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TWGP > SEC Filings for TWGP > Form 10-Q on 21-Aug-2014All Recent SEC Filings

Show all filings for TOWER GROUP INTERNATIONAL, LTD.

Form 10-Q for TOWER GROUP INTERNATIONAL, LTD.


21-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Note on Forward-Looking Statements

Some of the statements under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Form 10-Q may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and to the insurance sector in general. Statements that include the words "expect," "intend," "plan," "believe," "project," "estimate," "may," "should," "anticipate," "will" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the Federal securities laws or otherwise.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those described under "Risk Factors" and the following:

changes in our financial strength or credit ratings could impact our ability to write new business, the cost of, and our ability to obtain, capital or our ability to attract and retain brokers, agents and customers;

further decreases in the capital and surplus of our insurance subsidiaries and their ability to meet minimum capital and surplus requirements;

changes in our ability to raise additional capital;

the implementation and effectiveness of our capital improvement strategy;

Tower's ability to continue operating as a going concern;

changes in our ability to meet ongoing cash requirements and pay dividends;

greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;

changes in the availability, cost or quality of reinsurance or retrocessional coverage;

decreased demand for our insurance or reinsurance products;

increased competition on the basis of pricing, capacity, coverage terms or other factors;

ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions;

currently pending or future litigation or governmental proceedings;

developments that may delay or limit our ability to enter new markets as quickly as we anticipate;

loss of the services of any of our executive officers or other key personnel;

changes in acceptance of our products and services, including new products and services;

developments in the world's financial and capital markets that could adversely affect the performance of our investments;

the effects of acts of terrorism or war;

changes in general economic conditions, including inflation, interest rates and other factors which could impact our performance and the performance of our investment portfolio;

changes in accounting policies or practices;

changes in legal theories of liability under our insurance policies;

changes in rating agency policies or practices;

declining demand for reinsurance due to increased retentions by cedents and other factors;

a lack of opportunities to increase writings in Tower's reinsurance lines of business and in specific areas of the reinsurance market;

changes in the percentage of our premiums written that we cede to reinsurers;

changes in regulations or laws applicable to us, our subsidiaries, brokers or customers, including regulatory limitations and restrictions on the declaration and payment of dividends and capital adequacy standards;

the Bermudian regulatory system, and potential changes thereto;

risks and uncertainties associated with technology, data security or outsourced services that could negatively impact our ability to conduct our business or adversely impact our reputation;


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the effects of mergers, acquisitions or divestitures;

disruptions in Tower's business arising from the integration of acquired businesses into Tower and the anticipation of potential or pending acquisitions or mergers; and

any changes concerning the conditions, terms, termination, or closing of the merger with ACP Re.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statements you read in this Form 10-Q reflect our views as of the date of this Form 10-Q with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. Before making an investment decision, you should specifically consider all of the factors identified in this Form 10-Q that could cause actual results to differ.

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to assist readers in understanding the interim consolidated results of operations and financial condition of Tower Group International, Ltd. and its subsidiaries (the "Company" or "Tower") and should be read in conjunction with the interim consolidated financial statements and notes thereto included under Part I, Item 1 of this Form 10-Q, as well as the MD&A contained in Tower's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"). References to "we," "our," "us" or similar terms refer to the business of Tower.

Tower, through its subsidiaries, offers a range of general commercial, specialty commercial and personal property and casualty insurance products and services to businesses in various industries and to individuals throughout the United States. We provide these products on both an admitted and an excess and surplus ("E&S") lines basis. Insurance companies writing on an admitted basis are licensed by the states in which they sell policies and are required to offer policies using premium rates and forms that are filed with state insurance regulators. Non-admitted carriers writing in the E&S market are not bound by most of the rate and form regulations imposed on standard market companies, allowing them the flexibility to change the coverage offered and the rate charged without the time constraints and financial costs associated with the filing process.

See "Note 1 - Nature of Business, Significant Business Developments and Risks and Uncertainties" in the Notes to the Consolidated Financial Statements for discussion on significant events impacting Tower's results of operations.

Critical Accounting Estimates

As of June 30, 2014, there were no material changes to our accounting policies on critical accounting estimates; refer to the Company's 2013 Annual Report on Form 10-K for a complete discussion of critical accounting estimates.

Critical Accounting Policies and New Accounting Standards Not Yet Adopted

See "Note 2 - Accounting Policies and Basis of Presentation" for information related to our significant accounting policies, including details of policies that were adopted during the six months ended June 30, 2014.


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Consolidating Supplemental Information

The following tables present the consolidating financial statements as of
June 30, 2014 and December 31, 2013 and for three and six months ended June 30,
2014 and 2013:



                                                                     June 30, 2014
                                                             Reciprocal
($ in thousands)                              Tower          Exchanges         Eliminations          Total
Assets
Investments
Available-for-sale investments, at fair
value:
Fixed-maturity securities                  $ 1,203,335      $    231,044      $            -      $ 1,434,379
Equity securities                               12,791             2,772                   -           15,563
Short-term investments                           2,000                 -                   -            2,000
Other invested assets                          132,817                 -             (77,200 )         55,617
Total investments                            1,350,943           233,816             (77,200 )      1,507,559
Cash and cash equivalents                      247,484            17,366                   -          264,850
Investment income receivable                    34,421             1,980             (26,716 )          9,685
Premiums receivable                            223,588            45,439              (2,307 )        266,720
Reinsurance recoverable on paid losses          48,423             3,922              (1,064 )         51,281
Reinsurance recoverable on unpaid losses       441,213            23,326              (9,067 )        455,472
Prepaid reinsurance premiums                   440,193            26,285              (3,790 )        462,688
Deferred acquisition costs, net                   (121 )          10,841                   -           10,720
Intangible assets                               73,327             6,104                   -           79,431
Funds held by reinsured companies               77,289                 -                   -           77,289
Other assets                                   272,575             1,307              (8,022 )        265,860
Total assets                               $ 3,209,335      $    370,386      $     (128,166 )    $ 3,451,555
Liabilities
Loss and loss adjustment expenses          $ 1,887,301      $    109,324      $       (9,067 )    $ 1,987,558
Unearned premium                               533,772           111,274              (3,790 )        641,256
Reinsurance balances payable                   152,098             8,927              (3,371 )        157,654
Funds held under reinsurance agreements         81,999                22                   -           82,021
Other liabilities                              169,989            54,339             (34,938 )        189,390
Deferred income taxes                           10,677            19,181                   -           29,858
Debt                                           384,373            77,000             (77,000 )        384,373
Total liabilities                            3,220,209           380,067            (128,166 )      3,472,110
Shareholders' equity
Common stock                                       574                 -                   -              574
Treasury stock                                     (88 )               -                   -              (88 )
Paid-in-capital                                815,096             9,400              (9,400 )        815,096
Accumulated other comprehensive income
(loss)                                         (30,740 )           5,130              (5,130 )        (30,740 )
Retained earnings (accumulated deficit)       (795,816 )         (24,211 )            24,211         (795,816 )
Noncontrolling interests                           100                 -              (9,681 )         (9,581 )
Total shareholders' equity                     (10,874 )          (9,681 )                 -          (20,555 )
Total liabilities and shareholders'
equity                                     $ 3,209,335      $    370,386      $     (128,166 )    $ 3,451,555


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                                                                   December 31, 2013
                                                             Reciprocal
($ in thousands)                              Tower          Exchanges         Eliminations          Total
Assets
Investments
Available-for-sale investments, at fair
value:
Fixed-maturity securities                  $ 1,390,146      $    252,549      $            -      $ 1,642,695
Equity securities                              104,107             2,523                   -          106,630
Short-term investments                           5,897                 -                   -            5,897
Other invested assets                          173,355                 -             (77,200 )         96,155
Total investments                            1,673,505           255,072             (77,200 )      1,851,377
Cash and cash equivalents                      288,214             5,684                   -          293,898
Investment income receivable                    38,564             2,325             (23,396 )         17,493
Premiums receivable                            267,151            44,878              (2,530 )        309,499
Reinsurance recoverable on paid losses          66,974             3,028              (1,039 )         68,963
Reinsurance recoverable on unpaid losses       555,468            25,208              (9,816 )        570,860
Prepaid reinsurance premiums                   164,250            26,514              (4,288 )        186,476
Deferred acquisition costs, net                 85,485             9,611                   -           95,096
Intangible assets                               73,599             6,337                   -           79,936
Funds held by reinsured companies               98,816                 -                   -           98,816
Other assets                                   391,258             1,395              (9,522 )        383,131
Total assets                               $ 3,703,284      $    380,052      $     (127,791 )    $ 3,955,545
Liabilities
Loss and loss adjustment expenses          $ 1,973,970      $    117,131      $       (9,816 )    $ 2,081,285
Unearned premium                               657,045           110,355              (4,288 )        763,112
Reinsurance balances payable                    84,948             8,441              (3,569 )         89,820
Funds held under reinsurance agreements        222,137                22                   -          222,159
Other liabilities                              268,937            50,352             (33,118 )        286,171
Deferred income taxes                           10,327            19,181                   -           29,508
Debt                                           382,770            77,000             (77,000 )        382,770
Total liabilities                            3,600,134           382,482            (127,791 )      3,854,825
Shareholders' equity
Common stock                                       574                 -                   -              574
Treasury stock                                     (39 )               -                   -              (39 )
Paid-in-capital                                815,119             9,400              (9,400 )        815,119
Accumulated other comprehensive income         (19,507 )           1,338              (1,338 )        (19,507 )
Retained earnings (accumulated deficit)       (700,596 )         (13,168 )            13,168         (700,596 )
Noncontrolling interests                         7,599                 -              (2,430 )          5,169
Total shareholders' equity                     103,150            (2,430 )                 -          100,720
Total liabilities and shareholders'
equity                                     $ 3,703,284      $    380,052      $     (127,791 )    $ 3,955,545


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                                                                                           Three Months Ended June 30,
                                                                      2014                                                            2013
                                                            Reciprocal       Elimina-                                       Reciprocal       Elimina-
($ in thousands)                              Tower         Exchanges          tions          Total          Tower          Exchanges          tions          Total
Net premiums written                        $  26,988      $     41,800      $       -      $  68,788      $  359,807      $     42,776      $       -      $  402,583
Revenues
Net premiums earned                         $  54,539      $     40,128      $       -      $  94,667      $  376,554      $     41,810      $       -      $  418,364
Ceding commission revenue                      15,826             2,311           (417 )       17,720            (285 )           1,830          1,339           2,884
Insurance services revenue                      7,773                 -         (7,725 )           48           8,804                 -         (8,272 )           532
Policy billing fees                             2,622               137              -          2,759           3,287                34              -           3,321
Net investment income                          10,065             1,812         (1,667 )       10,210          27,611             2,459         (1,668 )        28,402
Total net realized investment gains
(losses)                                       13,405                33              -         13,438          (2,243 )             209              -          (2,034 )
Total revenues                                104,230            44,421         (9,809 )      138,842         413,728            46,342         (8,601 )       451,469
Expenses
Loss and loss adjustment expenses              66,573            28,332              -         94,905         537,435            22,457              -         559,892
Commission expense                             28,996             7,843           (417 )       36,422          91,202             6,387          1,339          98,928
Other operating expenses                       46,918            11,829         (7,725 )       51,022          79,948            14,933         (8,272 )        86,609
Acquisition-related transaction costs           2,397                 -              -          2,397             665                 -              -             665
Interest expense                                7,322             1,667         (1,667 )        7,322           7,640             1,663         (1,668 )         7,635
Total expenses                                152,206            49,671         (9,809 )      192,068         716,890            45,440         (8,601 )       753,729
Other income (expense)
Equity in income (loss) of unconsolidated
affiliate                                           -                 -              -              -           7,838                 -              -           7,838
Goodwill and fixed asset impairment                 -                 -              -              -        (214,049 )               -              -        (214,049 )
Income (loss) before income taxes             (47,976 )          (5,250 )            -        (53,226 )      (509,373 )             902              -        (508,471 )
Income tax expense (benefit)                      766                 -              -            766          (2,031 )             101              -          (1,930 )
Net income (loss)                           $ (48,742 )    $     (5,250 )    $       -      $ (53,992 )    $ (507,342 )    $        801      $       -      $ (506,541 )
Net income (loss) attributable to
Noncontrolling interests                            -            (5,250 )            -         (5,250 )             -               801              -             801
Net income (loss) attributable to Tower
Group International, Ltd.                   $ (48,742 )    $          -      $       -      $ (48,742 )    $ (507,342 )    $          -      $       -      $ (507,342 )

Ratios
Net loss and LAE                                122.1 %            70.6 %                       100.3 %         142.7 %            53.7 %                        133.8 %
Net underwriting expenses                        80.7 %            43.0 %                        64.7 %          41.7 %            46.5 %                         42.2 %
Net Combined                                    202.8 %           113.6 %                       165.0 %         184.4 %           100.2 %                        176.0 %


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                                                                                              Six Months Ended June 30,
                                                                       2014                                                              2013
                                                             Reciprocal       Elimina-                                         Reciprocal       Elimina-
($ in thousands)                              Tower          Exchanges          tions          Total            Tower          Exchanges          tions           Total
Net premiums written                          (272,008 )    $     80,151      $       -      $ (191,857 )    $   775,878      $     79,902      $       -      $   855,780
Revenues
Net premiums earned                         $  127,208      $     79,003      $       -      $  206,211      $   757,438      $     82,812      $       -      $   840,250
Ceding commission revenue                       24,548             4,789           (815 )        28,522            4,231             4,046             46            8,323
Insurance services revenue                      15,691                 -        (15,078 )           613           16,093                 -        (15,433 )            660
Policy billing fees                              5,194               241              -           5,435            6,134               337              -            6,471
Net investment income                           24,762             4,127         (3,321 )        25,568           57,195             4,839         (3,315 )         58,719
Total net realized investment gains
(losses)                                        32,205             3,496              -          35,701            3,990               827              -            4,817
Total revenues                                 229,608            91,656        (19,214 )       302,050          845,081            92,861        (18,702 )        919,240
Expenses
Loss and loss adjustment expenses              139,201            58,265              -         197,466          777,769            57,855              -          835,624
Commission Expense                              46,496            15,790           (815 )        61,471          167,325            14,078             46          181,449
Other operating expenses                       119,654            25,323        (15,078 )       129,899          156,786            27,992        (15,433 )        169,345
Acquisition-related transaction costs            3,043                 -              -           3,043           19,721                 -              -           19,721
Interest expense                                14,332             3,321         (3,321 )        14,332           15,443             3,315         (3,315 )         15,443
Total expenses                                 322,726           102,699        (19,214 )       406,211        1,137,044           103,240        (18,702 )      1,221,582
Other income (expense)
Equity in income (loss) of unconsolidated
affiliates                                           -                 -              -               -            7,966                 -              -            7,966
Goodwill and fixed asset impairment                  -                 -              -               -         (214,049 )               -              -         (214,049 )
Income (loss) before income taxes              (93,118 )         (11,043 )            -        (104,161 )       (498,046 )         (10,379 )            -         (508,425 )
Income tax expense (benefit)                     1,729                 -              -           1,729           (3,621 )             101              -           (3,520 )
Net income (loss)                           $  (94,847 )    $    (11,043 )    $       -      $ (105,890 )    $  (494,425 )    $    (10,480 )    $       -      $  (504,905 )
Net income (loss) attributable to
Noncontrolling interests                           373           (11,043 )            -         (10,670 )              -           (10,480 )            -          (10,480 )
Net income (loss) attributable to Tower
Group International, Ltd.                   $  (95,220 )    $          -      $       -      $  (95,220 )    $  (494,425 )    $          -      $       -      $  (494,425 )

Ratios
Net loss and LAE                                 109.4 %            73.8 %                         95.8 %          102.7 %            69.9 %                          99.4 %
Net underwriting expenses                         81.1 %            45.7 %                         67.5 %           38.6 %            45.5 %                          39.3 %
Net Combined                                     190.5 %           119.5 %                        163.3 %          141.3 %           115.4 %                         138.7 %

Insurance Ratios

Net loss ratio. The net loss ratio is the ratio of losses and LAE incurred to net premiums earned and measures the underwriting results of a company's insurance business. Our net loss ratio is meaningful in evaluating our financial results, which are net of ceded reinsurance, as reflected in our consolidated financial statements. In addition, we use accident year and calendar year loss ratios to measure our underwriting performance. An accident year loss ratio measures losses and LAE for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that particular accident year. A calendar year loss ratio measures losses and LAE for insured events occurring during a particular year and the changes in estimates in loss and LAE reserves from prior accident years as a percentage of premiums earned during that particular calendar year.

Net underwriting expense ratio. We calculate our net underwriting expense ratio after the effect of ceded reinsurance and policy billing fees. Ceding commission revenue and policy billing fees are applied to reduce our underwriting expenses in our insurance company operation. As discussed below, this is a non-GAAP measure.

Net combined ratio. We use the net combined ratio to measure our underwriting performance. The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio. If the net combined ratio is at or above 100%, an insurance company is not underwriting profitably and may not be profitable unless investment income is sufficient to offset underwriting losses. As discussed below, this is a non-GAAP measure.

Non-GAAP measures. The net underwriting expense ratio and net combined ratio are considered non-GAAP financial measures under applicable SEC rules because a . . .

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