Tower Group Inc. Reports Operating Results (10-Q)

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Aug 09, 2010
Tower Group Inc. (TWGP, Financial) filed Quarterly Report for the period ended 2010-06-30.

Tower Group Inc. has a market cap of $958.8 million; its shares were traded at around $21.33 with a P/E ratio of 8.2 and P/S ratio of 0.98. The dividend yield of Tower Group Inc. stocks is 1.31%. Tower Group Inc. had an annual average earning growth of 31.4% over the past 5 years.TWGP is in the portfolios of NWQ Managers of NWQ Investment Management Co, Columbia Wanger of Columbia Wanger Asset Management, RS Investment Management, Paul Tudor Jones of The Tudor Group, Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Commission and fee income. Commission and fee income decreased by $4.8 million in the six months ended June 30, 2010 compared to the same period in 2009 due to our decision to retain more business in 2010, as discussed above. Ceding commission revenue in 2009 represents commissions on ceded premiums earned from quota share reinsurance contracts written in 2008 which continued to be earned in 2009. Tower Risk Management Corp. (TRM) ceased producing business on behalf of CPIC subsequent to the CastlePoint acquisition date. Commission and fee income increased by $2.0 million in the three months ended June 30, 2010 compared to the same period in 2009 largely as a result of a change in the estimated sliding scale ceding commission rate which reduced commission and fee income by $3.2 million in the second quarter of 2009.

Net investment income and net realized gains (losses). Net investment income increased 37.4% and 47.4%, respectively in the three and six months ended June 30, 2010 compared to the same periods in 2009. The increase in net investment income resulted from an increase in average cash and invested assets for the three and six months ended June 30, 2010 as compared to the same periods of 2009. The increase in cash and invested assets resulted primarily from invested assets acquired from the aforementioned acquisitions (reduced by $135.6 million of cash used to finance such acquisitions) and to operating cash flows of $214.7 million generated during 2009 and $59.2 million generated during the first six months of 2010. The positive cash flow from operations was the result of the aforementioned acquisitions and an increase in premiums collected from a growing book of business. The tax equivalent investment yield at amortized cost was 5.2% at June 30, 2010 compared to 5.7% at June 30, 2009. Operating cash invested in 2009 and in 2010 has been affected by a low yield environment, as asset classes other than US Treasuries have experienced tightening spreads, the result of investors reaching for yield in a low interest rate environment. We have modestly increased our investment in high yield securities to reduce the impact of this low rate environment.

Net realized investment gains were $5.9 million for the six months ended June 30, 2010 compared to a loss of $0.2 million in the same period last year. Credit related OTTI losses in the three and six months ended June 30, 2010 of $0.3 million and $3.3 million respectively were considerably lower than the $4.1 million and $7.4 million, respectively, which were recorded for the comparable periods of 2009.

Acquisition-related transaction costs. Acquisition-related transaction costs for the three and six months ended June 30, 2010 were $0.4 million and $1.3 million, respectively, and relate to the acquisition of the Personal Lines Division of OneBeacon. In the comparable periods of the prior year, we recorded acquisition related transaction costs of zero and $11.3 million, respectively, primarily related to the CastlePoint acquisition.

Interest expense. Interest expense increased by $0.6 million and $1.7 million, respectively, for the three and six months ended June 30, 2010 compared to the same periods in 2009. Interest expense increased mainly due to interest expense on subordinated debentures which were assumed as a result of the merger with CastlePoint, and to a much lesser extent, interest of $0.1 million on the $56 million draw-down on the line of credit on May 24, 2010.

Net income and annualized return on average equity were $45.7 million and 9.2% for the six months ended June 30, 2010 compared to $48.6 million and 18.6% for the same period in 2009. The decline in the annualized return on equity in 2010 is primarily due to the reduced earnings resulting from the $17.5 million pre-tax charge for the Northeast U.S. Storm occurring during March 13 to March 15, 2010.

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