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Tower Group, Inc. (TWGP)

Q3 2010 Earnings Call

November 09, 2010 09:30 a.m. ET

Executives

Bill Hitselberger - SVP & CFO

Michael Lee - President & CEO

Analysts

Bijan Moazami - FBR Capital Markets

Beth Malone - Wunderlich

Mike Grasher - Piper Jaffray

Adam Klauber - Macquarie

Presentation

Operator

Good morning ladies and gentlemen, my name is Mary and I will be your conference facilitator today. At this time I would like to welcome everyone to Tower Groups Third Quarters Earnings Conference Call. All lines have been put on mute to prevent any back ground noise. After the speakers remarks there will be a questions and answering period.

It is now my pleasure to turn the floor over to your host Mr. Bill Hitselberger, Senior Vice President and Chief Financial Officer. Please go ahead sir.

Bill Hitselberger

Thank you Mary, good morning everyone. This is Bill Hitselberger, Senior Vice President and Chief Financial Officer of Tower Group, before I turn the call over to Tower group president and CEO, Michael Lee. I would remind you that some of the statements that will be making during this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in these forward-looking statements.

For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with SEC from time to time. Also I'd like to remind everyone that a replay of this call will be available in the Investor Relations section at Tower's website.

With that, I'd like to turn the call over to Michael.

Michael Lee

Thank you, Bill and good morning everyone. I'd like to thank all of you for joining us on this conference call to discuss our third quarter operating results. On this mornings call I will provide you with updates in several areas of our business including our views on the current market conditions, our business strategies, revised segmental reporting and the acquisition of OneBeacon Personal Lines Division, which we closed on July 1.

Bill will then provide a detailed overview of our financial performance and turnings guidance; we will conclude this call with a question and answer session.

Through the several quarters we've indicated that our operating performance as measured by earnings per share and return on equity would improve beginning in the third quarter as we successfully deploy the capsule that we acquired from CastlePoint, especially after the closing of the OneBeacon acquisition.

Consisting with this guidance we're pleased that we were able to achieve a significant improvement through our overall operating results in the third quarter. Our operating incomes which excludes realized capital gains on investments, transactions related expenses and operating results of the reciprocal businesses was $33 million or $0.70 per diluted share compared with $30.2 million or $0.74 per diluted share during the same period last year.

Including the realized capital gains and transaction related expenses, our net income and diluted earnings per share were $33.7 million and $0.78 per diluted share respectively during the third quarter. Our annualized operating return on shareholders equity improved to 12.75% in the third quarter as compared to 8.7% for the first six months of 2010.

Our September 30, 2010 book value per share of $26.34 has increased 6.2% during the quarter, 12.8% since year-end and 15.9% compared to September 30, 2009.

During the quarter, our total premiums increased by 58.3% to 447.6 million from 282.8 million during the same period last year with a combined ratio of 93.8%, consisting of a loss ratio of 61.1% and an expense ratio of 32.7%, excluding the results of the reciprocal insurance exchanges that we now manage and are consolidated with our overall financial results. Our combined ratio was 92.9%.

Beginning in the third quarter, we reorganized our business segments as a result of the changes that we had made to our commercial business and the addition of the OneBeacon Personal Lines Division to our Personal Lines business.

We now operate in commercial, personal and insurance services segment. As a result of the addition of OneBeacon, we have created a personal lines segment to consolidate OneBeacon's Personal Lines business with our personal lines business comprises, primarily, of homeowners business.

In addition, our commercial business segment was created to combine the commercial and specialty business, which allows us to implement our overall commercial underwrite strategy to focus on small commercial business and specialty business utilizing the same underwriting infrastructure.

Finally, due to the acquisition of the managing companies in connection with the OneBeacon transaction, we would be able to significantly increase our key income in out insurance services segment, from managing their two reciprocal insurance changes.

Later, in this call, Bill will further explain the changes to our financial results as a result of the new business segment reporting and the financial impact, including the results of the reciprocals in our overall financial result.

As we've been mentioning in prior quarters, we continue to see soft insurance market conditions across the industry. I think the challenging market conditions in our industry, weak economic conditions and low interest rates that continued this quarter have reinforced our commitment to exercise underwriting and cost discipline and moderate our organic growth, while focusing on consolidating profitable business through acquisitions.

In addition, we have attempted to generate a higher return on equity by leveraging our capital effectively by wholly utilizing our capital and then generating additional reinsurance commission and fee income by transferring business to reinsurers and managing the reciprocal insurance exchanges.

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