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TWGP - Tower Group, Inc.

Junto

By Junto
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Junto Newbie

Junto

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Tower Group, Inc. announced its intent to merge today with Canopius Holdings Bermuda Limited and Canopius Bermuda Limited (http://investor.twrgrp.com/releasedetail.cfm?ReleaseID=696609) . The merger will pay out $1.25/share to current share holders in cash and then the existing shareholders will own 75-80% of the new entity.

 

NEW YORK--(BUSINESS WIRE)-- Tower Group, Inc. (NASDAQ: TWGP-News) today announced that it has exercised its previously announced option to combine with Canopius Holdings Bermuda Limited and Canopius Bermuda Limited (together, "Canopius Bermuda"), the Bermuda reinsurance business currently operated by Canopius Group Limited ("Canopius Group"). The merger with Canopius Bermuda will enable Tower to create a global specialty insurance company with greater diversification supported by an efficient international holding company structure and should enable Tower to increase its profitability.

 

The company has been plagued over the last quarters with adjustments to its prior years reserves and again it announced a further adjustment (this time being indicated fully reflected)

 

Tower conducted a comprehensive review of its loss reserves in the second quarter and strengthened prior accident year reserves by $65 million on a pre-tax basis following an analysis of recent loss emergence that occurred during the quarter. The reserve strengthening in the second quarter is expected to represent about 4% of the company's consolidated loss reserves (excluding the reserves that are carried by the reciprocal insurance companies managed by Tower). It culminates a multi-year effort that began in the fourth quarter 2009 to mitigate soft market conditions. The loss ratio after the reserve strengthening for the accident years from 2008 to 2011 continues to remain favorable at 62.3%, excluding storm losses. This reserve charge should allow Tower's prospective financial results to fully reflect current accident year profitability going forward.

 

Guidance of $2.85 to $3.05 per share for 2013 before merger and 4-6% boost to earnings with merger. Need more definition on the merger parties revenue and earnings potential for its 20-25% interest in the transaction.

 

On the back of a napkin, close on July 30 is $21.71, so you get $1.25 / 21.71 = 5.76% special dividend then earn 75% of a company with 7.18X earnings base plus the boost from merger and existing business of the target which ~89% not owned by Tower already. It looks like the business lost money in 2011 but is also acquiring Omega Insurance as part of the transaction.

 

Certainly a lot of moving parts, so I am curious if anyone else has been wading through this transaction or has any thoughts on Tower Group? I currently have a long position and need to decide what to do given the direction the firm is going.

 

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tooskinneejs Newbie

tooskinneejs

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Anyone taking a look at this one recently? ;)  They completed their merger with Canopius.  Repeating the situation described in Junto's post from over a year ago, the company has once again announced that it is undertaking another review of its reserves and may have to record an additional $60 to $110 million of reserves.  They say that on 9/17/13 they will announce their earnings release date for Q2 reflecting these adjustments.

 

The plus side to this mess?  The stock price dropped from about $22 to under $14 (about 40%) even though the impact on book value per share of the adjustment will is expected by management to be only about -10% at most.  The stock trades at about 65% of the expected adjusted book value after the additional reserve charge.

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dcollon Newbie

dcollon

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On September 24, 2013, Gary S. Maier notified Tower Group International, Ltd. (the “Company”) of his resignation effective as of October 4, 2013, from his position as Executive Vice President and Chief Underwriting Officer of Tower Group, Inc., a wholly owned subsidiary of the Company.

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Potato Newbie

Potato

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An interesting mess. My gut says to watch closely for more panic selling, but my head says it belongs in the too hard pile.

 

If I've done my math right, additional reserves would mean that all the policies written for the past few years were unprofitable. Looking forward, I tried to sketch out a few scenarios where insurance continued to be written at a loss, but the company made minor profit from the return on the float. I wasn't able to convince myself there was a margin of safety at the current price, but I can't shake the feeling that I'm missing something or making a mistake. Will continue to watch, if only to try to learn something.

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dcollon Newbie

dcollon

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Tower Group International, Ltd. Announces Reinsurance Agreements

Tuesday, October 01, 2013 09:08:00 PM (GMT)

 

 

Tower Group International, Ltd. (NASDAQ:TWGP) announced today that it has entered into agreements with three reinsurers – Arch Reinsurance Ltd., Hannover Re and Southport Re – to enhance the Company’s financial flexibility.

 

The reinsurance agreements include the following:

 

-

      Tower Insurance Company of New York (Tower New York) on its behalf and on behalf of each of its pool participants entered into a multi-line quota share agreement with Arch Reinsurance Ltd. to cede a 17.5% quota share of certain brokerage commercial automobile liability, brokerage commercial multi-peril property, brokerage commercial multi-peril liability and brokerage other liability (monoline liability) business. The agreement covers losses occurring on or after July 1, 2013 for policies in-force as at June 30, 2013 and policies written or renewed from July 1, 2013 to December 31, 2013. 

     

-

  Tower New York on its behalf and on behalf of each of its pool participants also entered into a multi-line quota share agreement with Hannover Re (Ireland) Plc to cede a 14% quota share of certain brokerage commercial automobile liability, brokerage commercial multi-peril property, brokerage commercial multi-peril liability, brokerage other liability (monoline liability) and brokerage workers’ compensation business. The agreement covers losses occurring on or after July 1, 2013 for policies in-force as at June 30, 2013 and policies written or renewed from July 1, 2013 to December 31, 2013. 

     

-

  Tower New York on its behalf and on behalf of each of its pool participants entered into two reinsurance agreements with Southport Re (Cayman), Ltd. Under the first agreement, Tower New York ceded to Southport Re a 30% quota share of its workers’ compensation and employer’s liability business. The agreement covers losses occurring on or after July 1, 2013 for policies in force as at June 30, 2013 and policies written or renewed during the term of the agreement. Under the second, an aggregate excess of loss agreement, Southport Re assumed a portion of the losses incurred by Tower New York on its workers’ compensation and employer’s liability business between January 1, 2011 and May 31, 2013, but paid by Tower New York on or after June 1, 2013. 

     

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  Tower Reinsurance, Ltd. (Tower Re), a wholly-owned Bermuda-domiciled reinsurance subsidiary of Tower, also entered into an aggregate excess of loss agreement with Southport Re (Cayman), Ltd., in which Southport Re assumed a portion of the losses incurred by Tower Re on its assumed workers’ compensation and employer’s liability business between January 1, 2011 and May 31, 2013, but paid by Tower Re on or after June 1, 2013. 

     

 

Tower reaffirmed that it is not providing and does not expect to provide any information with respect to its results for the second quarter of 2013, including the amount of any adjustments for its estimates of loss reserves and amounts of goodwill, until it releases its second quarter results during the week of October 7, 2013. Tower continues to work on its second quarter Form 10-Q and expects to file such report soon after it reports its financial results.

 

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HJ Newbie

HJ

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I got involved as well.  Here are my thoughts:

 

Assuming this is not a fraud situation, management ought to be somewhat close in their $60-$110MM adverse development assessment.  If we are closer to the low end of that estimate, and given that a lot of P&C insurers / reinsurers seem to be over capitalized in relation to the premium they write, there ought to be enough capital in the industry to accommodate a small capital raise.  In which case you are looking at a going concern that over time ought to get back up to book, which would be in the teens if the reserve write down is on the low end of their estimate.  The fact that they were able to get reinsurance done, even though that doesn't really solve their capital issue, at least indicates that some people think there is value in their client base.  It also helps somewhat that Hannover Re is already involved in their regular book of business, and still chose to be involved in this emergency exercise.

 

If the adverse development is very high, say into the 150MM-200MM range, you are looking at a wind down, in which case, using 70% tangible book (Seabright's sell price to Enstar) as a yard stick, the downside ought to be reasonably contained as well.

 

Beyond that, you are really talking fraud, and while possible, and at times the stock trades like that, that's a risk you bear with any investment (Chinese RTO excluded).

 

 

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longlake95 Newbie

longlake95

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I figure there were many eyes reviewing the books, just 6 months ago during the Canopius merger, including AM Best. Although anything can happen, i'm not expecting a fraud situation ( but who does ??? ). Lee still owns 2+million shares.

I'd expect a small capital raise, which might give the street sigh of relief. We'll see...

 

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Potato Newbie

Potato

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I don't know, it looks like it could just be bad underwriting to me. $365M was right at the difference between their stated "worst case" and actual reserves, and I was kind of surprised that their previous reserves were so close to the "best case" part of the range given Sandy. That said, it's pretty bad underwriting: years and years of policies written at a loss, and they're not making it back on the float. Doesn't have to be a fraud to not touch it.

 

If I've back-of-the-enveloped it right (I may be over-discounting some items) TBV is now negligible/negative, so unless there's a good reason to expect that they will start writing better policies going forward I'm not sure I'd buy it at any price. HJ, I'd be interested to see your TBV to see if I've improperly ignored an asset I didn't fully understand.

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HJ Newbie

HJ

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For P&C companies, I generally don't do too much work on the asset side of the equation, have more or less take what is given.  The bond portfolio tend to be higher rated compared with the life companies, and the mark to market generally doesn't bother me too much. The question was on reserve adequacy.

 

The company has always reserved toward the low end of their range.  I was somewhat anchored by the previous press release of 60-110MM reserve addition estimate.  Part of it was the thought that the book that's really in question is the worker's comp book, which at $380MM at YE 2012, would have been written up by 20%-30% (assuming a revision of 60-110MM).  I've seen revisions of that magnitude in several different situation before.  Granted some of them went on to have further revisions, but that was what I was thinking.  I really haven't seen much revisions to the general commercial lines, or commercial auto's before.

 

 

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Potato Newbie

Potato

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Thanks for the info guys, and sorry for being so late to follow-up.

 

Here's my read:

(millions)

Investments: 2638

Cash+investment income rec: 259

Investment in unconsolodated affiliate: 68

Premiums rec: 418

Reins recov on paid losses: 50

Reins recov on unpaid losses: 887 (this one is huge and I don't understand it)

Prepaid reins premiums: 234

Deferred acq costs: assuming actual value of 0 (my understanding is that this asset is only worth something if the company continues and has a profit sometime in the future)

Intangible: assuming actual value of 0 (my default assumption for intangibles)

Goodwill: assuming actual value of 0

Funds held by reinsured companies: 830

Other assets: 430 (don't understand what's in this)

 

Total: 4497 + 887 + 430

 

Liabilities: 5170 + 365 (new increase in reserves)

 

So assuming the two lines I really don't understand well are worth what they're stated, I get ~$4.86 as book value. Assuming the deferred acq costs and intangible assets are also real helps a lot though, as those are another ~$5/share. I guess there's too many large line items that I don't understand well enough to have confidence that there's still value there in a run-off, but I can see what you're saying.

 

Reins recov on unpaid losses I think is losses that they have not yet paid out, but which should be represented in the liabilities/reserves, and which should also be covered by reinsurance agreements. So this should be money-good, but I'm not confident of my assumption.

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