Tower Group, Inc.reported fourth quarter 2012 net loss attributable to common shareholders of $52.1 million or ($1.36) per share, compared to fourth quarter 2011 net income attributable to common shareholders of $25.3 million or $0.64 per diluted share. For the full year 2012, net loss attributable to common shareholders was $28.2 million or ($0.73) per share, compared to full year 2011 net income of $60.5 million or $1.48 per diluted share.
The operating loss in the fourth quarter of 2012 was $54.9 million or ($1.43) per share, compared to operating income of $23.5 million or $0.59 per diluted share in the fourth quarter of 2011. For the full year 2012, the operating loss was $27.9 million or ($0.72) per share, compared to full year 2011 operating income of $56.3 million or $1.38 per diluted share.
As previously disclosed, Tower's results in the fourth quarter and full year 2012 included losses from Superstorm Sandy, to which Tower had exposure through its direct insurance operations, its assumed reinsurance business, and certain of its alternative investments. In aggregate, Tower's after-tax net losses in the fourth quarter and full year 2012 from Superstorm Sandy were $80.1 million, or ($2.09) per diluted share. This excludes $7.2 million in after-tax net losses from the reciprocal exchanges, which are not included in net income attributable to common shareholders. Through February 24, 2013, Tower has closed 93.7% of the 30,511 claims that its stock companies and reciprocal exchanges received as a result of Superstorm Sandy. Tower received 99.0% of these claims prior to February 1, 2013. To date, Tower has paid $164.0 million, before reinsurance collections, to personal lines and commercial policyholders affected by Superstorm Sandy.
Full Year 2012 Highlights:
- Net premiums earned increased 8.0% to $1.72 billion from $1.59 billion in 2011.
- Gross premiums written and managed increased 8.8% to $1.97 billion from $1.81 billion in 2011.
- Consolidated net combined ratio was 109.2%, compared with 100.3% in 2011.
- Consolidated net combined ratio excluding the impact of catastrophes and reserve development was 97.4%, compared with 96.6% in 2011.
- Net investment income was $127.2 million, compared with $126.5 million in 2011.
- Book value per share(3) was $25.54 at December 31, 2012, compared with $26.36 at December 31, 2011. Tower Group, Inc. stockholders' equity was $980.8 million at December 31, 2012, compared with $1.03 billion at December 31, 2011.
- Operating return on average equity (ROE) excluding the impact of catastrophes and reserve development(2) was 10.1% in 2012 compared to 11.0% in 2011.
- Tower paid cash dividends of 75 cents per share in 2012.
Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., said, "2012 was disappointing for Tower from a financial perspective as the impact of Superstorm Sandy in the fourth quarter and the reserve charge we took in the second quarter combined to yield our first annual operating loss since we went public in 2004. Excluding the losses from Superstorm Sandy and reserve development, our ROE for 2012 was within our 10 to 12% near term target. While Tower's financial results were disappointing, we made substantial progress in 2012 on various important strategic initiatives. Tower's organic growth initiative continued to drive premium growth by expanding our product offerings, improving existing business units and creating new business units.
"Tower is also progressing well with our proposed merger transaction with the Bermuda reinsurance business of Canopius. We received all the necessary regulatory approvals and anticipate that we will be able to complete this transaction by the end of the first quarter of 2013 subject to shareholder approval. This merger will create a new global holding company that will provide us with access to the world's three key insurance markets - the U.S., Bermuda and London. The new holding company in Bermuda will give us an efficient business platform to continue expanding our assumed reinsurance and specialty business in the future. Finally, we saw positive pricing trends across all of our product lines last year, and we expect these conditions to continue during 2013. As a result of our progress in advancing our long-term strategy, including the Canopius transaction, as well as the positive signs we are observing in the marketplace, we believe we are on track to return to profitability in 2013."
Superstorm Sandy Impact
On October 29, 2012, Superstorm Sandy made landfall in New Jersey and caused significant property damages, with total property-casualty insurance industry losses estimated at $25 billion. Tower's pre-tax net loss from Superstorm Sandy was $123.2 million, including $101.0 million in net losses incurred in Tower's direct and reinsurance businesses, $18.0 million in reinstatement premiums and $4.2 million in losses from Tower's investment in Canopius, but excluding $11.2 million in pre-tax losses and reinstatement premiums from the reciprocal exchanges. Tower's after-tax net losses were $80.1 million, including $77.4 million in net losses incurred and reinstatement premiums in Tower's direct and reinsurance businesses and $2.7 million in losses from Tower's investment in Canopius, but excluding $7.2 million in after-tax losses and reinstatement premiums from the reciprocal exchanges.
On February 21, 2013, the NY Department of Financial Services (DFS) announced that it was investigating certain insurers, including one of Tower's insurance company subsidiaries, for unacceptable claims practices in New York related to Superstorm Sandy. In connection with such investigation, the DFS issued an Insurance Law Section 308 letter to Tower, which is a request for information to which insurers are legally required to respond. Tower is cooperating with the DFS and believes that any allegations in this matter do not constitute a pattern or practice of Tower and will not have a material adverse effect on Tower's financial condition or results of operations.