Tower Group, Inc., announced it reported a net loss attributable to common shareholders in the second quarter of 2012 of $15.1 million, or ($0.39) per diluted share.

In a release on August 6, Tower Group said net income attributable to common shareholders in the second quarter of 2011 was $24.1 million, or $0.58 per diluted share.

Operating loss was $15.5 million in the second quarter of 2012, or ($0.39) per diluted share, compared to operating income of $26.0 million in the second quarter of 2011, or $0.63 per diluted share. The 2012 operating loss included an after-tax charge of $42.3 million, or $1.08 per share, associated with prior year reserve strengthening compared to $0.3 million or $0.01 per share of favorable reserve development in the second quarter of 2011. The reserve strengthening relates primarily to unfavorable development in the company's Commercial Insurance segment arising from changes in estimated losses for accident years 2011 and prior. During the quarter Tower conducted detailed reserve studies for all lines using loss data through the first quarter of 2012 as well as reported claims during the second quarter, including analysis of the source of unusually high reported loss emergence for certain casualty lines, primarily workers' compensation and commercial automobile, observed during the first and second quarters of 2012. In the second quarter 2012 we also experienced $3.3 million in after-tax severe weather losses or $0.08 per share, compared to after-tax severe weather losses of $4.6 million or $0.11 per share in the same time period last year. Excluding the business managed by reciprocals, the storm losses added 1.2 points to the second quarter 2012 loss ratio compared to 2.1 points in the same time period last year.

Highlights (all figures compare second quarter 2012 results to the results for the same period in 2011 except as noted):

-Gross premiums written and managed increased by 14.9 percent to $537.6 million.

-For the combined insurance segments, the net combined ratio rose to 110.8 percent from 94.9 percent. (Excluding the business that Tower manages on behalf of the reciprocal exchanges, the net combined ratio was 110.9 percent for the second quarter of 2012.)

-The net loss ratio increased to 76.0 percent from 61.2 percent. The net loss ratio excluding the reciprocal exchanges increased to 77.3 percent from 62.4 percent, with the reserve adjustment adding 15.6 points to the second quarter 2012 net loss ratio.

-The net expense ratio was 34.8 percent compared to 33.7 percent.

-Net investment income was flat at $31.8 million.

-Book value per share was $26.53 at June 30, compared to $26.37 at December 31, 2011. During the quarter, Tower paid cash dividends of 18.75 cents per share, and year to date Tower has paid cash dividends of 37.50 cents per share.

-Tower stockholders' equity was $1.0 billion at June 30.

Michael H. Lee, President and CEO of Tower, said, "During the quarter, we took an important step to establishing a diversified global specialty insurance company by entering into an agreement with Canopius to merge Tower with Canopius'Bermuda operations. We believe this transaction will allow us to access U.S., Bermuda and Lloyd's markets to enhance our profitability and create new business opportunities. As part of our strategic review during the second quarter, we conducted a comprehensive review of our prior accident year and strengthened our prior accident year reserves. We believe we have taken decisive actions to address our reserve position from prior accident years, so that our future results should better reflect the underwriting profitability of our ongoing business. Excluding this reserve development, our operating results continue to be strong, and in the second quarter we experienced 15 percent top line growth and a 95.3 percent combined ratio. During the quarter, we continued to successfully implement our organic growth initiative to expand into new products, and improve existing and create new business units. We also continue to see signs of improving market conditions which are allowing us to continue to drive rate increases to further improve our underwriting profitability. In summary, due to our transaction with Canopius, actions that we have taken this quarter with respect to our reserve position, the success of the organic growth initiative and improving market conditions, we have a positive outlook for the remainder of 2012 and 2013."

Second Quarter 2012 Highlights

Consolidated

Gross premiums written and managed increased to $537.6 million in the second quarter, 14.9 percent higher than in the second quarter of 2011. Excluding programs, policies in-force increased by 5.0 percent as of June 30, compared to June 30, 2011. For the three months ended June 30, premiums on renewed Commercial Insurance business excluding programs increased 4.2 percent and premiums on renewed Personal Insurance business increased 2.6 percent, resulting in an overall premium increase on renewal business of 3.4 percent. During the same time period, our Commercial Insurance business renewal retention rate excluding programs was 78.4 percent and our Personal Insurance business renewal retention rate was 92 percent, resulting in an overall retention rate of 89 percent.

Total revenues increased 16.0 percent to $506.1 million in the second quarter of 2012 as compared to $436.3 million in the prior year's second quarter. The growth was primarily due to increased net premiums earned. Net premiums earned represented 90.9 percent of total revenues for the three months ended June 30, compared to 90.2 percent for 2011.

Net investment income was flat at $31.8 million. The tax equivalent book yield on our investment portfolio, excluding the reciprocal exchanges, was 4.8 percent at June 30, compared to 4.7 percent at June 30, 2011. Net realized investment losses were $0.2 million for the quarter ended June 30, compared to losses of $2.3 million in the same period last year. Total commission and fee income increased 9 percent to $14.4 million in the second quarter of 2012 compared to $13.2 million in the second quarter of 2011.

The net loss ratio was 76.0 percent for the three months ended June 30, compared to 61.2 percent for the same period in 2011. (Excluding the business that we manage on behalf of the reciprocal exchanges, the net loss ratio was 77.3 percent for the second quarter of 2012.) The second quarter 2012 results include an after- tax charge of $42.3 million associated with prior year reserve strengthening which added 15.6 points to the net loss ratio, excluding the business that Tower manages on behalf of the reciprocal exchanges. Excluding the business managed by reciprocals, the storm losses added 1.2 points to the second quarter 2012 loss ratio compared to 2.1 points in the same time period last year.

Our net expense ratio was 34.8 percent for the three months ended June 30, compared to 33.7 percent for the same period in 2011. (Excluding the business that we manage on behalf of the reciprocal exchanges, the net expense ratio was 33.6 percent for the second quarter of 2012 compared to 33.0 percent for the second quarter of 2011.)

The effective tax rate was 28.3 percent in the second quarter of 2012 compared to 31.3 percent for the same time period in 2011. Interest expense decreased by $0.4 million for the three months ended June 30, compared to the same period in 2011.

Additional Highlights and Disclosures

Dividend Declaration

Tower's Board approved a quarterly dividend on August 1, of 18.75 cents per share payable on September 21, to stockholders of record as of September 10.

Guidance

Tower expects full year 2012 operating earnings per share to be in a range of $1.45 to $1.55 and 2013 operating earnings per share to be in a range of $2.85 to $3.05.

Tower offers property and casualty insurance products and services through its operating subsidiaries.

More information:

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