Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tower Group, Inc. (NASDAQ:TWGP)

Q2 2008 Earnings Call Transcript

August 7, 2008 10:00 am ET

Executives

Thomas Song – Managing VP of Corporate Development

Michael Lee – Chairman, President and CEO

Frank Colalucci – SVP, CFO and Treasurer

Analysts

Elizabeth Malone – KeyBanc Capital Markets

Mike Grasher – Piper Jaffray

Alper Sungur – Sidoti & Company

Operator

Good morning, ladies and gentlemen, my name is Audra and I will be your conference facilitator today. At this time I would like to welcome everyone to Tower Group's second quarter 2008 earnings conference call. (Operator instructions)

It is now my pleasure to turn the floor over to your host, Managing Vice President, Mr. Thomas Song. Please go ahead sir.

Thomas Song

Thank you, operator. Good morning. Before I turn the call over to Tower Group President and CEO, Michael Lee, and the company's Senior Vice President and CFO, Frank Colalucci, I want to remind you that some of the statements that will be made 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 want to remind everyone that a replay of this call will be available in the investor relations section of Tower's website.

Now I'd like to turn the call over to Michael.

Michael Lee

Thank you, Tom, and good morning everyone. I'd like to thank all of you for joining us on this conference call to discuss our second quarter operating results.

As described in this morning's press release, I'm pleased to report that Tower Group has once again produced strong operating results for the second quarter of 2008. In addition to discussing our second quarter results I will provide additional insight into the CastlePoint acquisition that we announced 2 days ago.

On an operating basis, net income increased by 24.6% to $15.4 million for the second quarter as compared to $12.3 million for the same period last year.

We also reported diluted earnings per share of $0.66 during this quarter as compared to $0.53 per share during the same period last year.

These figures exclude a realized investment loss of $5.2 million net of tax this quarter. We continued to experience volatility in a certain isolated and limited portion of our investments and we took a rate write-down on some of our mortgage-backed securities holdings.

We do not anticipate that these investment losses will have an impact on our operations. In fact, due to the CastlePoint acquisition we anticipate our book value per share to increase significantly by the year end.

Frank will review our investments in further detail later during today’s presentation.

Our return on equity was 19.3% for the third [ph] quarter compared to 17.1% for the same period last year when excluding net realized investment gains and losses. Despite continued soft market conditions we are seeing opportunities to profitably grow our top line organically as well as externally through acquisitions. Our organic top line growth continues to be outstanding as reflected in our 34.8% growth this past quarter in total premiums written and managed as compared to the same period last year.

Our strong top line growth during the quarter was driven by continued success in growing our business in Northeast [ph] and successful expansion into California, Texas, and Florida. We believe we will continue to successfully expand into these states throughout the year and well into 2009. In addition, the multiple distribution platform resulting from the CastlePoint transaction comprised of Tower’s retail and wholesale agents and CastlePoint’s program underwriting agents and small insurance companies positions us very well to aggregate profitable business that Tower has historically underwritten.

Along with this strong growth, we were able to achieve favorable underwriting results as reflected by our 81.6% net combined ratio comprised of a 52.6% net loss ratio and a 29% net expense ratio.

Overall, our policies in force increased by 13% this past quarter compared to the same period last year. This very positive trend demonstrates our success in using our broad product line platform to achieve a desired business mix and our ability to identify profitable market segments in response to changing market conditions. In addition, our retention was approximately 80% across all lines of business that we underwrite and we managed to see nominal increase in premium change in our renewed business.

As for acquisitions, we are seeing a healthy flow of opportunities as a result of the challenging market environment. We have closely reviewed several acquisition opportunities this year but capital constraints limited our ability to execute on these potential transactions. With our CastlePoint transaction, we believe we are now well positioned to take advantage of these opportunities. As we execute on these acquisition opportunities we will be able to ramp up CastlePoint's capital to generate higher earnings and return on equity.

With that overview of our second quarter results, I would now like to now provide additional perspective on the acquisition of CastlePoint. As I mentioned during our conference call on Tuesday to discuss the CastlePoint acquisition, this transaction is financially compelling to both Tower and CastlePoint shareholders. From a Tower shareholder standpoint this transaction is anticipated to increase the book value per share by 39% from $13.34 at the end of 2007 to a range between $18.45 and $18.65 at year-end 2008. Obviously, this more than offsets any slight decrease in book value per share resulting from the losses to our investment portfolio as a result of the challenging investment environment. We also estimate Tower's ROE will be slightly lower at 16.4% then our original standalone plan for 2009, but anticipate that it will ramp up to our target 18% to 20% as more of CastlePoint’s capital is deployed to write primary business. Based upon this past Monday's closing price of $23.09, Tower is valued at approximately 1.25 times 2008 projected book value and seven times 2009 estimated earnings. At these valuations Tower is well below its historical valuation levels and valued even lower then when Tower went public in October of 2004 when it was valued at 1.4 times book value.

In addition to increasing our own level of capitalization and strengthening our balance sheet, this transaction provides us with the opportunity to generate additional underwriting capacity from other reinsurers by utilizing Tower's hybrid business model. By shifting Tower's quota share reinsurance business from CastlePoint Re to other reinsurers and placing reinsurance on CastlePoint's business with other clients – with clients other than Tower, we're able to create approximately $500 million of additional underwriting capacity that we can use to grow Tower's business organically or externally through acquisitions. We also realized the benefit of expanding and diversifying our revenue stream by accessing CastlePoint’s program (inaudible) and reinsurance businesses to increase our premium volume to a range between $1.21 billion to $1.2 billion in 2009. Finally through this transaction we will be able to simplify our corporate structure and realize cost savings and efficiency by operating as a single publicly traded company. Lastly, we do not anticipate that this transaction will have an impact on Tower's current A- rating as A.M. Best has stated that they expect to affirm the ratings of both companies unless there are significant changes to the transactions or operating plans of the companies. That is also announced the upgrade of the Preserver subsidiaries that we recently acquired from B++ to A-. This is an important step for these subsidiaries and will further enhance their ability to support our business plan. With that I will now turn the call over to Frank to review our financial details in more detail. Frank.

Frank Colalucci

Thank you, Michael, and good morning everyone. I'll cover some of our financial highlights as usual and then provide an update on our outlook for the third quarter and for the rest of 2008 and 2009.

Second quarter growth of premiums written and managed of 34.8% remain very strong as Michael mentioned. This growth was the result of our continued success and initiative that we highlighted in the past including our 2008 national wholesale initiative which generated $18 million in premiums written for the quarter and $32 million on a year-to-date basis. Additionally, we saw continuing growth in the traditional and specialty programs managed by CastlePoint, which increased to $23.7 million from the second quarter this year as compared to $3.3 million for the same period last year.

On a year-to-date basis, gross premiums written for programs were $41.8 million for the six months ending June 30 compared to $8.5 million in the same period last year. In addition in contrast to recent periods in which our personalized products led growth we are seeing our commercial lines contribute significantly to our premium volume. Geographically, one-third of our business during the quarter was produced outside of New York State and that growth rate as compared to the second quarter of 2007 was almost 61%.

Total consolidated revenues increased by 4% to $106.8 million this quarter over the second quarter last year. Net premiums earned decreased by 5.3% to $70.1 million for the quarter over the same quarter in 2007. Although gross premiums earned increased 6.1%, ceded premiums earned increased 21.1% resulting from the higher ceding percentage on premiums written in the second quarter of ‘07 that are being earned this quarter. We ceded 40% of our broker’s businesses to CastlePoint and other reinsurers (inaudible) reinsurance agreement this quarter.

Net premiums earned represented 66% of total revenues. Less of a contribution to total revenues than in the past as commissions and fee income have ramped up significantly with an 88.9% increase to $36 million in the second quarter compared to $19 million last year. Commissions and fees represented 34% of total revenues this quarter as compared to about 19% in 2007's second quarter. This was due to the increase in ceding commission revenue earned from our quota share reinsurance program with CastlePoint as well as the contribution of insurance services revenue by TRM from producing premiums on behalf of CastlePoint's U.S. insurance company, CPIC.

Net investment income excluding realized capital gains represented 8% of total revenues in second quarter of ’08 [ph] as compared to 9% in the same period a year ago.

Investments totaling over $685 million, including cash equivalents decreased nominally from $697 million at year-end 2007. Our portfolio activity was directed around maintaining overall credit quality and included reducing our allocation to mortgages and other asset-backed securities, rotating more to corporate bonds and increasing our allocation to tax-exempt positions.

We review all of our investment positions with particular focus on non-agency residential mortgage-backed securities that are rated below AA. The GAAP rules do not leave much room for management judgment in determining a recognition of an income statement loss. We are required under GAAP rules particularly EITF 99-20 to test cash flows and recognize as an OTTI loss. Those securities were the projected cash flows are less than in the previous tests. We do this test every quarter.

As a result of this required testing, we recorded $5.2 million on an after tax basis as an OTTI loss on 15 of the non-agency residential mortgage backed securities. After recording this loss we have 13 of these non-agency residential mortgage backed securities remaining on our portfolio rated less than AA with an unrealized loss of $3 million. The book value of these positions is a little under $17 million and the fair market value is a little bit under $14 million and this represents only about 2.4% of the fair market value of our total portfolio.

Simply stated, these investments do not have a meaningful impact on our operations because most of these losses are reflected in book value. However, as we write down these investments primarily due to cash flow testing we shift these losses out of the comprehensive net income bucket into the net income bucket. Irrespective of the investment losses our book value per share is projected to increase by 39% from year-end 2007 to year-end 2,008 after the CastlePoint transaction. In addition our investment portfolio is projected to increase from about $620 million at the end of 2007 to approximately $1.3 billion at year-end 2008 after the CastlePoint transaction. Prior to closing we will also have the opportunity to mark CastlePoint's investments to market and use that as our cost basis. This will allow us to further strengthen our investment portfolio and reduce the unrealized losses in our investment portfolio.

The targeted duration of our fixed income portfolio is about 4 years and we were slightly higher at 4.4 years at June 30th. On and tax equivalent basis, the investment yield was 5.4% during the quarter compared to 5.8% in the second quarter of 07. Again this was due to a larger than usual position in cash (inaudible) about 5.7%.

For the quarter, net investment income decreased by 11% to $8.4 million as compared to $9.4 million last year. The investment yield was lower this quarter than in 2007 from having sold off investments that were providing higher yields but declining in value and from the applications another technical accounting bulletin FAS 91 that requires adjusting the amortization of bond discount on mortgage backed securities from prepayments fee changes that extend the life of these securities or from favorable or unfavorable changes in estimated cash flow. This adjustment was approximately $500,000.

The gross loss ratio for the insurance segment for the three months ending June 30 was 50.4% and the net loss ratio was 52.6%, which compares to a net loss ratio of 54.9% in the second quarter of 2007. This is due to lower (inaudible) and loss ratios in homeowners, commercial multi-peril and auto liability lines. Prior year’s net loss reserves developed fairly to the extent of about $1.3 million.

For the quarter, the gross expense ratio was 30.2% and the net expense ratio was 29%. We expect this ratio to remain in this range during the remainder of the year. Our growth and net combined ratios were 80.6% and 81.6% respectively. We have successfully reduced Preserver's expense ratio to be in line with the rest of our operations as we have discussed previously.

Our book value per share at June 30 was $13.82 as compared to $12.52 at the end of the second quarter last year.

Tower expects third quarter 2008 diluted earnings per share and net income excluding realized investment gains to be in a range of $0.70 to $0.75 and $16.3 to $17.5 million dollars respectively. For the full year we anticipate diluted earnings per share to be between $2.90 and $3.00 per share. These projections do not include any amounts from realized investment gains or losses.

For 2009, including the effects of the CastlePoint transaction Tower projects diluted earnings per share excluding realized investment gains and losses to be in a range between $3.20 and $3.40 per diluted share. Combined gross premiums written is projected to be in a range between $1.1 billion and $1.2 billion for 2009 and stockholders equity is expected to increase to approximately $865 million at the end of 2009.

We will now turn the floor over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Beth Malone with KeyBanc.

Beth Malone – KeyBanc Capital Markets

Thank you. Good morning. Could you just explain a little bit more about your guidance here because when we do the math on the third quarter guidance of $0.73, coming up with that pretty significant fourth quarter to get to that $2.90 to $3.00 range. So, could you kind of explain how the fourth quarter is going to be significantly higher than the other three quarters, is that because of the consolidation of – assuming the consolidation of CastlePoint?

Michael Lee

No Beth. It doesn’t really take into account of the CastlePoint transaction. We anticipate closing to take place sometime in December, but I think if you look at the pattern that we had last year, you know, this year's pattern in the third quarter and fourth quarter pretty much mirrors the pattern that we saw last year. This fourth quarter is a significant quarter for us. Most of the writing is skewed towards the fourth quarter and we're just pretty much applying similar percentage rate increases, I mean similar percentage increases in the net income to the fourth quarter of this year compared to last year's fourth quarter. So I don't see much difference than what we've shown in the past.

Beth Malone – KeyBanc Capital Markets

Okay. And then just on the environment for CastlePoint you know is, I guess one of the decision was you Tower Group could access cheaper reinsurance than what CastlePoint was offering even though they had the Bermuda – they benefited of the Bermuda tax treatment. So going forward if CastlePoint no longer has the benefits of the Bermuda, could you just explain how CastlePoint is going to continue to compete in the reinsurance market as a part of Tower Group or is that going to be – be more opportunistic and not have the same model?

Michael Lee

Well, let me just explain that – the Bermuda platform really benefits CastlePoint, not necessarily Tower. It only is relevant to Tower in a sense that that advantage allows CastlePoint to price their products in a way that is attractive to Tower. So if Tower is able to get better terms from other reinsurers whether it is Bermuda platform that CastlePoint enjoys is really not relevant. However, from CastlePoint's standpoint it is relevant obviously because it allows CastlePoint to price its products competitively because of its Bermuda platform. However, their return on equity is calculated based on taking into account of that pricing as well as the Bermuda platform that they enjoy and the finals score card on all this is how much CastlePoint is able to generate in terms of ROE on that capital regardless of whether they use of Bermuda platform or whether they use a platform in the U.S., their ability to achieve a certain return on equity depends on the market environment and right now the market environment is such that they are not able to achieve their target return on equity whether they are in the U.S. or in Bermuda. So going forward after this transaction we're going to pretty much keep the business that we have in the reinsurance business platform, however, we have to price their products based on the fact that we don't have that advantage. But when we price the reinsurance from CastlePoint's standpoint, we price the product in such a way we don't think it makes a difference whether we are in Bermuda or in United States. We look at the business and try to write to a combined ratio of about 92% and that will continue and that is profitable we believe whether it is in Bermuda or whether it is United States. In addition to that, we're going to try to make the program business more profitable by placing reinsurance on that business and what that would do is it would allow us to achieve the better return on equity on the capital that we use to support that business. So in summary I don't think CastlePoint is going to be adversely impacted at all because of the changes of the business strategy that we're making after the transaction is completed.

Beth Malone – KeyBanc Capital Markets

Okay, and then another question on the top line growth in Tower in the second quarter total revenues, which I guess would kind of take into account your – as the way business gets moved around between ceding commission and loan premiums was up 12%. That is the lowest year-over-year growth we've seen I think so far, and I'm just wondering is that just because, you know, the comparisons are getting more difficult with the (inaudible) as the company has grown?

Michael Lee

At 12%, I think I – I don't know where you got that?

Beth Malone – KeyBanc Capital Markets

Okay. That excludes capital gains or losses for total revenues consolidated.

Michael Lee

Are you talking about top line premium growth?

Beth Malone – KeyBanc Capital Markets

Including that investment income which was down?

Michael Lee

Do you mean the increase in net income?

Beth Malone – KeyBanc Capital Markets

No, I was thinking total revenues but that includes, while I guess just generally it is slowing – the growth rate is slowing on the top line. So my question is?

Michael Lee

I think I mentioned 34.8% growth on the top line.

Beth Malone – KeyBanc Capital Markets

Okay. So you are including the insurance –

Michael Lee

Premium.

Beth Malone – KeyBanc Capital Markets

Okay, all right. Because I was –

Michael Lee

With Tower Beth you have to take into account not only gross written premiums that we generate through our insurance company subsidiary but also the premium that we place on CastlePoint insurance companies and our metrics really focus on utilizing, I mean, we in measuring our top line growth we look at the premiums written in our insurance company as well as managed premiums through CastlePoint insurance company and on that basis we had a 34.8% increase over last year.

Beth Malone – KeyBanc Capital Markets

Okay.

Michael Lee

So I think we're still showing very healthy growth as far as top line is concerned.

Beth Malone – KeyBanc Capital Markets

Okay. All right.

Frank Colalucci

But if you look Beth. This is Frank. If you look at – in the press release the insurance services segment you could see the premiums that were produced on behalf of TRM almost $36 million.

Beth Malone – KeyBanc Capital Markets

Okay.

Michael Lee

Okay.

Beth Malone – KeyBanc Capital Markets

Yes, thank you.

Michael Lee

You're welcome.

Operator

(Operator instructions) We will go next to Mike Grasher of Piper Jaffray.

Mike Grasher – Piper Jaffray

Hi, good morning gentlemen. Just a quick question, a few questions here, Michael what was the capital position or maybe Frank you can address this, the capital position after the transaction closes, what level will you be at or how much excess capital will you have?

Frank Colalucci

We mentioned we will have a GAAP equity of approximately $865 million, but the issue is that – that is on a GAAP basis. We have insurance capital that would be at a higher level and as Michael did mention we have the ability to use that excess capital from CastlePoint to either grow organically or have it available for acquisitions.

Mike Grasher – Piper Jaffray

Right, and that is where I'm trying to get at is sort of what level of excess capital will you have or what size acquisitions might you be able to do. And then secondarily would you need to wait for the close of the CastlePoint transaction to actually engage in any of these opportunities that you're seeing on a day-to-day basis?

Michael Lee

Mike that is a good question. I will just break down your question into two parts. This transaction will increase our own capital. As Frank mentioned, we will be able to increase our own capital from a GAAP equity standpoint to $865 million by the end of 2009. So that is a significant increase in terms of our own capital. So what that does is it allows us immediately after the transaction to eliminate sort of the ceding or the premiums that we transfer to CastlePoint. So from the point of view of both companies on a combined basis you eliminate that sort of premium transfer from Tower to CastlePoint. Then right immediately after the transaction we have very little premium, I think it is about 5% that is being ceded to external reinsurers since CastlePoint is considered to be part of this – part of the combined entity. So that frees up – additional capacity 45% that we can place with other reinsurers to reach our target of 15% of the total premium volume being – for us to be able to transfer to other reinsurers. So with that target of 50% which is self imposed we can create about $500 million of additional underwriting capacity. How that is going to work is that we will start placing the reinsurance that Tower currently places with CastlePoint and shift that as needed to other reinsurers, and we already have a treaty set up with other reinsurers to be able to do that. So what that does is at any time that we need additional capacity what we do is we shift that to other reinsurers. That frees up capital in CastlePoint to be used for the purposes of acquiring other insurance companies and we plan to do that and in fact, we're not going to wait until the transaction closes. If you recall, our strategy even on an independent basis for both companies was to participate or work together to make acquisitions. So the arrangement that we have in mind is for CastlePoint to acquire the balance sheet of these insurance companies that we plan to acquire and then to sell the renewal rates of the business to Tower and that would allow Tower to focus on managing this business and aggregating or consolidating that business to bring efficiency and CastlePoint could provide the balance sheet. And that is sort of the acquisitions structure that we have outlined in prior calls and we plan to use that structure for any acquisitions that may come up prior to the closing in December.

Mike Grasher – Piper Jaffray

Okay. So if you are targeting $1.1 billion to $1.2 billion in gross for '09 and you're looking at ceding 45% of that away that would imply a net, I was going to say that would imply a net of about $600 million with capital worth about $865. Does that imply then that you would have capacity for an additional $250 million?

Michael Lee

Well, as I mentioned, we would have the ability to probably ramp up to about two times that capital. So $865 we would – is the anticipated GAAP equity at the end of 2009. So you can multiply that by two times. That is where we're at right now. We're a little about that Tower is for 2008. So using Towers hybrid business model we can add – we can create significant capacity above and beyond our own capital base. But we are not going to probably utilize all that capacity, certainly the projections that we have is about as I mentioned, 1.1 to 1.2. And if we do an acquisition we will probably try to reduce organic growth. We're pretty firm on that – those projections that we've provided as far as top line growth, and we think we can get there organically or by making acquisitions. And if we do make acquisitions it will go towards meeting that plan and we probably will reduce our premium projections if the acquisition turns out to be such that we can anticipate additional premium volume above and beyond the range that we're provided.

Mike Grasher – Piper Jaffray

Reduce your organic expectations?

Michael Lee

Yes organic growth.

Mike Grasher – Piper Jaffray

Okay. And Frank what should we be thinking about in terms of eliminations as we model going forward?

Frank Colalucci

I presume you are asking about the accounting eliminations that arise on the acquisition of –

Mike Grasher – Piper Jaffray

Yes.

Frank Colalucci

From Tower's point of view you would have to eliminate the equity that Tower recognizes in CastlePoint’s income. The 6.7 percent that we presently own would not be – would not be part of Tower’s 2009 projections to the extent that you have that in there. I guess the only other significant elimination, that elimination would be a slight change in accounting that would result from having to record the – the TRM and MGA [ph] situation will likely not have any significant bearing in 2009 income. So the premiums that are going through TRM that Tower generates a fee on will have to be translated into a insurance accounting bases as opposed to an MGA accounting basis. Where that all is really today is just an adjustment in terms of timing because MGA accounting allows the fee to be recognized on a written basis which is a little bit faster than on earned basis. So it is shifting from one year to another. Those are the only – those are the most significant account consolidation type adjustments that could occur.

Mike Grasher – Piper Jaffray

Okay. Thank you and I will get back in the queue.

Operator

Next we will move to Alper Sungur at Sidoti & Company.

Alper Sungur – Sidoti & Company

Hi, good morning.

Michael Lee

Good morning

Alper Sungur – Sidoti & Company

My first question, you are projecting year end 2008 book value per share to increase to $18.65 mid point on a pro forma basis. You had $40 million of goodwill and intangibles at the end of the second quarter. You can project goodwill and intangibles once the CastlePoint transaction deal is closed?

Michael Lee

Could we project, I don't have the figure in front of me but –

Alper Sungur – Sidoti & Company

Where do you see the goodwill and intangibles.

Michael Lee

Excuse me

Alper Sungur – Sidoti & Company

Where do you see that $40 million increasing to?

Michael Lee

Let's see. It would increase depending on the final price that we pay for CastlePoint. It would probably, I am not sure of the figure but maybe close to – maybe $30 million or so. Maybe that's the ballpark figure, I rather calculate that precisely but it would be the multiple that we would pay on CastlePoint – for CastlePoint above and beyond its book value and I think we're projected to pay about 1.16 times book value. So 0.16 would represent the book value but we anticipate CastlePoint's book value to increase by the time that we close. So the gap may close or it may stay that way depending on the final price. As you know, the final price would be determined between the collar [ph] of $20 and $26. So depending on Tower's price that figure – the price that we actually pay for CastlePoint will move around. So it is pretty hard to give you a precise figure as far as what the goodwill will be, but I think you can estimate based on, I guess, Tuesday's announcement what the anticipated goodwill will be and I would ask you to refer to that press release, and I think you'll be able to figure that out.

Alper Sungur – Sidoti & Company

Okay. And also on a standalone basis Tower 2008 premiums to equity leverage 2.4 times on the presentation?

Michael Lee

Yes.

Alper Sungur – Sidoti & Company

And then closing year end 2008 looking at the premiums to equity leverage of 1.2 times.

Michael Lee

Yes

Alper Sungur – Sidoti & Company

And what will be the ROE then?

Michael Lee

Well that is hard to figure out because, you know, ROE is calculated based on the average equity. So you would have to take into account of you know the both – you would have to take account of both Tower shareholders' equity up to the point of the closing and then you would have to combine the equities of both companies from the date of closing to year-end and sort of average that. So it's – we don't have that figure in front of us but I think if you just look at it as the closing taking place at year end 2009 and then recalculating the shareholders' equity in 2009 it is probably more efficient to look at it that way rather than just trying to calculate what the average equity might be taking into account the closing date that occurs prior to the year end.

Alper Sungur – Sidoti & Company

Okay, And also I just want to get back to the top line growth discussion that I was mentioning a year ago from the Preserver there was $19 million of top line contribution if I'm not mistaken. Do you keep track of just the Preserver contribution, what was that amount in the second quarter '08?

Michael Lee

Well, I think, given the fact that we already closed on the Preserver – we closed on the Preserver acquisition in I guess in early part of 2007. Preserver is already in last year's numbers so, you know, 34.8% growth is really – really comes from both Preserver and Tower and since they have been integrated we're not really splitting out what the growth from Preserver and Tower is. We don't have that figure. In aggregate, we saw about a 34.8% growth in terms of total premiums written in our insurance companies and managed through our managing general agency, TRM.

Alper Sungur – Sidoti & Company

Okay, and also do you have an amount of the gross premiums written by wholesale agents with binding authority in the second quarter?

Michael Lee

I am sorry we don't have that figure. I can tell you that our wholesalers probably represent approximately 50% of our total business and I think that changes – it is probably increasing due to our national wholesale expansion. So we are writing a lot of business through wholesalers in Florida, California, and Texas. So I'm sure that ratio is climbing up as a result of that initiative.

Alper Sungur – Sidoti & Company

Okay, and just one last question. Territories other than the New York State there was roughly $51 million of premium written, 37% of the total, do you have a figure for that second quarter other than New York?

Michael Lee

I don't have it yet, Frank or our team in New York do you have that. We can give you a call and give you that figure. I don't think we have that readily available.

Alper Sungur – Sidoti & Company

Okay, sounds fair. Thanks so much.

Michael Lee

Okay.

Operator

(Operator instructions) We will go to a follow up from Mike Grasher – Piper Jaffray.

Mike Grasher – Piper Jaffray

Thank you, just a couple of additional. Michael can you remind us or at least update us on the program business at CastlePoint and how different or similar that is to the existing business at Tower Group?

Michael Lee

It is pretty much similar except that Tower focuses on writing using its own underwriting team to write each policy on a transactional basis as opposed to CastlePoint that looks at existing books of business from program underwriting agents and small insurance companies. So typically what CastlePoint does is look for program underwriting agents and small insurance companies that pretty much have similar underwriting guidelines, I mean, underwriting guidelines similar to Tower's. So typically we're seeing very similar business in terms of risk profile, however, obviously CastlePoint supports these program underwriting agents and small insurance companies that have – that utilize their own underwriting infrastructure and therefore CastlePoint’s business model is to participate on a pro rata basis with these clients. So they are like Tower like clients and we think this platform allows Tower not only to aggregate the type of business that they have historically written through wholesale and retail agents but also through programs underwriting agents and small insurance companies. So I think in the future going forward that should give us the ability to get large books of business but quite frankly, I mean we're focused on moderating that growth. We're very careful. In this past quarter, I think the percentage of business that we got from third party clients declined mainly because we have very stringent underwriting guidelines and profitability standards and we're seeing little less of an opportunity in terms of getting books of business that can meet those standards that we have established. So, I think the platform that we're getting through CastlePoint allows us to access books of business in a way that would supplement very nicely the type of business that we're getting from Tower. So, having that multiple distribution system will allow us to look for opportunities from these different types of distribution systems and allocate capital based on the opportunities that we see and that I think would allow us to navigate through the market cycles lot more effectively. And for that reason we think that CastlePoint business model is a good fit and we believe after the acquisition we will have lot more opportunities to meet our premium volume projections by utilizing a very diverse distribution system.

Mike Grasher – Piper Jaffray

Okay and then a numbers question Frank, I don't know if you've got – do you have the statutory capital at the end of the quarter?

Frank Colalucci

It is in the range of 295 to 300. We're just finalizing our statements.

Mike Grasher – Piper Jaffray

Okay, thank you.

Michael Lee

You are welcome.

Operator

And that does conclude the question and answer session. At this time, I will turn the conference back over to Mr. Lee for any closing remarks.

Michael Lee

Thank you. We continue to generate outstanding operating results and are seeing robust expansion opportunities, which we believe positions us to effectively navigate through the challenging market conditions. Our transaction with CastlePoint will position both shareholders groups to benefit from these opportunities in 2009. We appreciate your participation on our call and very much look forward to speaking with you again. Thank you.

Operator

And that does conclude today's conference. Again thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tower Group, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts