary
Merger with Canopius Holdings Bermuda, Limited. (“CHBL”) will
enable Tower to create a global specialty insurance company with
greater diversification and profitability
•
Access to U.S. Bermuda and Lloyd’s markets supported by an efficient
international holding company structure
•
Enables Tower to increase its ROE target to 13% to 15% within 18
months of merger
As a part of its strategic review, Tower conducted a comprehensive
review of its reserves in the second quarter
•
$42M 2Q after-tax reserve strengthening is a culmination of multi-year
actions that began in the 4Q 2009 to mitigate prolonged soft market
conditions •
Reserve charge should allow Tower’s prospective financial results to
fully reflect current accident year profitability going forward
•
Tower’s on-going business continues to be profitable with a positive
earnings outlook:
»
2012 guidance -
$1.45 to
$1.55
»
2013 guidance -
$ 2.85 to $3.05 (excluding merger
impact) |
 3
As previously announced on April 25, 2012, Tower, as part of its
agreement to invest in Canopius Group, Ltd. (“Canopius”), acquired an
option to merge into a subsidiary of CHBL
»
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
»
Tower’s investment represents 10.7% interest in Canopius After a strategic review initiated in the second quarter, Tower has
decided to exercise this option and has entered into a merger agreement
with CHBL
•
For each share of Tower common stock, shareholders will receive $1.25 in cash
and a certain of number CHBL common shares equal to the quotient
obtained by dividing (X) the price per share of Tower common stock
(reduced by the $1.25 per share) at the market close on the date of the
pricing of the Canopius Secondary Offering by (Y) the adjusted CHBL
price per share
•
Upon completion of merger, CHBL’s name will be changed and its stock will
be listed on NASDAQ as an international holding company
•
Under applicable accounting principles, Tower will be regarded as the
acquiring entity Exercise of Canopius
Option |
 4
Strategic Rationale
Creates an efficient global, diversified specialty insurance company that
supports our expansion plans
•
Efficient international holding company structure
•
Diversified product platform comprised of U.S and international business with
access to U.S. Bermuda and Lloyd’s markets
Improved profitability and financial strength
•
By regaining Bermuda platform, Tower will be able to increase its ROE target
range to 13% to 15% within 18 months of the merger
•
Stockholders’
equity will increase through the merger to support growth resulting
from the new business platform
»
We project the transaction will be accretive to earnings per share
Bermuda platform provides competitive advantage to support growth
opportunities in U.S. and international markets
•
Provides efficient source of capital to support Tower’s expansion in the
U.S. •
Supports international expansion plans, especially business sourced from
Lloyd’s and Bermuda |
 5
Combined Business Plan, Post-Merger
Merger with CHBL will enable Tower to create a global specialty
insurance company with access to U.S., Bermuda and Lloyd’s
markets:
•
U.S.
»
Continue to focus on building commercial, specialty and personal
lines businesses with continuing reinsurance support from Bermuda
based reinsurance affiliate
•
Bermuda
»
Assumed Reinsurance business will be underwritten from the Bermuda office
utilizing the staff acquired from the merger with CHBL supplemented by
other Bermuda personnel
»
Other businesses (ex. risk sharing business previously underwritten by
CastlePoint) will be created using Bermuda platform
•
London
»
Continue to participate in Lloyd’s business through ownership in and
expanded reinsurance relationship with Canopius and continue to support
other Lloyd’s syndicates |
 6
Closing Conditions and Process
Completion of Merger is subject to various customary and other closing
conditions, including:
•
Canopius’ acquisition of Omega
•
Successful completion of the secondary offering of CHBL shares at terms and
conditions acceptable to Tower
•
Approval by the SEC, Tower’s stockholders and various regulators of the
operating subsidiaries
•
Tower maintains the ability to terminate the merger agreement at any time
prior to the effective time of the merger
Sale of CHBL shares and Merger
•
As part of the merger transaction, new investors will purchase the stock of
CHBL from Canopius prior to the merger
•
Tower will seek stockholder approval of the merger concurrent with the stock
sale
•
The target investors will be institutional investors or private equity firms,
who would look to the prospective value of the combined group following
the merger to make their investment decision |
 7
Reserve Strengthening -
Transitioning to Improving Market
Conditions and Focus on Strategic Initiatives
As part of our strategic review, a comprehensive review of the loss reserves in
the second quarter led to $42 million after-tax charge
•
Reserve strengthening primarily from terminated business
•
Represents 4% of the outstanding reserves,
»
The year end 2011 central estimates developed by outside actuaries exceeded
carried reserves: the June 2012 carried reserves now exceed the year
end 2011 central
estimates developed by the outside actuaries.
•
Historical loss ratio continues to remain favorable after reserve
strengthening »
64.7% loss ratio from 2008 to 2011 (includes 2.4 points of storm losses)
Reserve charge in 2Q 2012 culminates the multi-year effort that began in 4Q
2009 to mitigate soft market conditions
•
Impact of soft market conditions (2007 to mid 2011)
»
Re-assessment concluded adverse impact of new business pricing was
larger and emergence was longer than anticipated
»
Poor underwriting results from terminated program business
»
Increased claims trends (e.g. Increased WC medical costs)
•
Series of actions were taken since 4Q 2009 to mitigate the soft market
conditions •
Reserve charge enables Tower to transition to improving market environment
with profitable on-going business and focus on long-term
strategic initiatives |
 8
Positive Underwriting and Reserves Outlook
Corrective Underwriting Actions
•
Multi-year corrective underwriting action plan to terminate unprofitable
business that began in 4Q 2009 was completed in 2Q 2012
•
Executed corrective underwriting actions to terminate underpriced business
projected to reduce accident year loss ratio by 1 to 2 points in
2012 •
Reduction in claims expenses is projected to reduce accident year loss ratio
by 1 point in 2012 as compared to 2011
•
As a part of its organic growth initiative, Tower has shifted its business mix
toward property, assumed reinsurance and higher margin specialty
business •
Property has outperformed Casualty by approximately 15 loss ratio points
during 2008-2011 Improving Market Conditions
•
After several years of commercial lines pricing deterioration, Tower has begun
to see an improved pricing environment on new business beginning in 3Q
2011 More Conservative Loss Ratio Selection
•
2012 loss ratio reflects emerging loss trends from prior accident year and the
benefits from improving pricing, corrective underwriting and shift in
business mix
Business Mix
2010
2011
YTD 2012
Property
37.8%
40.6%
44.7%
Casualty
62.2%
59.4%
55.3%
Improved Business Mix |
 9
Components of Reserve Development
Programs accounted for 82% of the total commercial adverse development
•
Two thirds of program development is from terminated programs
Workers Compensation and Commercial Auto Liability accounted for
98% of
the total commercial adverse development
Other
Commercial
18%
Terminated
Programs
58%
Ongoing
Programs
24%
Workers Comp
62%
Commercial
Auto Liability
36%
Other
Commercial
2% |
 10
Second Quarter Estimated Earnings and Guidance
As a result of the $42 million after-tax charge and after-tax storm
losses of $3.3 million, Tower expects its second quarter operating
result to be a loss in a range of $0.39 to $0.42 per share
Full year 2012 per share operating earnings are expected to be
$1.45 to $1.55 per share, which reflects the impact of the reserve
strengthening. Second half earnings are projected to be $1.32 to
$1.42 per share
Based on the planned business mix, Tower expects its operating
results in 2013 to produce operating earnings of $2.85 to $3.05 per
share, and an operating ROE of between 11% and 12%
This guidance does not contemplate the consummation of the
Canopius merger. The merger is expected to be accretive to per
share earnings by about 5% in the first year of consolidated activity
|
 11
Additional Information and Where to Find It
In connection with this proposed transaction, Tower and Canopius
Bermuda will file a joint proxy statement/prospectus with the
SEC. Investors are urged to carefully read the proxy statement/prospectus and
any other relevant documents filed with the SEC when they become
available because they will contain important information. Investors will be able to obtain the proxy
statement/prospectus and all relevant documents filed by Tower with the SEC
free of charge at the SEC’s website www.sec.gov or, with respect to
documents filed by Tower, from Tower directly at 120 Broadway (31st Floor), New York, NY 10271, (212) 655-
2000; email: info@twrgrp.com.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy the securities, nor shall there be any offer,
solicitation or sale of securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of such jurisdiction. No offering of securities shall be made except by
means of a prospectus meeting the requirements of Section 10 of the Securities
Act of 1933, as amended. Participants in the Solicitation
The directors, executive officers and other members of management and employees
of Tower may be deemed participants in the solicitation of proxies from
its stockholders in favor of the transactions. Information concerning persons who may be considered
participants in the solicitation of Tower’s stockholders under the rules
of the SEC is set forth in public filings filed by Tower with
the SEC and will be set forth in the proxy statement/prospectus when it is
filed with the SEC. Information concerning Tower’s participants in
the solicitations contained in Tower’s Proxy Statement on Schedule 14A, filed with the SEC on March 16, 2012. |