As filed with the Securities and Exchange Commission on November 4, 2005.
Registration No. 333-127730
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------------
Post-Effective Amendment No. 2
To
Form S-1
on
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------
TOWER GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 6331 13-3894120
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
120 Broadway, 14th Floor
New York, New York 10271
Telephone: (212) 655-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------------------------------------
Steven G. Fauth, Esq.
Senior Vice President and General Counsel
Tower Group, Inc.
120 Broadway, 14th Floor
New York, New York 10271
Telephone: (212) 655-2000
Facsimile: (212) 271-5492
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------------------------------
Copies to:
John Schwolsky, Esq.
Matthew Ricciardi, Esq.
LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, New York 10019
Telephone: (212) 424-8000
Facsimile: (212) 424-8500
Approximate date of commencement of the proposed sale of the securities to
the public: From time to time after the effective date of this Post-Effective
Amendment No. 2.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
500,000 Shares
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Common Stock
---------------
This prospectus covers the resale of up to 500,000 shares of our common
stock. These shares may be offered and sold from time to time by the selling
stockholder named in this prospectus, following the effective date of the
registration statement of which this prospectus is part. We will not receive any
of the proceeds from the sale of our common stock in this offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"TWGP." On October 28, 2005, the last quoted price of our common stock as
reported by the Nasdaq National Market was $18.53 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
---------------
The selling stockholder may sell all or a portion of these shares from time
to time in market transactions through any stock exchange or market on which our
common stock is then listed, in negotiated transactions or otherwise, and at
prices and on terms that will be determined by the then prevailing market price
or at negotiated prices, directly or through a broker or brokers, who may act as
agent or principal, or by a combination of such methods of sale.
Neither the Securities and Exchange Commission nor any state securities
commission or regulatory authority has approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
---------------
The date of this prospectus is , 2005
TABLE OF CONTENTS
Page
COMPANY OVERVIEW...............................................................4
RISK FACTORS...................................................................7
CERTAIN IMPORTANT INFORMATION.................................................20
NOTE ON FORWARD-LOOKING STATEMENTS............................................21
USE OF PROCEEDS...............................................................21
SELLING STOCKHOLDERS..........................................................23
PLAN OF DISTRIBUTION..........................................................24
LEGAL MATTERS.................................................................26
EXPERTS.......................................................................26
WHERE YOU CAN FIND MORE INFORMATION...........................................26
INCORPORATION BY REFERENCE....................................................26
3
COMPANY OVERVIEW
We provide specialized property and casualty insurance products and
services to small to mid-sized businesses and to individuals in New York City
and the adjacent areas of New York State. Through our subsidiaries Tower
Insurance Company of New York ("TICNY"), an insurance company, and Tower Risk
Management Corporation ("TRM"), an insurance services company, we offer a broad
range of profitable products and services in our chosen niche markets. In March
2005, we completed the acquisition of North American Lumber Insurance Company
("NALIC"), now known as Tower National Insurance Company ("TNIC"), a "shell"
insurance company that is not currently writing new business and has no net
liabilities. The company holds licenses that are valid and in good standing in
nine states. Because Tower Group recently acquired the company, we must amend
these licenses to reflect the company's new name and the fact that we have
obtained control of the company in order for TNIC to transact business under its
new name. We have completed this process in Massachusetts, where TNIC is
domiciled, and are in the process of making the appropriate filings to do so
with the insurance departments in each of the other states in which TNIC holds
valid licenses. In connection with the acquisition, all liabilities and assets
of TNIC were transferred to a liquidating trust with the exception of TNIC's
charter and insurance licenses. On August 5, 2005, following our shell
acquisition strategy, we announced our execution of an agreement to acquire MIIX
Insurance Company of New York ("MIIX"), an insurance company with licenses in
New York and New Jersey. Closing of the transaction is expected to occur by year
end and is contingent upon a variety of conditions including approval of the
transaction by the New York State Insurance Department. In the event of closing,
we will pay $225,000 in cash as well as an amount equal to MIIX's statutory
surplus which was approximately $7.8 million as of December 31, 2004. MIIX has
no liabilities for insurance losses. MIIX's assets consist of U.S. Treasuries
and cash.
We seek to expeditiously develop and deliver products in response to the
needs of our customers. We target select market segments that we believe are
underserved and therefore provide us with the best opportunity to obtain
favorable policy terms, conditions and pricing. TICNY provides coverage for many
different market segments, including nonstandard risks that do not fit the
underwriting criteria of standard carriers due to factors such as type of
business, location and the amount of premium per policy. TRM, through its
managing general agency, underwrites and produces business on behalf of other
insurance companies (which we refer to as TRM's issuing companies) but does not
itself bear risk on that business. It primarily focuses on commercial risks with
higher per policy premium, including risks that TICNY has not been able to
target due to historical surplus, rating and geographical license constraints.
TICNY also reinsures a modest amount of the premiums written by TRM's issuing
companies.
TICNY is a licensed property and casualty insurance company in New York and
as such is authorized to write various lines of insurance business as specified
in the New York Insurance Law and is subject to comprehensive regulation and
supervision, including limitations relating to reserves and statutory surplus.
As of September 30, 2005 TICNY is authorized to write business in New York, the
District of Columbia, Pennsylvania, Rhode Island and South Carolina. TNIC is a
property and casualty insurance company that is authorized to write business in
the Commonwealth of Massachusetts, Delaware, Maryland, Pennsylvania and
Vermont as of September 30, 2005, and is subject to comprehensive regulation and
supervision, including limitations relating to reserves and statutory surplus,
in Massachusetts, its state of domicile. We expect to begin writing property and
casualty insurance business through TNIC in New Jersey in the latter half of
2005 or early 2006. TRM is a non-risk bearing insurance service company and acts
as a managing general agency to bind risks, adjust claims and negotiate
reinsurance terms on behalf of other insurance companies. Since TRM is not an
insurance company, it does not have loss reserves or statutory surplus and it is
not subject to regulation and supervision as an insurance company. However, TRM
is subject to licensing requirements and regulation under the laws of New York
and New Jersey.
We offer commercial lines products that provide property, liability,
workers' compensation and automobile insurance to businesses such as retail and
wholesale stores, grocery stores, restaurants, artisan contractors and
residential and commercial buildings. In addition, we offer personal lines
products that provide property and liability insurance to individuals that own
modestly valued homes and dwellings. Generally, we target risks that have
reduced potential for loss severity and are not normally exposed to claims that
are complex and by their nature subject to late reporting or settlement, such as
product liability, asbestos or environmental claims.
In the 15 years since we began our operations, we have grown a profitable
premium base in TICNY of $178 million for the year ended December 31, 2004, and
we produced $53 million of premiums for TRM's issuing companies in 2004. We
transfer a significant portion of TICNY's risk and premiums to other insurance
companies through the use of reinsurance. TRM generates commission income from
its managing general agency by producing premiums for other insurance companies
and earns fees by administering claims and providing reinsurance intermediary
services on behalf of these and other companies. In doing so, TRM broadens our
market presence.
4
Generally, the premium volume that an insurance company can write, and the
amount of risk that it can assume, are limited by its surplus, which is a
measure of its net worth calculated under accounting principles prescribed by
insurance laws. TRM's activities have enabled us to create an insurance company
infrastructure capable of supporting a larger premium base than otherwise would
have been possible given TICNY's level of surplus.
Since beginning operations in 1990 with fewer than 10 employees and surplus
for statutory accounting purposes of $2.1 million, TICNY has grown to 327
employees and its statutory surplus has grown to $ 128.9 million as of June 30,
2005. From 2000 through 2004, TICNY increased its gross premiums written at an
average annual rate of 61.6% to $177.8 million in 2004 while maintaining
favorable loss, underwriting expense and combined ratios. The loss ratio is a
measure of underwriting profitability that expresses losses and related expenses
as a percentage of premiums earned. The underwriting expense ratio is a measure
of underwriting efficiency that expresses underwriting expenses as a percentage
of premiums earned. The combined ratio is the sum of the loss and the
underwriting expense ratios. The gross loss, underwriting expense and combined
ratios are calculated before the effect of reinsurance and the net ratios are
calculated after the effect of reinsurance. In 2004, TRM produced $53.4 million
of premiums for other insurance companies and generated total revenue of $16.4
million. We reported net income of $9.0 million in 2004.
Strategy
The business model that we have developed in the 15 years since we began
our operations has allowed us to succeed despite a limited pre-IPO capital base.
This model has enabled us to support a much larger premium base and create an
insurance company infrastructure otherwise not possible, ultimately leading to
the present stage of our development. With the infusion of the proceeds from our
IPO and the concurrent private placement in October 2004, we increased the
statutory surplus in TICNY and are pursuing continued profitable growth through
the following strategies:
o Reducing our Dependence on Reinsurance and Other Insurance Companies.
The additional capital from the IPO and the concurrent private
placement has allowed us to retain a greater percentage of our premium
writings and thereby reduce our use of quota share reinsurance in
TICNY. It has also provided us with greater flexibility to selectively
retain a larger portion of the business previously placed with other
insurance companies while continuing to utilize TRM to generate
commissions on premiums placed with other insurance companies and
non-risk bearing, service income. Depending on our capital and
changing quota share reinsurance market conditions, we may ultimately
eliminate our use of quota share reinsurance.
o Improving our Rating to Attract Customers in Other Market Segments. As
a result of the infusion of $98.0 million of the proceeds of the IPO
and concurrent private placement into TICNY, on October 26, 2004 TICNY
received a rating upgrade from A.M. Best to "A-" (Excellent) from
"B++" (Very Good). Our A.M. Best rating reflects A.M. Best's opinion
of TICNY's financial strength and is not an evaluation directed to
investors in our common stock nor a recommendation to buy, sell or
hold our common stock. Ratings are an increasingly important factor in
establishing the competitive position of insurance companies. An
increase in rating positions us to write policies in rating-sensitive
market segments that TICNY was not previously able to access,
especially policies written by TRM's issuing companies. This rating
increase should, over the long term, enable TICNY to reinsure other
insurance companies, including TRM's issuing companies, and assume a
greater portion of profitable reinsurance business.
o Expanding Territorially. On March 25, 2005, Tower Group, Inc. closed
on its purchase of the outstanding common stock of North American
Lumber Insurance Company and renamed it Tower National Insurance
Company. This acquisition will allow us to continue executing our plan
to expand territorially first in New Jersey, followed by expansion
into other states. On August 5, 2005, following our shell acquisition
strategy, we announced our execution of an agreement to acquire MIIX.
Closing of the transaction is expected to occur by year end and is
contingent upon a variety of conditions including approval of the
transaction by the New York State Insurance Department. In the event
of closing, we will pay $225,000 in cash as well as an amount equal to
MIIX's statutory surplus which was approximately $7.8 million as of
December 31, 2004. MIIX has no liabilities for insurance losses.
MIIX's assets consist of U.S. Treasuries and cash. We also expect to
make similar shell acquisitions in the future in order to offer
products in various market segments in the same territory. In
addition, we recently formed a Program Underwriting Unit to expand on
our regional distribution approach and allow us greater access to
established, highly
5
focused and narrowly defined industry classes of business with which
we are familiar but which are typically distributed over a broader
geographical area.
o Acquiring Books of Business. We intend to continue to acquire books of
business that fit our underwriting competencies from competitors,
managing agents and other producers. In September 2004, Tower entered
into a Commercial Renewal Rights Agreement with OneBeacon Insurance
Group LLC and some of its insurance company subsidiaries pursuant to
which we have acquired OneBeacon's rights to seek to renew a block of
commercial lines insurance policies in New York State. Through the
OneBeacon renewal rights transaction, we were able to add
approximately 280 retail agents throughout New York State to expand
our number of appointed agents to approximately 600 in 2004. As we
enter other states, we will continue to expand our distribution
capability by appointing quality wholesale and retail agents
o Expanding Non-Risk-Bearing Fee-Generating Services. We plan to
continue to generate commission and fee income through our insurance
services operation by offering managing general underwriting,
reinsurance intermediary and claims administration services.
o Continuing Implementation of Technological Improvements. We plan to
continue our implementation of technology-based initiatives such as
WebPlus, our web-based platform for quoting and capturing policy
submissions from our agents, in order to improve customer service and
further lower our underwriting expense ratio.
----------------------------
Our principal executive offices are located at 120 Broadway, 14th Floor,
New York, New York 10271, and our telephone number at that location is (212)
655-2000.
6
RISK FACTORS
An investment in our common stock involves a number of risks. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before investing in our
common stock. Additional risks not presently known to us, or that we currently
deem immaterial may also impair our business or results of operations. Any of
the risks described below could result in a significant or material adverse
effect on our financial condition or results of operations, and a corresponding
decline in the market price of our common stock. You could lose all or part of
your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus. See "Note
on Forward-Looking Statements."
Risks Related to Our Business
If our actual loss and loss adjustment expenses exceed our loss reserves,
our financial condition and results of operations could be significantly
adversely affected.
Our results of operations and financial condition depend upon our ability
to assess accurately the potential losses associated with the risks that we
insure and reinsure. We establish loss reserves to cover our estimated liability
for the payment of all losses and loss adjustment expenses incurred under the
policies that we write. Loss reserves include case reserves, which are
established for specific claims that have been reported to us, and reserves for
claims that have been incurred but not reported (or "IBNR"). To the extent that
loss and loss adjustment expenses exceed our estimates, we will be required to
immediately recognize the less favorable experience and increase loss reserves,
with a corresponding reduction in our net income in the period in which the
deficiency is identified. For example, over the past ten years we have
experienced adverse development of reserves for losses and loss adjustment
expenses incurred in prior years. In 2002, following an annual review by an
outside actuarial consulting company of TICNY's net loss and loss adjustment
reserves, we increased such reserves by $2.9 million.
With respect to losses on the property coverage portion of our commercial
and personal lines policies, the primary component of our loss reserve is a case
reserve, which is posted by the assigned examiner shortly after the loss is
reported. The extent of the damage is evaluated through a primarily fact-based
loss assessment process. Property losses are typically reported within days of
occurrence and case reserves are posted promptly. While this case reserving
process is not free of errors in determining the scope of the loss or deviations
at the time the loss is paid, major deviations are infrequent. Consequently,
commercial and personal property lines of business generally do not require
significant IBNR nor are they difficult to predict with a relative amount of
certainty. Absent significant changes by underwriting personnel in risk
selection and coverage offered and assuming examiners are properly trained with
the requisite experience, loss reserves on property lines of business remain
relatively predictable from an actuarial standpoint.
With respect to losses on the liability coverage portions of our commercial
and personal lines policies, the reserving process possesses characteristics
that make case and IBNR reserving inherently less susceptible to accurate
actuarial estimation. Unlike property losses, liability losses are claims made
by third parties of which the policyholder may not be aware and therefore may be
reported a significant time after the occurrence, sometimes years. In addition,
as liability claims most often involve claims of bodily injury, assessment of
the proper case reserve is a far more subjective process than claims involving
property damages. In addition, the determination of a case reserve for a
liability claim is often without the benefit of information, which develops
slowly over the life of the claim and can subject the case reserve to
substantial modification well after the claim was first reported. Numerous
factors impact the liability case reserving process, such as venue, the amount
of monetary damage, the permanence of the injury, the age of the claimant and
many others.
Estimating an appropriate level of loss and loss adjustment expense
reserves is an inherently uncertain process. Accordingly, actual loss and loss
adjustment expenses paid will likely deviate, perhaps substantially, from the
reserve estimates reflected in our consolidated financial statements. It is
possible that claims could exceed our loss and loss adjustment expense reserves
and have a material adverse effect on our financial condition or results of
operations.
7
TICNY and TRM conduct business in a concentrated geographical area. Any
single catastrophe or other condition affecting losses in this area could
adversely affect our results of operations.
TICNY currently writes business in a concentrated geographic area,
primarily in the southern portion of New York State, and reinsures business
produced by TRM in New York and to a lesser extent in New Jersey and
Pennsylvania. As a result, a single catastrophe occurrence, destructive weather
pattern, terrorist attack, regulatory development or other condition or general
economic trend affecting the region within which TICNY and TRM conduct their
business could adversely affect our financial condition or results of operations
more significantly than other insurance companies that conduct business across a
broader geographical area. During our history, we have not experienced any
single event that materially affected our results of operations. The most
significant single event was the terrorist attacks of September 11, 2001, as a
result of which we suffered $351,000 in net losses as of December 31, 2004.
The incidence and severity of catastrophes are inherently unpredictable and
our losses from catastrophes could be substantial. The occurrence of claims from
catastrophic events is likely to result in substantial volatility in our
financial condition or results of operations for any fiscal quarter or year and
could have a material adverse effect on our financial condition or results of
operations and our ability to write new business. Increases in the values and
concentrations of insured property may increase the severity of such occurrences
in the future. Although we attempt to manage our exposure to such events,
including through the use of reinsurance, the frequency or severity of
catastrophic events could exceed our estimates. As a result, the occurrence of
one or more catastrophic events could have a material adverse effect on our
financial condition or results of operations.
If we cannot obtain adequate reinsurance protection for the risks we have
underwritten, we may be exposed to greater losses from these risks or we may
reduce the amount of business we underwrite, which will reduce our revenues.
Under state insurance law, insurance companies are required to maintain a
certain level of capital in support of the policies they issue. In addition,
rating agencies will reduce an insurance company's ratings if the company's
premiums exceed specified multiples of its capital. As a result, the level of
TICNY's statutory surplus and capital limits the amount of premiums that it can
write and retain risk on. Historically, we have utilized reinsurance to expand
our capacity to write more business than TICNY's surplus would have otherwise
supported. As a result of the increase in TICNY's surplus with proceeds
contributed from the IPO and the concurrent private placement, the quota share
ceding percentage was reduced from 60% to 25% on October 1, 2004.
From time to time, market conditions have limited, and in some cases have
prevented, insurers from obtaining the types and amounts of reinsurance that
they consider adequate for their business needs. For example, beginning in 2001,
terms and conditions in the reinsurance market generally became less attractive
for insurers seeking reinsurance. In addition, recent investigations by the New
York State Attorney General, the SEC and other regulatory and government bodies
into the use of non-traditional reinsurance by certain reinsurers may lead to
the re-examination of applicable accounting standards or a reduction in the
availability of some types of reinsurance. In turn, these developments could
produce unfavorable changes in prices, reduced ceding commission revenue or
other potentially adverse changes in the terms of reinsurance. Accordingly, we
may not be able to obtain our desired amounts of reinsurance. In addition, even
if we are able to obtain such reinsurance, we may not be able to obtain such
reinsurance from entities with satisfactory creditworthiness or negotiate terms
that we deem appropriate or acceptable. Currently, three reinsurers provide
reinsurance to us on a quota share basis, six provide reinsurance on an excess
of loss basis and six provide catastrophe reinsurance. If we cannot obtain
adequate reinsurance protection for the risks we have underwritten, we may be
exposed to greater losses from these risks or we may be forced to reduce the
amount of business that we underwrite, which will reduce our revenues. As a
result, our inability to obtain adequate reinsurance protection could have a
material adverse effect on our financial condition or results of operation.
If we are able to obtain reinsurance, our reinsurers may not pay losses in
a timely fashion, or at all, which may cause a substantial loss and increase our
costs.
As of December 31, 2004, we had a net balance due in our favor from our
reinsurers of $129.6 million, consisting of $101.2 million in reinsurance
recoverables and $28.4 million in prepaid reinsurance premiums. This amount is
$3.5 million higher than our insurance subsidiary's statutory capital and
surplus at that date. Since October 1, 2003, we have sought to manage our
exposure to our reinsurers by placing our quota share reinsurance on a "funds
withheld" basis and requiring any non-admitted reinsurers to collateralize their
share of unearned premium and loss reserves. However, we have substantial
recoverables from our pre-October 1, 2003 reinsurance
8
arrangements that are uncollateralized, in that they are not supported by
letters of credit, trust accounts, "funds withheld" arrangements or similar
mechanisms intended to protect us against a reinsurer's inability or
unwillingness to pay. Our net exposure to our reinsurers totaled $66.2 million
as of December 31, 2004 (representing 13.4% of our total assets on that date),
including $46.8 million due from PXRE Reinsurance Company, which was recently
downgraded to "A-" (Excellent) by A.M. Best primarily as a result of losses
incurred in connection with Hurricanes Katrina and Rita. Because we remain
primarily liable to our policyholders for the payment of their claims, in the
event that one of our reinsurers under an uncollateralized treaty became
insolvent or refused to reimburse us for losses paid, or delayed in reimbursing
us for losses paid, our cash flow and financial results overall could be
materially and adversely affected.
Our insurance company subsidiary is rated "A-" (Excellent) by A.M. Best,
and a decline in this rating or the ratings assigned by other rating agencies
could affect our standing among brokers, agents and insureds and cause our sales
and earnings to decrease.
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. A.M. Best maintains a letter scale
rating system ranging from "A++" (Superior) to "F" (In Liquidation). Following
our IPO, TICNY was upgraded to "A-" (Excellent) by A.M. Best, which is the 4th
highest of 15 rating levels. There is no guarantee that TICNY will maintain this
rating, which is subject to, among other things, A.M. Best's evaluation of our
capitalization and performance on an ongoing basis including our management of
terrorism risks, loss reserves and expenses. The expiration of the Terrorism
Risk Insurance Act of 2002 on December 31, 2005, if not renewed or extended, may
impact any evaluation of our terrorism risk and, therefore, our rating.
In April 2003, in connection with the issuance of subordinated debentures
underlying trust preferred securities, TICNY also received an insurer financial
strength rating from Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"). The most recent rating from
Standard & Poor's is "BB+" with a stable outlook. A "BB+" rating is the 11th
highest of 21 rating levels used by Standard & Poor's.
Our ratings are subject to periodic review by, and may be revised downward
or revoked at the sole discretion of A.M. Best or Standard & Poor's. A decline
in a company's ratings indicating a reduced financial strength or other adverse
financial developments can cause concern about the viability of the downgraded
insurer among its agents, brokers and policyholders, resulting in a movement of
business away from the downgraded carrier to other stronger or more highly rated
carriers. Because many of our agents and brokers (whom we refer to as
"producers") and policyholders purchase our policies on the basis of our current
ratings, the loss or reduction of any of our ratings will adversely impact our
ability to retain or expand our policyholder base. The objective of the rating
agencies' rating systems is to provide an opinion of an insurer's financial
strength and ability to meet ongoing obligations to its policyholders. Our
ratings reflect the rating agencies' opinion of our financial strength and are
not evaluations directed to investors in our common stock nor recommendations to
buy, sell or hold our common stock.
The failure of any of the loss limitation methods we employ could have a
material adverse effect on our financial condition or our results of operations.
Various provisions of our policies, such as limitations or exclusions from
coverage or choice of forum, which have been negotiated to limit our risks, may
not be enforceable in the manner we intend. At the present time we employ a
variety of endorsements to our policies that limit exposure to known risks,
including but not limited to exclusions relating to coverage for lead paint
poisoning, asbestos and most claims for bodily injury or property damage
resulting from the release of pollutants.
In addition, the policies we issue contain conditions requiring the prompt
reporting of claims to us and our right to decline coverage in the event of a
violation of that condition. Our policies also include limitations restricting
the period in which a policyholder may bring a breach of contract or other claim
against the company, which in many cases is shorter than the statutory
limitations for such claims in the states in which we write business. While
these exclusions and limitations reduce the loss exposure to us and help
eliminate known exposures to certain risks, it is possible that a court or
regulatory authority could nullify or void an exclusion or legislation could be
enacted modifying or barring the use of such endorsements and limitations in a
way that would adversely affect our loss experience, which could have a material
adverse effect on our financial condition or results of operations.
9
We may face substantial exposure to losses from terrorism, we are currently
required by law to provide coverage against such losses, and the Terrorism Risk
Insurance Act of 2002 may expire on December 31, 2005.
Our location and concentration of business written in New York City and
adjacent areas expose us to losses from terrorism. We are required by state and
Federal law to provide coverage for terrorism in certain circumstances. We also
have limitations in our ceded reinsurance treaties pertaining to terrorism.
In response to the September 11, 2001 terrorist attacks, the United States
Congress enacted legislation designed to ensure, among other things, the
availability of insurance coverage for foreign terrorist acts, including the
requirement that insurers provide such coverage in certain circumstances. The
Terrorism Risk Insurance Act of 2002 (the "Terrorism Act") requires commercial
property and casualty insurance companies to offer coverage for certain acts of
terrorism and has established a Federal assistance program through the end of
2005 to help such insurers cover claims related to future terrorism-related
losses. Legislation has been introduced to extend the Terrorism Act, but we
cannot predict whether or when any such extension may be enacted and what the
final terms of such legislation would be.
Pursuant to the Terrorism Act, TICNY must offer insureds the option to
purchase coverage for certified acts of terrorism for an additional premium or
decline such coverage. When the coverage is not purchased, we endorse the policy
to exclude coverage for certified acts of terrorism, but losses from an act of
terrorism that is not a certified event may be covered in any case. Also, even
for certified acts of terrorism, losses from fire following the act of terrorism
are covered.
The Terrorism Act reimburses up to 90% of the losses to commercial insurers
due to certified acts of terrorism in excess of a deductible. Our deductible in
2004 was 10% of our 2003 direct earned premium on commercial lines. Our
deductible in 2005 is 15% of our 2004 direct earned premiums on commercial
lines. Excess of loss reinsurance treaties for multiple-line and workers'
compensation contain various sublimits for terrorism coverage.
In the event that the Federal assistance under the Terrorism Act is not
extended or is altered (e.g., by increasing the deductible or reducing the
amount of loss that is reimbursed), our potential losses from a terrorist attack
could be substantially larger than previously expected. Potential future changes
to the Terrorism Act could also adversely affect us by causing our reinsurers to
increase prices or withdraw from certain markets where terrorism coverage is
required.
In addition, in the event that the Terrorism Act is not extended, while we
would no longer be required to offer the insured the ability to purchase
coverage for certified acts of terrorism, the New York State Insurance
Department has not approved a terrorism exclusion, so it is possible that we
would not be permitted to exclude losses resulting from terrorist acts in New
York State for accounts under $100,000 in premium size. An increased exposure to
terrorism risk as a result of the expiration of the Terrorism Act may impact our
current underwriting strategy in New York City, our ability to secure
reinsurance, our rating, as well as other elements of our operations.
A terrorist attack or series of attacks in New York City or the surrounding
areas could have a material adverse effect on our results of operations and
financial condition. In addition, terrorist attacks in these areas could depress
economic activity in our core market, which could hurt our business.
The effects of emerging claim and coverage issues on our business are
uncertain.
As industry practices and legal, judicial, social and other environmental
conditions change, unexpected and unintended issues related to claims and
coverage may emerge. These issues may adversely affect our business by either
extending coverage beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become apparent until
some time after we have issued insurance or reinsurance contracts that are
affected by the changes. As a result, the full extent of liability under our
insurance or reinsurance contracts may not be known for many years after a
contract is issued.
One recent example of an emerging claim and coverage issue is New York City
sidewalk liability. Effective as of September 14, 2003, a new law enacted by the
New York City Council allows an injured party to sue the owner of a commercial
building located in the five boroughs of New York City for any property damage
or personal injury that was caused by the failure of the owner to maintain the
sidewalk abutting the owner's building in a reasonably safe condition.
Previously, the City of New York, and not the building owner, was responsible
for the maintenance of city sidewalks. We have adjusted our underwriting
guidelines to attempt to screen out exposures that present a
10
heightened risk from this new law. However, the size and extent of the claims
that may emerge due to this change in law are as yet uncertain.
Since we depend on a few producers for a large portion of our revenues,
loss of business provided by any one of them could adversely affect us.
Our products are marketed by independent producers. Other insurance
companies compete with us for the services and allegiance of these producers.
These producers may choose to direct business to our competitors, or may direct
less desirable risks to us. For the twelve months ended December 31, 2004,
approximately 49% of the total of TICNY's gross premiums written and premiums
produced by TRM on behalf of its issuing companies was derived from our top 10
producers. For the twelve months ended December 31, 2004, Morstan General
Agency, Davis Agency Inc., Simon Agency, Inc. and CRC Insurance Inc. produced
14%, 7%, 7% and 5%, respectively, of the total of TICNY's gross premiums written
and the premiums produced by TRM on behalf of its issuing companies. A
significant decrease in business from, or the entire loss of, our largest
producer or several of our other large producers would cause us to lose premium
and require us to seek alternative producers or to increase submissions from
existing producers. In the event we are unable to find replacement producers or
increase business produced by our existing producers, our premium revenues would
decrease and our business and results of operations would be materially and
adversely affected.
Our reliance on producers subjects us to their credit risk.
With respect to the premiums produced by TRM for its issuing companies and
a limited amount of premium volume written by TICNY, producers collect premium
from the policyholders and forward them to TRM and TICNY. In certain
jurisdictions, including New York, when the insured pays premiums for these
policies to producers for payment over to TRM and TICNY, the premiums might be
considered to have been paid under applicable insurance laws and regulations and
the insured will no longer be liable to us for those amounts, whether or not we
have actually received the premiums from the producer. Consequently, we assume a
degree of credit risk associated with producers. Although producers' failures to
remit premiums to us have not caused a material adverse impact on us to date,
there have been instances where producers collected premium but did not remit it
to us and we were nonetheless required under applicable law to provide the
coverage set forth in the policy despite the absence of premium. Because the
possibility of these events is dependent in large part upon the financial
condition and internal operations of our producers, which in most cases are not
public information, we are not able to quantify the exposure presented by this
risk. If we are unable to collect premiums from our producers in the future, our
financial condition and results of operations could be materially and adversely
affected.
We operate in a highly competitive environment. If we are unsuccessful in
competing against larger or more well-established rivals, our results of
operations and financial condition could be adversely affected.
The property and casualty insurance industry is highly competitive and has
historically been characterized by periods of significant pricing competition
alternating with periods of greater pricing discipline, during which competition
focuses upon other factors. In recent years the market environment was favorable
in that rates increased significantly. During the latter part of 2004, increased
competition in the marketplace became evident and, as a result, rate increases
have become moderate. A softening of the market could lead to reduced growth or
a reduction in premium volume, adverse effects on profitability and, ultimately,
dislocation in the insurance industry. A.M. Best estimates that industry wide
growth in net premiums written in the homeowner's line slowed in 2003 and 2004,
and is expected to slow further in 2005, while industry wide net premiums
written in commercial lines grew significantly less in 2004 than in 2003 and are
projected to decline slightly in 2005. Industry policyholders' surplus increased
to record levels in 2004 to approximately $387.5 billion as projected by A.M.
Best, a 9.5% increase over 2003. This additional underwriting capacity may
result in increased competition from other insurers seeking to expand the types
or amount of business they write or cause a shift in focus by some insurers to
maintaining market share at the expense of underwriting discipline. We attempt
to compete based primarily on products offered, service, experience, the
strength of our client relationships, reputation, speed of claims payment,
perceived financial strength, ratings, scope of business, commissions paid and
policy and contract terms and conditions. There are no assurances that in the
future we will be able to retain or attract customers at prices which we
consider to be adequate.
We compete with major U.S. insurers and certain underwriting syndicates,
including large national companies such as The St. Paul Travelers Companies,
Inc., Allstate Insurance Company and State Farm Fire and Casualty Company;
regional insurers such as OneBeacon Insurance Company; and smaller, more local
competitors such as Magna Carta Companies, Utica First Insurance Company,
Greater New York Mutual Insurance Company,
11
Commercial Mutual Insurance Company and Otsego Mutual Fire Insurance Company.
Many of these companies have greater financial, marketing and management
resources than we do. Many of these competitors also have more experience,
better ratings and more market recognition than we do. We seek to distinguish
ourselves from our competitors by providing a broad product line offering and
targeting those market segments that provide us with the best opportunity to
earn an underwriting profit. We also compete with other companies by quickly and
opportunistically delivering products that respond to our producers' needs.
In addition to competition in the operation of our business, we face
competition from a variety of sources in attracting and retaining qualified
employees. We also face competition because of entities that self-insure,
primarily in the commercial insurance market. From time to time, established and
potential customers may examine the benefits and risks of self-insurance and
other alternatives to traditional insurance.
In addition, a number of new, proposed or potential legislative or industry
developments could also increase competition in our industries. These
developments include:
o an increase in capital-raising by companies in our line of business,
which could result in stronger competitors, new entrants to our
markets and an excess of capital in the industry, all of which may
make it harder to generate sufficient business at profitable rates;
and
o changing practices and other effects caused by the internet (e.g.,
increased availability of information regarding different insurance
companies and their policies and lower barriers to entry into new
geographic markets by insurance companies), which have led to greater
competition in the insurance business and, in some cases, greater
expectations for customer service.
New competition could cause the demand for insurance to fall or the expense
of customer acquisition and retention to increase, either of which could have a
material adverse effect on our financial condition or results of operations.
We may experience difficulty in expanding our business, which could
adversely affect our results of operations and financial condition.
We plan to expand our licensing or acquire other insurance companies with
multi-state property and casualty licensing in order to expand our product and
service offerings geographically. TICNY is in the process of expanding its
licensing into multiple states and TNIC is in the process of amending its
licenses in multiple states in order to transact business under its new name. We
have completed this process in Massachusetts, where TNIC is domiciled, and are
in the process of making the appropriate filings to do so in New Jersey. We also
intend to continue to acquire books of business that fit our underwriting
competencies from competitors, managing agents and other producers and to
acquire other insurance companies. This expansion strategy may present special
risks:
o We have achieved our prior success by applying a disciplined approach
to underwriting and pricing in select markets that are not well served
by our competitors. We may not be able to successfully implement our
underwriting, pricing and product strategies in companies or books of
business we acquire or over a larger operating region;
o We may not be successful in obtaining the required regulatory
approvals to offer additional insurance products or expand into
additional states;
o We have limited acquisition experience and may not be able to
efficiently combine an acquired company or block of business with our
present financial, operational and management information systems; and
o An acquisition could dilute the book value and earnings per share of
our common stock.
We cannot assure you that we will be successful in expanding our business
or that any new business will be profitable. If we are unable to expand our
business or to manage our expansion effectively, our results of operations and
financial condition could be adversely affected.
We could be adversely affected by the loss of one or more principal
employees or by an inability to attract and retain staff.
Our success will depend in substantial part upon our ability to attract and
retain qualified executive officers, experienced underwriting talent and other
skilled employees who are knowledgeable about our business. We rely
substantially upon the services of our executive management team. Although we
are not aware of any planned
12
departures or retirements, if we were to lose the services of members of our
management team, our business could be adversely affected. We believe we have
been successful in attracting and retaining key personnel throughout our
history. We have employment agreements with Michael H. Lee, our Chairman of the
Board, President and Chief Executive Officer, and other members of our senior
management team. We do not currently maintain key man life insurance policies
with respect to our employees except for Michael H. Lee.
If issuing companies or reinsurers are unwilling to participate in
insurance arranged by TRM, our financial condition or results of operations
could be materially adversely affected.
TRM produces insurance for other insurance companies, which we call TRM's
issuing companies that in turn cede 100% of the business to reinsurers,
including TICNY. TRM receives commissions and fees for producing the insurance
and arranging the reinsurance. TRM's ability to generate fee income therefore
depends upon the willingness of issuing companies to write the business produced
by TRM, which depends upon the willingness of reinsurers, including TICNY, to
assume the risk on the business produced by TRM. For example, in 2001 commission
revenue generated by TRM's managing general agency began to decline, as we were
unable to secure favorable reinsurance terms for the business produced for TRM's
issuing companies due to the unfavorable loss experience on that business during
the soft market. Currently, all of the premium produced by TRM is written
through two issuing insurance companies, Virginia Surety Company, Inc.
("Virginia Surety") and State National Insurance Company, Inc. ("State
National"). The contracts with these companies are terminable by either party
upon 90 days notice. If we are unable to successfully structure a reinsurance
transaction that would be satisfactory to these issuing companies or if the
issuing companies are otherwise unwilling to do business with us, and we are
unable to find additional or replacement issuing companies, we would have to
rely on our own insurance company to write the premium currently produced by TRM
for these issuing companies or else forego some or all of this business and the
associated fee revenues. Writing this business in our own insurance company
would require us to bear additional insurance risk. Depending on our insurance
companies' statutory surplus and our premium growth, we may not be able to write
some or all of this business. Accordingly, the inability to retain or replace a
TRM issuing company or to obtain reinsurance acceptable to us or the issuing
companies could have a material adverse effect on our financial condition or
results of operations.
An issuing company's insolvency or weakened financial condition may have an
adverse impact on TRM's revenues.
In the event of the insolvency or liquidation of an issuing company or
other event having a negative impact on the financial strength of an issuing
company, TRM may be unable to collect commissions due on policies written
through that issuing company and may be unable to collect other fees due such as
claims administration fees. Commission revenue on policies written through TRM's
issuing companies represented 10.7% of consolidated revenues in each of 2004 and
2003, 7.5% in 2002 and 24.5% in 2001.
For example, one of TRM's previous issuing companies, Legion Insurance
Company ("Legion"), was placed into rehabilitation in March of 2002 and then
subsequently declared insolvent and placed into liquidation in July of 2003.
Although we were able to minimize the adverse financial impact in this case by
terminating our agreement with Legion prior to regulatory action being taken,
the insolvency, receivership, liquidation or weakened financial condition of one
of TRM's issuing companies would leave TRM with no guarantee of full or partial
payments of monies due. Accordingly, as a result of such an event, our financial
condition or results of operations could be materially adversely affected.
Our investment performance may suffer as a result of adverse capital market
developments or other factors, which may affect our financial results and
ability to conduct business.
We invest the premium we receive from policyholders until it is needed to
pay policyholder claims or other expenses. At December 31, 2004, our invested
assets consisted of $224.5 million in fixed maturity securities, $2.5 million in
equity securities $1.4 million in common trust securities - statutory business
trusts. Additionally, we held $55.2 million in cash and cash equivalents. In
2004, we earned $5.1 million of net investment income representing 4.7% of our
total revenues and 34.4% of our pre-tax income. Our funds are invested by a
professional investment advisory management firm under the direction of our
management team in accordance with detailed investment guidelines set by us.
Although our investment policies stress diversification of risks, conservation
of principal and liquidity, our investments are subject to a variety of
investment risks, including risks relating to general economic conditions,
market volatility, interest rate fluctuations, liquidity risk and credit and
default risk. (Interest rate risk is discussed below under the heading, "--We
may be adversely affected by interest rate changes"). In particular, the
volatility of our claims may force us to liquidate securities, which may cause
us to incur capital losses. If we do not
13
structure our investment portfolio so that it is appropriately matched with our
insurance and reinsurance liabilities, we may be forced to liquidate investments
prior to maturity at a significant loss to cover such liabilities. Investment
losses could significantly decrease our asset base and statutory surplus,
thereby affecting our ability to conduct business.
We may be adversely affected by interest rate changes.
Our operating results are affected, in part, by the performance of our
investment portfolio. Our investment portfolio contains interest rate sensitive
instruments, such as bonds, which may be adversely affected by changes in
interest rates. A significant increase in interest rates could have a material
adverse effect on our financial condition or results of operations. Generally,
bond prices decrease as interest rates rise. Changes in interest rates could
also have an adverse effect on our investment income and results of operations.
For example, if interest rates decline, investment of new premiums received and
funds reinvested will earn less than expected.
In addition, our investment portfolio includes mortgage-backed securities.
As of December 31, 2004, mortgage-backed securities constituted approximately
28.1% of our invested assets. As with other fixed income investments, the fair
market value of these securities fluctuates depending on market and other
general economic conditions and the interest rate environment. Changes in
interest rates can expose us to prepayment risks on these investments. When
interest rates fall, mortgage-backed securities are prepaid more quickly than
expected and the holder must reinvest the proceeds at lower interest rates. Our
mortgage-backed securities currently consist of securities with features that
reduce the risk of prepayment, but there is no guarantee that we will not invest
in other mortgage-backed securities that lack this protection. In periods of
increasing interest rates, mortgage-backed securities are prepaid more slowly,
which may require us to receive interest payments that are below the interest
rates then prevailing for longer than expected.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political conditions
and other factors beyond our control.
We may require additional capital in the future, which may not be available
or only available on unfavorable terms.
Our future capital requirements depend on many factors, including our
ability to write new business successfully and to establish premium rates and
reserves at levels sufficient to cover losses. To the extent that our present
capital is insufficient to meet future operating requirements and/or cover
losses, we may need to raise additional funds through financings or curtail our
growth. Based on our current operating plan, we believe current capital together
with our anticipated retained earnings, will support our operations without the
need to raise additional capital. However, we cannot provide any assurance in
that regard, since many factors will affect our capital needs and their amount
and timing, including our growth and profitability, our claims experience, and
the availability of reinsurance, as well as possible acquisition opportunities,
market disruptions and other unforeseeable developments. If we had to raise
additional capital, equity or debt financing may not be available at all or may
be available only on terms that are not favorable to us. In the case of equity
financings, dilution to our stockholders could result, and in any case such
securities may have rights, preferences and privileges that are senior to those
of the shares offered hereby. If we cannot obtain adequate capital on favorable
terms or at all, our business, financial condition or results of operations
could be materially adversely affected.
The regulatory system under which we operate, and potential changes
thereto, could have a material adverse effect on our business.
TICNY is subject to comprehensive regulation and supervision in New York,
which is the only state in which TICNY is presently licensed. The purpose of the
New York insurance laws and regulations is to protect insureds, not our
stockholders. These regulations are generally administered by the New York State
Insurance Department and relate to, among other things:
o standards of solvency, including risk based capital measurements;
o restrictions on the nature, quality and concentration of investments;
o required methods of accounting;
o rate and form regulation pertaining to certain of our insurance
businesses; and
o potential assessments for the provision of funds necessary for the
settlement of covered claims under certain policies provided by
impaired, insolvent or failed insurance companies.
14
Significant changes in these laws and regulations could make it more
expensive to conduct our business. The New York Insurance Department also
conducts periodic examinations of the affairs of insurance companies and
requires the filing of annual and other reports relating to financial condition,
holding company issues and other matters. These regulatory requirements may
adversely affect or inhibit our ability to achieve some or all of our business
objectives.
TICNY may not be able to obtain or maintain necessary licenses, permits,
authorizations or accreditations in New York or in new states we intend to
enter, or may be able to do so only at significant cost. In addition, we may not
be able to comply fully with or obtain appropriate exemptions from, the wide
variety of laws and regulations applicable to insurance companies or holding
companies. Failure to comply with or to obtain appropriate authorizations and/or
exemptions under any applicable laws could result in restrictions on our ability
to do business or engage in certain activities that are regulated in one or more
of the jurisdictions in which we operate and could subject us to fines and other
sanctions, which could have a material adverse effect on our business. In
addition, changes in the laws or regulations to which our operating subsidiaries
are subject could adversely affect our ability to operate and expand our
business or could have a material adverse effect on our financial condition or
results of operations.
TNIC is subject to comprehensive regulation and supervision in
Massachusetts, the only state in which TNIC is currently authorized to transact
business. TNIC is currently in the process of amending its license in New Jersey
in order to transact business in that state.
In recent years, the U.S. insurance regulatory framework has come under
increased Federal scrutiny, and some state legislators have considered or
enacted laws that may alter or increase state regulation of insurance and
reinsurance companies and holding companies. Moreover, the National Association
of Insurance Commissioners ("NAIC"), which is an association of the insurance
commissioners of all 50 states and the District of Columbia, and state insurance
regulators regularly re-examine existing laws and regulations, often focusing on
modifications to holding company regulations, interpretations of existing laws
and the development of new laws. Changes in these laws and regulations or the
interpretation of these laws and regulations could have a material adverse
effect on our financial condition or results of operations. The recent highly
publicized investigations of the insurance industry by the New York State
Attorney General and other regulators and government officials have led to, and
may continue to lead to, additional legislative and regulatory requirements for
the insurance industry and may increase the costs of doing business.
The activities of TRM are subject to licensing requirements and regulation
under the laws of New York and New Jersey. TRM's business depends on the
validity of, and continued good standing under, the licenses and approvals
pursuant to which it operates, as well as compliance with pertinent regulations.
Licensing laws and regulations vary from jurisdiction to jurisdiction. In
all jurisdictions, the applicable licensing laws and regulations are subject to
amendment or interpretation by regulatory authorities. Generally such
authorities are vested with relatively broad and general discretion as to the
granting, renewing and revoking of licenses and approvals. Licenses may be
denied or revoked for various reasons, including the violation of such
regulations, conviction of crimes and the like. Possible sanctions which may be
imposed include the suspension of individual employees, limitations on engaging
in a particular business for specified periods of time, revocation of licenses,
censures, redress to clients and fines. In some instances, TRM follows practices
based on its or its counsels' interpretations of laws and regulations, or those
generally followed by the industry, which may prove to be different from those
of regulatory authorities.
If New York drastically increases the assessments TICNY is required to pay,
our results of operations and financial condition will suffer.
TICNY is subject to assessments in New York for various purposes, including
the provision of funds necessary to fund the operations of the New York
Insurance Department and the New York Security Fund, which pays covered claims
under certain policies provided by impaired, insolvent or failed insurance
companies. In 2004, our assessment for the New York Insurance Department was
$556,000 and our New York Security Fund assessment was $435,000. These
assessments are generally set based on an insurer's percentage of the total
premiums written in New York State within a particular line of business. We are
permitted to assess premium surcharges on workers' compensation policies that
are based on statutorily enacted rates. However, assessments by the various
workers' compensation funds have recently exceeded the permitted surcharges
resulting in additional expenses of $1,143,000 in 2004. As of December 31, 2004
the liability for the various workers' compensation funds, which includes
amounts assessed on workers' compensation policies was $1,839,000. This amount
is expected to be paid over an
15
eighteen month period ending June 30, 2006. As our company grows, our share of
any assessments may increase. However, we cannot predict with certainty the
amount of future assessments because they depend on factors outside our control,
such as insolvencies of other insurance companies. Significant assessments could
have a material adverse effect on our financial condition or results of
operations.
Our ability to meet ongoing cash requirements and pay dividends may be
limited by our holding company structure and regulatory constraints.
Tower is a holding company and, as such, has no direct operations of its
own. Tower does not expect to have any significant operations or assets other
than its ownership of the shares of its operating subsidiaries. Dividends and
other permitted payments from our operating subsidiaries are expected to be our
primary source of funds to meet ongoing cash requirements, including any future
debt service payments and other expenses, and to pay dividends, if any, to our
stockholders. TICNY and TNIC are subject to significant regulatory restrictions
limiting their ability to declare and pay dividends.
As of June 30,2005 the maximum amount of distributions that TICNY could pay
to Tower without approval of the New York Insurance Department was $1.5 million.
The inability of TICNY to pay dividends and other permitted payments in an
amount sufficient to enable us to meet our cash requirements at the holding
company level would have a material adverse effect on our operations and our
ability to pay dividends to our stockholders. While we currently intend to pay
dividends, if you require dividend income you should carefully consider these
risks before relying on an investment in our company. For more information
regarding restrictions on the payment of dividends.
Although we have paid cash dividends in the past, we may not pay cash
dividends in the future.
We have a history of paying dividends to our stockholders when sufficient
cash is available. We have paid dividends in the first three quarters of 2005,
and we currently intend to pay dividends in the remaining quarter of 2005.
However, future cash dividends will depend upon our results of operations,
financial condition, cash requirements and other factors, including the ability
of our subsidiaries to make distributions to us, which ability is restricted in
the manner previously discussed in this section. Also, there can be no assurance
that we will continue to pay dividends even if the necessary financial
conditions are met and if sufficient cash is available for distribution.
Risks Related to Our Industry
The threat of terrorism and military and other actions may adversely affect
our investment portfolio and may result in decreases in our net income, revenue
and assets under management.
The threat of terrorism, both within the United States and abroad, and
military and other actions and heightened security measures in response to these
types of threats, may cause significant volatility and declines in the equity
markets in the United States, Europe and elsewhere, as well as loss of life,
property damage, additional disruptions to commerce and reduced economic
activity. Some of the assets in our investment portfolio may be adversely
affected by declines in the equity markets and economic activity caused by the
continued threat of terrorism, ongoing military and other actions and heightened
security measures.
We cannot predict at this time whether and the extent to which industry
sectors in which we maintain investments may suffer losses as a result of
potential decreased commercial and economic activity, or how any such decrease
might impact the ability of companies within the affected industry sectors to
pay interest or principal on their securities, or how the value of any
underlying collateral might be affected.
We can offer no assurances that terrorist attacks or the threat of future
terrorist events in the United States and abroad or military actions by the
United States will not have a material adverse effect on our business, financial
condition or results of operations.
Our results of operations and revenues may fluctuate as a result of many
factors, including cyclical changes in the insurance industry, which may cause
the price of our securities to be volatile.
The results of operations of companies in the property and casualty
insurance industry historically have been subject to significant fluctuations
and uncertainties. Our profitability can be affected significantly by:
o competition;
o rising levels of loss costs that we cannot anticipate at the time we
price our products;
16
o volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist attacks;
o changes in the level of reinsurance capacity and capital capacity;
o changes in the amount of loss and loss adjustment expense reserves
resulting from new types of claims and new or changing judicial
interpretations relating to the scope of insurers' liabilities; and
o fluctuations in equity markets and interest rates, inflationary
pressures and other changes in the investment environment, which
affect returns on invested assets and may impact the ultimate payout
of losses.
The supply of insurance is related to prevailing prices, the level of
insured losses and the level of industry surplus which, in turn, may fluctuate
in response to changes in rates of return on investments being earned in the
insurance and reinsurance industry. As a result, the insurance business
historically has been a cyclical industry characterized by periods of intense
price competition due to excessive underwriting capacity as well as periods when
shortages of capacity permitted favorable premium levels. Premium levels for
many products have increased in recent years. However, beginning in the latter
part of 2004, rates for property and casualty insurance products began to
moderate, and for certain products, began to decrease due to increased levels of
competition. A. M. Best estimates that industry wide growth in net premiums
written in the homeowner's line slowed in 2003 and 2004, and is expected to slow
further in 2005, while industry wide net premiums written in commercial lines
grew significantly less in 2004 than in 2003 and are projected to decline
slightly in 2005. The supply of insurance and reinsurance as measured by the
amount of industry policyholders' surplus has increased and may continue to
increase, either by capital provided by new entrants or by the commitment of
additional capital by existing insurers or reinsurers, which may cause prices to
decrease further. Industry policyholders' surplus increased to record levels in
2004 to approximately $387.5 billion as projected by A.M. Best, a 9.5% increase
over 2003. This additional underwriting capacity may result in increased
competition from other insurers seeking to expand the types or amount of
business they write or cause a shift in focus by some insurers to maintaining
market share at the expense of underwriting discipline. These factors could lead
to a significant reduction in premium rates, less favorable policy terms and
fewer submissions for our underwriting services. In addition to these
considerations, changes in the frequency and severity of losses suffered by
insureds and insurers may affect the cycles of the insurance business
significantly, and we expect to experience the effects of such cyclicality. This
cyclicality could have a material adverse effect on our results of operations
and revenues, which may cause the price of our securities to be volatile.
Risks Related to Our Common Stock and this Offering
The price of our common stock may decrease after this offering.
The trading price of shares of our common stock may decline for many
reasons, some of which are beyond our control, including among others:
o quarterly variations in our results of operations;
o changes in expectations as to our future results of operations,
including financial estimates by securities analysts and investors;
o announcements by third parties of claims against us;
o changes in law and regulation;
o results of operations that vary from those expected by securities
analysts and investors; and
o future sales of shares of our common stock.
Recently, stock prices of companies in the insurance industry have
experienced substantial volatility as a result of ongoing investigations of the
insurance industry and certain practices by the Attorney General of the State of
New York, other state attorneys general, state insurance regulators and the
Securities and Exchange Commission. These investigations began by focusing on
compensation paid to brokers for producing business and anti-competitive
practices by some insurers in connection with insurance premium quotes, and have
more recently spread to include finite insurance and reinsurance agreements. The
recent volatility in insurance industry stocks may continue for the foreseeable
future and may affect the price of our stock regardless of our practices. These
investigations concern an evolving area of the law, and we can give no assurance
regarding its consequences for the industry or for us.
17
Future sales of shares of our common stock may affect their market price
and the future exercise of options and warrants may depress our stock price and
will result in immediate and substantial dilution.
We cannot predict what effect, if any, future sales of shares of our common
stock, or the availability of shares for future sale, will have on the market
price of our common stock. Sales of substantial amounts of our common stock in
the public market following our initial public offering, or the perception that
such sales could occur, could adversely affect the market price of our common
stock and may make it more difficult for you to sell your shares at a time and
price which you deem appropriate.
As of the date of this prospectus, there are 19,774,892 shares of our
common stock outstanding. Moreover, 308,985 additional shares of our common
stock will be issuable upon the full exercise or conversion of outstanding
vested options and 189,000 additional shares of common stock will be issuable
upon exercise of a warrant issued to Friedman, Billings, Ramsey & Co., Inc. that
became exercisable on October 29, 2005. In the event that any outstanding
options or warrants are exercised, you will suffer immediate and substantial
dilution of your investment.
Applicable insurance laws may make it difficult to effect a change of
control of our company.
TICNY, our principal insurance company subsidiary, is domiciled in New York
State. Before a person can acquire control of a New York insurance company,
prior written approval must be obtained from the Superintendent of Insurance of
the State of New York. Prior to granting approval of an application to acquire
control of a New York insurer, the Superintendent of Insurance of the State of
New York will consider such factors as the financial strength of the applicant,
the integrity and management of the applicant's board of directors and executive
officers, the acquirer's plans for the future operations of the domestic insurer
and any anticompetitive results that may arise from the consummation of the
acquisition of control. Pursuant to the New York insurance holding company
statute, "control" means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of the company,
whether through the ownership of voting securities, by contrast (except a
commercial contract for goods or non-management services) or otherwise. Control
is presumed to exist if any person directly or indirectly owns, controls or
holds with the power to vote 10% or more of the voting securities of the
company; however, the New York State Insurance Department, after notice and a
hearing, may determine that a person or entity which directly or indirectly
owns, controls or holds with the power to vote less than 10% of the voting
securities of the company, "controls" the company. Because a person acquiring
10% or more of our common stock would indirectly control the same percentage of
the stock of TICNY, the insurance change of control laws of New York would apply
to such a transaction.
Our subsidiary insurance company, TNIC, is domiciled in Massachusetts.
Before a person can acquire control of a Massachusetts insurance company, prior
written approval must be obtained from the Commissioner of Insurance of the
Commonwealth of Massachusetts. Prior to granting approval of an application to
acquire control of a Massachusetts insurer, the Commissioner of Insurance of
Massachusetts, after notice and a hearing, will consider such factors as the
financial strength of the applicant, the integrity and management of the
applicant's board of directors and executive officers, the acquirer's plans for
the future operations of the domestic insurer and any anticompetitive results
that may arise from the consummation of the acquisition of control. Pursuant to
the Massachusetts law, "control" means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of the
company, whether through the ownership of voting securities, by contract (except
a commercial contract for goods or non-management services) or otherwise.
Control is presumed to exist if any person directly or indirectly owns, controls
or holds with the power to vote 10% or more of the voting securities of the
company. Because a person acquiring 10% or more of our common stock would
indirectly control the same percentage of the stock of TNIC the insurance change
of control laws of Massachusetts would apply to such a transaction.
18
These laws may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of our company, including through
transactions, and in particular unsolicited transactions, that some or all of
our stockholders might consider to be desirable.
A few large stockholders may be able to influence stockholder decisions,
which may conflict with your interests as a stockholder.
Immediately after this offering, Michael H. Lee, our Chairman of the Board,
President and Chief Executive Officer, and members of his family will own
beneficially shares representing approximately 14.5% of the voting power of our
common stock on a diluted basis. As a result of their ownership position, these
stockholders voting together may have the ability to significantly influence
matters requiring stockholder approval, including, without limitation, the
election and removal of directors and mergers, acquisitions, changes of control
of our company and sales of all or substantially all of our assets. This
concentration of stock ownership may make it difficult for stockholders to
replace management. Your interests as a stockholder may conflict with the
interests of these stockholders and the trading price of shares of our common
stock could be adversely affected.
Anti-takeover provisions in our amended and restated certificate of
incorporation and amended and restated by-laws and under the laws of the State
of Delaware could impede an attempt to replace or remove our directors or
otherwise effect a change of control of our company, which could diminish the
value of our common stock.
Our amended and restated certificate of incorporation and amended and
restated by-laws contain provisions that may entrench directors and make it more
difficult for stockholders to replace directors even if the stockholders
consider it beneficial to do so. In addition, these provisions could delay or
prevent a change of control that a stockholder might consider favorable. For
example, these provisions may prevent a stockholder from receiving the benefit
from any premium over the market price of our common stock offered by a bidder
in a potential takeover. Even in the absence of an attempt to effect a change in
management or a takeover attempt, these provisions may adversely affect the
prevailing market price of our common stock if they are viewed as discouraging
takeover attempts in the future. In addition, Section 203 of the Delaware
General Corporation Law may limit the ability of an "interested stockholder" to
engage in business combinations with us. An interested stockholder is defined to
include persons owning 15% or more of any class of our outstanding voting stock.
Our amended and restated certificate of incorporation and amended and
restated by-laws contain the following provisions that could have an
anti-takeover effect:
o election of our directors is staggered, meaning that the members of
only one of three classes of our directors are selected each year;
o stockholders have limited ability to remove directors;
o stockholders have limited ability to call stockholder meetings and to
bring business before a meeting of stockholders; and
o our board of directors may authorize the issuance of preferred stock
with such rights, powers and privileges as the board deems
appropriate.
These provisions may make it difficult for stockholders to replace
management and could have the effect of discouraging a future takeover attempt
which is not approved by our board of directors but which individual
stockholders might consider favorable.
19
CERTAIN IMPORTANT INFORMATION
You should rely only on the information contained in this prospectus and
any prospectus supplement. We have not authorized any other person to provide
you with information that is different from that contained in this prospectus.
If anyone provides you with different or inconsistent information, you should
not rely on it. The selling stockholder is offering to sell and seeking offers
to buy these securities only in jurisdictions where offers and sales are
permitted. You should assume that the information contained in this prospectus
and any prospectus supplement is accurate only as of the date of this prospectus
or such prospectus supplement relating to the offering, respectively, regardless
of the time of delivery of this prospectus or any prospectus supplement or any
sale of common stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
In this prospectus:
o references to the "Company," "we," "us" or "our" refer to Tower Group,
Inc. and its subsidiaries, including Tower Insurance Company of New
York, Tower National Insurance Company and Tower Risk Management
Corporation and any other direct or indirect subsidiary, unless the
context suggests otherwise; and
o references to "Tower" refer solely to Tower Group, Inc.
20
NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements under "Company Overview," "Risk Factors" and
elsewhere in this prospectus may include forward-looking statements that reflect
our current views with respect to future events and financial performance. These
statements include forward-looking statements both with respect to us
specifically and the insurance sector in general. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements that include the words "expect," "intend,"
"plan," "believe," "project," "estimate," "may," "should," "anticipate," "will"
and similar statements of a future or forward-looking nature identify
forward-looking statements for purposes of the federal securities laws or
otherwise.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those indicated in these
statements. We believe that these factors include but are not limited to those
described under "Risk Factors" and the following:
o ineffectiveness or obsolescence of our business strategy due to
changes in current or future market conditions;
o developments that may delay or limit our ability to enter new
markets as quickly as we anticipate;
o increased competition on the basis of pricing, capacity, coverage
terms or other factors;
o greater frequency or severity of claims and loss activity,
including as a result of natural or man-made catastrophic events,
than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
o the effects of acts of terrorism or war;
o developments in the world's financial and capital markets that
adversely affect the performance of our investments;
o changes in regulations or laws applicable to us, our
subsidiaries, brokers or customers;
o changes in the level of demand for our insurance and reinsurance
products and services, including new products and services;
o changes in the availability, cost or quality of reinsurance and
failure of our reinsurers to pay claims timely or at all;
o changes in the percentage of our premiums written that we cede to
reinsurers;
o decreased demand for our insurance or reinsurance products;
o loss of the services of any of our executive officers or other
key personnel;
o the effects of mergers, acquisitions and divestitures;
o changes in rating agency policies or practices;
o changes in legal theories of liability under our insurance
policies;
o changes in accounting policies or practices; and
o changes in general economic conditions, including inflation,
interest rates and other factors.
The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with the other cautionary
statements that are included in this prospectus. We undertake no obligation to
publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we project. Any forward-looking statements you read in this
prospectus reflect our views as of the date of this prospectus with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations, growth strategy
and liquidity. All subsequent written and oral forward-looking statements
attributable to us or individuals acting on our behalf are expressly qualified
in their entirety by this paragraph. Before making an investment decision, you
should specifically consider all of the factors identified in this prospectus
that could cause actual results to differ.
21
USE OF PROCEEDS
All of our common stock offered hereby is being sold by the selling
stockholder. We will not receive any of the proceeds from the sale of such stock
in this offering.
22
SELLING STOCKHOLDERS
The shares of our common stock that are being registered for sale under
this prospectus were issued in connection with a private placement completed
concurrently with our initial public offering in October 2004.
The selling stockholder may from time to time offer and sell pursuant to
this prospectus the number of shares of our common stock as are set forth
opposite its name in the table below. The following table sets forth the name of
the selling stockholder and the following information, based on information they
have provided to us, as of August 15, 2005:
o the number and percentage of shares of our common stock
beneficially owned by such selling stockholder;
o the maximum number of shares that may be offered for sale by such
selling stockholder under this prospectus; and
o the number and percentage of shares beneficially owned by such
selling stockholder, assuming all such shares are sold.
The selling stockholder may offer all, some or none of the common stock
shown in the table. Because the selling stockholder may offer some or some
portion of the common stock, we have assumed for purposes of completing the last
two columns that all shares of common stock offered hereby will have been sold
by the selling stockholder upon termination of sales pursuant to this
prospectus.
Name of Selling Stockholder Beneficial Ownership Shares to Beneficial Ownership
Prior to the Offering be Offered After the Offering
Hereby
Number Percentage (1) Number Percentage (1)
Friedman, Billings, Ramsey 689,100(3) 3.40% 500,000 189,100 *
Group, Inc. (2)
- ---------------
* Less than 1%
(1) Calculated based on the number of share of common stock outstanding as of
October 28,, 2005.
(2) Friedman, Billings, Ramsey Group, Inc. is an affiliate of a broker-dealer.
Friedman, Billings, Ramsey Group, Inc. purchased the securities in the
ordinary course of business. At the time Friedman, Billings, Ramsey Group,
Inc. purchased the securities to be resold, it had no agreement or
understanding, directly or indirectly, with any person to distribute such
securities.
(3) Includes 100 shares held by Friedman, Billings, Ramsey & Co., Inc., an
affiliate of the selling stockholder and includes a warrant to purchase
189,000 shares, exercisable on or after October 20, 2005, that is held by
Friedman, Billings, Ramsey & Co., Inc.
23
PLAN OF DISTRIBUTION
The selling stockholder, which for purposes of this prospectus includes any
of its donees, transferees, pledgees, assignees and successors-in-interest, may
sell, from time to time, any or all of its shares of common stock on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling stockholder may use any one or more of the following methods when
selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o over-the-counter distribution in accordance with the rules of the
Nasdaq National Market;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholder to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
Under applicable rules and regulations under the Securities Exchange Act,
any person engaged in a distribution of the shares of common stock covered by
this prospectus may be limited in its ability to engage in market activities
with respect to such shares. A selling stockholder, for example, will be subject
to applicable provisions of the Securities Exchange Act and the rules and
regulations under it, including, without limitation, Regulation M, which
provisions may restrict certain activities of the selling stockholder and limit
the timing of purchases and sales of any shares of common stock by the selling
stockholder. Furthermore, under Regulation M, persons engaged in a distribution
of securities are prohibited from simultaneously engaging in market making and
certain other activities with respect to such securities for a specified period
of time prior to the commencement of such distributions, subject to specified
exceptions or exemptions. The foregoing may affect the marketability of the
shares offered by this prospectus.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the shares or otherwise, the selling stockholder may enter into
hedging transactions with broker-dealers or other financial institutions. In
connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of our common stock in the course of
hedging the positions they assume with the selling stockholder. The selling
stockholder may also sell our securities short and redeliver the shares to close
out such short positions. The selling stockholder may also enter into option or
other transactions with broker-dealers or other financial institutions that
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares the broker-dealer or other
financial institution may resell pursuant to this prospectus, as supplemented or
amended to reflect such transaction.
The selling stockholder may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholder may pledge its shares to its brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may offer and sell, from time to time, the pledged shares.
The selling stockholder may sell shares directly to market makers acting as
principals and/or broker-dealers acting as agents for itself or its customers.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to
24
participate in sales. Broker-dealers may receive commissions, concessions or
discounts from the selling stockholder (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated.
The selling stockholder does not expect these commissions and discounts to
exceed what is customary in the types of transactions involved. Market makers
and block purchasers that purchase the shares will do so for their own account
and at their own risk. It is possible that a selling stockholder will attempt to
sell shares in block transactions to market makers or other purchasers at a
price per share that may be below the then-current market price. We cannot make
assurances that all or any of the shares of common stock offered hereby will be
sold by the selling stockholder.
In addition, any shares that qualify for sale pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended, may be sold under Rule
144 rather than pursuant to this prospectus.
The selling stockholder and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
In certain states, the applicable state securities laws will require a
holder of shares desiring to sell its shares to sell its shares only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
We are required to pay all fees and expenses incident to the registration
of the shares offered hereby. We have agreed to indemnify the selling
stockholder against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
In addition, we will make copies of this prospectus available to the
selling stockholder for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The selling stockholder may indemnify any
broker-dealer that participates in transactions involving the sale of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
25
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for us by LeBoeuf, Lamb, Greene & MacRae LLP, New York, New York.
EXPERTS
The audited consolidated financial statements of Tower and its subsidiaries
included in this prospectus have been audited by Johnson Lambert & Co.,
independent registered public accountants, as stated in their reports appearing
elsewhere in this prospectus and in the registration statement, and are included
in reliance upon their authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-1 as amended by a post-effective amendment no.
1 to Form S-1 on Form S-3 with respect to the common stock offered in this
prospectus. This prospectus, filed as part of the registration statement, does
not contain all of the information set forth in the registration statement and
its exhibits and schedules, portions of which have been omitted as permitted by
the rules and regulations of the SEC. For further information about us and our
common stock, we refer you to the registration statement and to its exhibits and
schedules. Statements in this prospectus about the contents of any contract,
agreement or other document are not necessarily complete and, in each instance,
we refer you to the copy of such contract, agreement or document filed as an
exhibit to the registration statement, with each such statement being qualified
in all respects by reference to the document to which it refers. Anyone may
inspect the registration statement and its exhibits and schedules without charge
at the public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain copies of all or any part of these
materials from the SEC upon the payment of certain fees prescribed by the SEC.
You may obtain further information about the operation of the SEC's Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these
documents without charge at a web site maintained by the SEC. The address of
this site is http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act and
are required to file annual, quarterly and other reports, proxy statements and
other information with the SEC. You may inspect and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at the address noted above. You also may obtain copies of this
material from the Public Reference Room of the SEC as described above, or
inspect them without charge at the SEC's web site. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
audited by, reported on, and with an opinion expressed by an independent
accounting firm.
Information about us is also available at our website at
http://www.twrgrp.com. However, the information on our website is not a part of
this prospectus.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those other documents. The information incorporated by
reference is an important part of this prospectus, and information we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act but prior to the termination of any offering of securities made by this
prospectus (other than any portion of such documents that are not deemed "filed"
under the Exchange Act in accordance with the Exchange Act and applicable SEC
rules):
o our annual report on Form 10-K for the year ended December 31,
2004, filed on March 22, 2005;
o our quarterly reports on Form 10-Q for the quarters ended March
31, 2005 and June 30, 2005, filed on May 9, 2005 and August 12,
2005, respectively;
o our current reports on Form 8-K filed on January 18, 2005,
February 28, 2005, March 28, 2005, May 20, 2005, June 2, 2005,
August 8, 2005 and August 26, 2005;
26
o our 2005 Proxy Statement filed on April 18, 2005 on Form DEF 14A;
and
o the description of our common stock, $0.01 par value per share,
contained in the Section entitled "Description of Registrant's
Securities to be Registered" contained in our Amended
Registration Statement on Form 8-A/A filed under the Exchange Act
with the SEC on October 20, 2004 (File No. 000-50990) and
incorporating by reference the information contained in our
Registration Statement on Form S-1 (File No. 333-115310),
including any amendment or report filed for the purpose of
updating such description.
Upon written or oral request, we will provide without charge to each
person, including any beneficial owner, to whom this prospectus is delivered, a
copy of any or all of such documents which are incorporated herein by reference
(other than exhibits to such documents unless such exhibits are specifically
incorporated by reference into the documents that this prospectus incorporates).
Written or oral requests for copies should be directed to Tower Group, Inc.,
Attn: Steven G. Fauth, 120 Broadway, 14th Floor, New York, New York 10271,
telephone number 212-655-2000.
27
TOWER GROUP, INC.
[GRAPHIC OMITTED]TOWER
GROUP
COMPANIES
500,000 Shares
Common Stock
----------------------
, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses Of Issuance And Distribution.
The following table sets forth the expenses payable by the Registrant in
connection with the issuance and distribution of the common stock being
registered hereby. All of such expenses are estimates, other than the filing and
listing fees payable to the Securities and Exchange Commission, the Nasdaq
National Market and the National Association of Securities Dealers, Inc.
Filing Fee--Securities and Exchange Commission.......... $ 879
Filing Fee--National Association of Securities
Dealers............] 2,246
Fees and Expenses of Counsel........................... 30,000
Fees and Expenses of Accountants....................... 17,000
Miscellaneous Expenses................................. 15,000
---------------
Total.................................................. $ 65,125
===============
Item 15. Indemnification Of Directors And Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers, as well as other employees and
individuals, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not excluding
other rights to which those seeking indemnification may be entitled under any
certificate of incorporation, bylaws, agreement, vote of stockholders or
disinterested directors or otherwise. The Registrant's amended and restated
certificate of incorporation provides for indemnification by the Registrant of
its directors, officers and employees to the fullest extent permitted by the
Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions or (iv) for any transactions from which the director derived
an improper personal benefit. The Registrant's amended and restated certificate
of incorporation provides for such limitations of liability.
The Registrant maintains standard policies of insurance under which
coverage is provided (i) to its directors and officers against loss arising from
claims made by reason of breach of duty or other wrongful act and (ii) to the
Registrant with respect to payments which may be made by the Registrant to such
directors and officers pursuant to the above indemnification provision or
otherwise as a matter of law.
Item 16. Exhibits And Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description of Document
- ------ -------------------------
3.1 Amended and Restated Certificate of Incorporation of Tower Group,
Inc., incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Amendment No. 2) (No. 333-115310)
filed on July 23, 2004
II-1
Exhibit
Number Description of Document
- ------ -------------------------
3.2 Amended and Restated By-laws of Tower Group, Inc., incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (Amendment No. 2) (No. 333-115310) filed on July 23, 2004
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Amendment No. 6) (No. 333-115310) filed on September 30, 2004
4.2 Purchase Agreement, dated as of June 30, 2001, by and between Tower
Group, Inc. and PXRE Reinsurance Ltd., incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1
(Amendment No. 2) (No. 333-115310) filed on July 23, 2004
4.3 Warrant issued to Friedman, Billings, Ramsey & Co., incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 (Amendment No. 3) (No. 333-115310) filed on August 25, 2004
5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae LLP*
10.1 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Michael H. Lee, incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (Amendment
No. 3) (No. 333-115310) filed on August 25, 2004
10.2 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Steven G. Fauth, incorporated by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (Amendment
No. 3) (No. 333-115310) filed on August 25, 2004
10.3 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Francis M. Colalucci, incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
(Amendment No. 3) (No. 333-115310) filed on August 25, 2004
10.4 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Ian Drachman, incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (Amendment
No. 3) (No. 333-115310) filed on August 25, 2004
10.5 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Christian K. Pechmann, incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1
(Amendment No. 3) (No. 333-115310) filed on August 25, 2004
10.6 Employment Agreement, dated as of August 1, 2004, by and between Tower
Group, Inc. and Joel Weiner, incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-1 (Amendment No. 3)
(No. 333-115310) filed on August 25, 2004
10.7 2004 Long-Term Equity Compensation Plan, incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(Amendment No. 6) (No. 333-115310) filed on September 30, 2004
10.8 2001 Stock Award Plan, incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (No. 333-115310)
filed on May 7, 2004
10.9 2000 Deferred Compensation Plan, incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1 (Amendment
No. 6) (No. 333-115310) filed on September 30, 2004
10.10 Amended & Restated Declaration of Trust, dated as of May 15, 2003, by
and between Tower Group, Inc., Tower Statutory Trust I and U.S. Bank
National Association, incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 (No. 333-115310)
filed on May 7, 2004
10.11 Indenture, dated as of May 15, 2003, by and between Tower Group, Inc.
and U.S. Bank National Association, incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form S-1 (No.
333-115310) filed on May 7, 2004
10.12 Guarantee Agreement, dated as of May 15, 2003, by and between Tower
Group, Inc. and U.S. Bank National Association, incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (No. 333-115310) filed on May 7, 2004
II-2
Exhibit
Number Description of Document
- ------ -------------------------
10.13 Amended and Restated Trust Agreement, dated as of September 30, 2003,
by and between Tower Group, Inc., JPMorgan Chase Bank, Chase Manhattan
Bank USA, National Association and Michael H. Lee, Steven G. Fauth and
Francis M. Colalucci as Administrative Trustees of Tower Group
Statutory Trust II, incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 2004
10.14 Junior Subordinated Indenture, dated as of September 30, 2003, by and
between Tower Group, Inc. and JPMorgan Chase Bank, incorporated by
reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (No. 333-115310) filed on May 7, 2004
10.15 Guarantee Agreement, dated as of September 30, 2003, by and between
Tower Group, Inc. and JPMorgan Chase Bank, incorporated by reference
to Exhibit 10.15 to the Company's Registration Statement on Form S-1
(No. 333-115310) filed on May 7, 2004
10.16 Service and Expense Sharing Agreement, dated as of December 28, 1995,
by and between Tower Insurance Company of New York and Tower Risk
Management Corp., incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 2004
10.17 Real Estate Lease and amendments thereto, by and between Broadpine
Realty Holding Company, Inc. and Tower Insurance Company of New York,
incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (Amendment No. 1) (No. 333-115310)
filed on June 24, 2004
10.18 License and Services Agreement, dated as of June 11, 2002, by and
between AgencyPort Insurance Services, Inc. and Tower Insurance
Company of New York, incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (Amendment No. 3) (No.
333-115310) filed on August 25, 2004
10.19 Agreement, dated as of April 17, 1996, between Morstan General Agency,
Inc. and Tower Risk Management Corp., incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 (No.
333-115310) filed on May 7, 2004
10.20 Managing General Agency Agreement, dated January 1, 2002, by and
between Virginia Surety Company and Tower Risk Management Corp.,
incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Amendment No. 1) (No. 333-115310)
filed on June 24, 2004
10.21 General Agency Agreement by and among State National Insurance
Company, Inc., Tower Insurance Company of New York and Tower Risk
Management Corp., incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 (Amendment No. 1) (No.
333-115310) filed on June 24, 2004
10.22 Quota Share Reinsurance Agreement, dated as of January 1, 2004, by and
between Tower Insurance Company of New York and Converium Reinsurance
(North America) Inc., incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form S-1 (Amendment No. 3)
(No. 333-115310) filed on August 25, 2004
10.23 Quota Share Reinsurance Agreement, dated as of January 1, 2004, by and
between Tower Insurance Company of New York, Tokio Millennium Re Ltd.
and Hannover Reinsurance (Ireland) Ltd. and E+S Reinsurance (Ireland)
Ltd., incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310)
filed on August 25, 2004
10.24 Amended and Restated Promissory Note, dated August 2, 2004, by Michael
H. Lee in favor of Tower Risk Management, Inc., incorporated by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (Amendment No. 6) (No. 333-115310) filed on September 30,
2004
10.25 Quota Share Reinsurance Agreement, dated as of October 1, 2003, by and
between Tower Insurance Company of New York and Tokio Millennium Re
Ltd., incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (No. 333-115310) filed on May 7,
2004
II-3
Exhibit
Number Description of Document
- ------ -------------------------
10.26 Quota Share Reinsurance Agreement, dated as of January 1, 2003, by and
between Tower Insurance Company of New York and PXRE Reinsurance
Company and PMA Capital Insurance Company, incorporated by reference
to Exhibit 10.26 to the Company's Registration Statement on Form S-1
(Amendment No. 1) (No. 333-115310) filed on June 24, 2004
10.27 Aggregate Excess of Loss Retrocession Agreement, dated as of January
1, 2004, by and between Converium Reinsurance (North America) Inc. and
Tower Insurance Company of New York, incorporated by reference to
Exhibit 10.27 to the Company's Registration Statement on Form S-1 (No.
333-115310) filed on May 7, 2004
10.28 Aggregate Excess of Loss Retrocession Agreement, dated as of January
1, 2004, by and between Hannover Reinsurance (Ireland) Ltd. and E+S
Reinsurance (Ireland) Ltd. and Tower Insurance Company of New York,
incorporated by reference to Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (No. 333-115310) filed on May 7,
2004
10.29 Excess of Liability Reinsurance Agreement dated as of January 1, 2004,
by and between State National Insurance Company, Tower Insurance
Company of New York and Tower Risk Management Corporation,
incorporated by reference to Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (No. 333-115310) filed on May 7,
2004
10.30 Commercial Renewal Rights Agreement, dated as of September 13, 2004,
by and among OneBeacon Insurance Group LLC, each of the insurance
company subsidiaries of OneBeacon Insurance Group LLC listed therein
and Tower Group, Inc., incorporated by reference to Exhibit 10.30 to
the Company's Registration Statement on Form S-1 (Amendment No. 5)
(No. 333-115310) filed on September 15, 2004
10.31 Addendum No. 1 to the Quota Share Reinsurance Agreement, effective
January 1, 2004 by and between Tower Insurance Company of New York and
Converium Reinsurance (North America) Inc., incorporated by reference
to Exhibit 10.31 to the Company's Registration Statement on Form S-1
(Amendment No. 6) (No. 333-115310) filed on September 30, 2004
10.32 Addendum No. 1 to the Quota Share Reinsurance Agreement, effective
January 1, 2004, by and between Tower Insurance Company of New York,
Tokio Millenium Re Ltd. and Hannover Reinsurance (Ireland) Ltd. and
E+S Reinsurance (Ireland) Ltd., incorporated by reference to Exhibit
10.32 to the Company's Registration Statement on Form S-1 (Amendment
No. 6) (No. 333-115310) filed on September 30, 2004
10.33 General Agency Agreement, effective October 1, 2004, by and among
State National Insurance Company Inc., Tower Insurance Company of New
York and Tower Risk Management Corp. (Equipment breakdown business) ,
incorporated by reference to Exhibit 10.33 to the Company's Annual
Statement on Form 10-K (No. 000-50990) filed on March 22, 2005
10.34 General Agency Agreement, effective October 1, 2004, by and among
State National Insurance Company Inc., Tower Insurance Company of New
York and Tower Risk Management Corp. (Umbrella business), incorporated
by reference to Exhibit 10.34 to the Company's Annual Statement on
Form 10-K (No. 000-50990) filed on March 22, 2005
10.35 Excess of Liabilities Reinsurance Agreement, effective October 1,
2004, by and among State National Insurance Company Inc., Tower
Insurance Company of New York and Tower Risk Management Corp.
(Umbrella business), incorporated by reference to Exhibit 10.35 to the
Company's Annual Statement on Form 10-K (No. 000-50990) filed on March
22, 2005
10.36 Stock purchase agreement by and among Tower Group, Inc., Lawrenceville
Holdings, Inc. and MIIX Insurance Company in rehabilitation dated
August 2, 2005*
21.1 Subsidiaries of the registrant*
23.1 Consent of Johnson Lambert & Co.
- ------------------------
* Previously filed.
II-4
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material
change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) or the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-5
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of New York,
state of New York, on the 4th day of November, 2005.
TOWER GROUP, INC.
By: /s/ Michael H. Lee
------------------------------------------------------
Name: Michael H. Lee
Title: Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the 4th day of November, 2005.
Signature Title Date
--------- ----- ----
/s/ Michael H. Lee Chairman of the Board, President and November 4, 2005
- -------------------------------- Chief Executive Officer
Michael H. Lee (Principal Executive Officer)
/s/ Michael H. Lee Senior Vice President, Chief Financial November 4, 2005
- -------------------------------- Officer and Treasurer, Director
Francis M. Colalucci (Principal Financial Officer,
Principal Accounting Officer)
/s/ Michael H. Lee Senior Vice President, General Counsel November 4, 2005
- -------------------------------- and Secretary, Director
Steven G. Fauth
/s/ Michael H. Lee Director November 4, 2005
- --------------------------------
Steven W. Schuster
/s/ Michael H. Lee Director November 4, 2005
- --------------------------------
Charles A. Bryan
/s/ Michael H. Lee Director November 4, 2005
- --------------------------------
Gregory T. Doyle
/s/ Michael H. Lee Director November 4, 2005
- --------------------------------
Austin Young
II-7