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| 8-K - FORM 8-K - Tower Group International, Ltd. | d442092d8k.htm |
 November 19, 2012
Investor 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 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
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
(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.
See
appendix
for
reconciliation
of
Non-
GAAP measures.
(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. See
appendix for reconciliation of Non-GAAP measures. |
 2
Presentation Outline
I.
Tower Overview
II.
Third Quarter 2012 and Superstorm Sandy Update
III.
Merger Transaction Overview
IV.
Positive Trends and Outlook |
 I. Overview of Tower
3 |
 4
Diversified
Property
and
Casualty
Insurance
Company
With
a
Niche
Focus
•
Headquartered in New York City
•
Formed in 1990 with a favorable track record of operating performance
•
Top 50 P&C insurance company in U.S., rated “A-" by A.M. Best
with positive outlook •
2011 GPW and managed of $1.8B and over $1B in equity
Broad Product Offering
Expanding National Presence
•
20 offices nationwide
•
Over 1400 employees
Overview of Tower (“TWGP”)
Commercial General
Commercial Specialty
Personal Lines
Home and auto |
 5
History and Progress
•
High ROE achieved by maintaining limited capital base
($330M) with reinsurance support from CastlePoint
•
Significantly increased capital ($1B) and lost access to
Bermuda platform after merger with CastlePoint in 2009
•
Developed a new 5 year plan to leverage capital first by
making acquisitions in 2009 and then through organic
growth initiatives beginning in 2011
•
Significant investment in technology, winding down in 2013
•
Generating fee income through acquisition of reciprocal
exchanges
•
Entered into Canopius transaction in 2012 to expand
globally (U.S, London, Bermuda) and regain Bermuda
platform
•
IPO in October, 2004
•
Formed CastlePoint in 2006
•
CastlePoint merged with Tower in 2009
•
Acquisitions to deploy excess capital 2009 –
2010
•
Organic Growth Initiative 2011
•
Canopius Transaction 2012
•
Northeast expansion with limited expansion nationally
•
Commercial lines /limited personal lines
•
National expansion with international business mix
through Lloyd’s and Bermuda
•
Commercial/Specialty/ Personal / International
Geographical Focus / Products
Business Model
Significant Events |
 6
Tower is Well-Positioned to Achieve its 2010 –
2014 Goals
One of the Top 50 insurance companies in the
US with $1.8bn in gross premiums
Licensed in 50 states
International expansion began in 2011 due to
soft domestic market conditions
3Q 2012 GPW was 35% commercial lines, 29%
specialty lines and 36% personal lines
Organic initiatives are creating growth
opportunities across existing and new product
lines and customer groups
Personal lines reciprocals are a new source of
fee income with opportunity for growth
Merger transaction allows Tower to regain the
Bermuda platform
Developed and implemented new systems
infrastructure across all functional areas to
fully leverage product suite nationwide
Completion of technology projects will lower
internal expense structure (Legacy systems to
be replaced by mid-2013)
Towers expects ROE to be in the range
between 10 to 12% beginning in 2013
Merger transaction restores Bermuda platform
and increases ROE range to 13 –
15% |
 7
36.5%
38.2%
21.0%
-0.8%
0.9%
3.5%
2005-2009
2010
2011
Tower
P&C Industry
Strong Track Record of Profitable Growth
AM Best and Company Data.
Total Premium Growth
Gross Premiums Written and Produced
Book Value per Share
*2005 –
2009 represents average total premium growth for Tower and Industry
*
$335
$1,082
$1,496
$1,811
2005
2009
2010
2011
$6.88
$22.72
$25.19
$26.37
2005
2009
2010
2011 |
 8
21.0%
7.5%
13.6%
9.4%
8.3%
4.8%
2005 -
09
2010
2011
Tower
P & C Industry
17.2%
13.4%
9.4%
7.8%
5.4%
4.0%
2005 -
09
2010
2011
Tower
P & C Industry
Tower’s Returns Have Consistently Outperformed the
Average of Publicly Traded P&C Companies
Note: SNL
Financial
and
Company
Data.
2005
–
2009
averages
are
premium
weighted
Operating Return on Average Equity
Operating Return on Average Tangible Equity |
 II. Third Quarter 2012 and Superstorm Sandy Update
9 |
 10
Third Quarter Snapshot -
Strong Operating Results
Net operating Income
•
Net
operating
income
of
$23.8
million
or
$0.62
per
diluted
share
compared
with
operating
loss
of
$15.3
million, or ($0.38) per diluted share same period last year
•
Previously disclosed litigation settlement of $2.9 million after-tax
($0.08 per share) charge was recorded against 3Q operating
results. »
Excluding
the
litigation
charge,
net
operating
income
would
have
been
$26.7
million
or
($0.70) per
diluted share
Gross premiums written and managed
•
$484.8
million,
representing
a
decrease
of
6.6%
primarily
due
to
the
termination
of
two
programs
($51.7
million from program cancelled in 3Q12 and $23.3 million of assumed
reinsurance business, which was commuted in 4Q11)
•
Excluded these 2 programs, 3Q12 GWP and managed increased by 8.2%
Net loss ratio and combined ratio
•
The net loss ratio excluding the reciprocal exchanges improved to 60.8% from
77.6% •
Excluding the business that Tower manages on behalf of the reciprocal
exchanges, the net combined ratio improved to 96.3% from 112.0%
Continued positive market and pricing trends
•
4.3% premium increase on renewed business (4.0% increase for commercial
excluding programs; 4.5% for personal)
Growth in book value
•
Stockholders’
equity increased by 4% in 3Q12 to $1,055 million from $1,014 million from same
time period last year despite the $64.5 million in share
repurchases. •
Book value per share increased by 8% to $27.49 in 3Q12 compared to $25.42 in
3Q11 |
 11
Organic Growth Initiative is Working
Excluding the effects of terminated program and commutation of an assumed
reinsurance treaty GPW were up $40.7 million or 8.2% due to organic growth
initiatives •
Continued production from newly created businesses including Assumed
Reinsurance ($39 million of GWP in the third quarter), Customized
Solutions and National Commercial Property business units
•
Forming strategic alliances with Lloyd's syndicates to provide expertise and
to support customized solutions
•
Evaluating industries and customer groups such as construction and affluent
home owners
•
Improving product manufacturing capabilities for core products
The Organic Growth Initiative is building momentum by investing in Product,
People and Process
•
Product: Identifying product opportunities from internal research and
customized solutions clients while forming strategic alliances with
companies with specialty product expertise
•
People: Recruiting franchise leaders to expand our product offering.
Decentralizing and implementing franchise concept
•
Process: Investing in business development to deliver customized
solutions and in business intelligence to conduct research.
Strengthening cross functional committees and practices. Investing our
processes and practices to improve and drive customer experience
|
 12
Net Loss and Loss Expense Ratio, Excluding Reciprocals
The net loss ratio was 60.8% for the third quarter of 2012 compared to 77.6%
for the third quarter of 2011.
•
Included in the third quarter 2011 loss ratio was 12.3 points associated with
Hurricane Irene and 2.6 points associated with reserve development.
Excluding the impact of severe weather and reserve development the
net loss ratio improved to 60.8% in 3Q12 compared to 62.7% in
3Q11. 60.8
60.8
77.6
65.3
65.3
62.7
-12.3
-2.6
3Q12
Storms
Dev.
Pro -
Forma
3Q12
3Q11
Storms
Dev.
Pro -
Forma
3Q11
Loss Ratio (%)
3Q12
3Q11 |
 13
Superstorm Sandy Impact to be Limited due to Tower’s
Catastrophe Reinsurance Program
Tower’s current after-tax estimate of loss ranges from $55 million to
$68 million •
Tower has exposure to Superstorm Sandy through direct insurance operations,
reinsurance assumed businesses and two alternative investments
Tower expects its direct insurance loss to be contained in its first
reinsurance layer •
Tower expects pre-tax net loss from direct insurance business to be $90 to
$95 million, including reinstatement premiums
•
Direct losses in excess of $75 million pre-tax are ceded to reinsurers as
shown in table below Assumed reinsurance pre-tax losses expected to
be between $15 and $20 million Tower expects to recover $10 million if
industry losses exceed $10 billion and an additional $10 million if
industry losses exceed $15 billion through industry loss warranties that it put
in place in July 2012 to manage risk associated with exposure in
the Northeast
Tower believes its alternative investments will not be materially affected by
the losses associated with Superstorm Sandy
Range of Loss
Retention
Tower Net Loss
$0 - $75 million
Retained by Tower
$75 million
$75 - $150 million
100% reinsured
$75 million
$150 - $225 million
70% reinsured
$75 - $97.5 million
$225 - $400 million
100% reinsured
$75 - $97.5 million |
 III. Merger Transaction Overview
14 |
 15
Merger Benefits
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
Improve profitability and financial strength
•
By regaining a Bermuda platform, Tower expects to increase its ROE range to
13% to 15% within 18 months of the merger
•
Projected to be single-digit accretive to EPS in the first full year and
mid-teens accretive in the second full year
•
Stockholders’
equity will increase through the merger to support growth resulting
from the new business platform
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 |
 16
Combined Business Plan, Post-Merger
Merger will enable Tower to create a global specialty insurance company with
access to U.S., Bermuda and Lloyd’s markets:
U.S.
Bermuda
Lloyds
Continue to focus on building
commercial, specialty and personal
lines businesses with continuing
reinsurance support from Bermuda
based reinsurance affiliate
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 Re) will be created using
Bermuda platform
Continue to participate in Lloyd’s
business through ownership in and
expanded reinsurance relationship
with Canopius and continue to
support other Lloyd’s syndicates
Continue to build out organic
initiatives to leverage infrastructure
Efficient use of capital across the
group
Diversification of business model to
source attractive business
Access to business global and
specialty risks |
 17
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 |
 IV. Positive Trends and Outlook
18 |
 19
Positive Trends and Outlook
Successful implementation of new five year plan (2010 to 2014) will allow Tower
to emerge with greater size, diversification and profitability
•
Underperformance from 2010 to 2012 due to:
»
Deployment of excess capital, acquisition integration costs, investment in
infrastructure and non-recurring events
•
Positive trends expected in 2013 (excluding merger) due to:
»
Full deployment of capital, improving scale resulting from leveraging
technology investment and organic growth initiative and improving
P&C market conditions Merger transaction
•
Accelerates completion of business model revision (U.S, Bermuda and London)
and restores CastlePoint’s Bermuda platform
•
Creates an efficient global, diversified specialty insurance company with a
Bermuda platform that provides a competitive advantage to support U.S.
and international growth •
Provides
highly
compelling
opportunity
for
Tower
shareholders
to
benefit
from
upside
potential
of
combined entity
•
Closing of merger is at Tower’s discretion (and will only occur on terms
favorable to Tower shareholders)
Tower expects full year 2013 operating earnings per share to be in a range of
$2.85 to $3.05 excluding any benefits of the proposed merger
transaction. •
By regaining a Bermuda platform, Tower expects to increase its ROE range to
13% to 15% within 18 months of the merger
|
 Appendix
20 |
 21
Appendix-
Non-
GAAP Measures and Reconciliation
GPW Written and managed (Dollars
in thousands)
Years ended December 31,
2011
2010
2009
Gross Premiums Written, Tower Stock Companies
$1,561,624
$1,369,481
$1,082,417
Premiums managed for others (A)
209,300
126,800
11,700
Gross Premiums Written and Managed
$1,810,924
$1,496,281
$1,070,717
(A) managed premiums in 2011 and 2010 are for the Reciprocal Business
Operating Income
(Dollars in thousands)
Years ended December 31,
2011
2010
2009
Net income attributable to Tower Group, Inc.
$60,198
$103,890
$96,798
Less: Net realized gains (losses) on investments
6,980
13,740
1,501
Add: Acquisition related transaction costs
360
2,369
14,038
Income tax
2,470
4,636
(2,047)
Operating Income
$56,048
$97,155
$107,288 |