Exhibit 99.1
Tower Group Inc. Reports 22% Increase in Third Quarter 2004 Net Income
NEW YORK--(BUSINESS WIRE)--Nov. 15, 2004--Tower Group, Inc.
(NASDAQ: TWGP) today reported third quarter net income of $2.5
million, or $0.43 per diluted share, a 22% increase from the $2
million, or $0.36 per diluted share, in the same quarter last year.
For the nine months ending September 30, 2004, Tower Group Inc. net
income was $5.8 million, or $1.01 per diluted share, a 26% increase
over net income of $4.6 million, or $0.79 per diluted share, reported
for the same period in 2003. On October 20, 2004, Tower Group
completed its public offering of 13,000,000 shares of common stock and
a concurrent private placement of 500,000 shares of common stock to an
affiliate of Friedman, Billings, Ramsey & Co., the lead underwriter
for the Tower's public offering. On November 10, 2004, the
underwriters exercised the over-allotment option. Pursuant to the
exercise, the underwriters purchased 629,007 shares of common stock
from Tower and 1,320,993 shares of common stock from the selling
shareholders at the public offering price of $8.50 per share, less the
underwriting discount.
Michael Lee, President and Chief Executive Officer of Tower Group
Inc, said, "The strength of our earnings reflects the continuing
trends of growth and profitability. Compared to 2003, the combined
total of gross premiums written in our insurance operations and
premiums produced in our insurance services operations grew 19% during
the third quarter and 27% for the nine month period. This level of
growth combined with our approach to segmenting the market and
delivering profitable products in response to changing market
conditions resulted in an increase in GAAP net underwriting profits of
48% during the third quarter and 51% for the nine month period. Our
business model, which combines traditional property and casualty
insurance, generates underwriting profits and ceding commission
revenue with our fee based brokerage operations. This continued to
produce significant returns on equity of 60% in the third quarter and
49% for the nine month period."
Third quarter highlights:
Total revenues increased to $26.5 million or 28.9% for the three
months ended September 30, 2004 compared to $20.5 million in the same
period in 2003. The increases are primarily due to the increase in net
earned premiums, ceding commission and fee income as well as
investment income. Net earned premiums represented 45.7% of total
revenues for the three months ended September 30, 2004 compared to
36.5% in the same period in 2003. Ceding commission and fee income
represented 49.6% of total revenue in the three months ended September
30, 2004 compared to 60.6% in the same period in 2003. Net investment
income, excluding realized capital gains, represented 4.6% and 2.7% of
total revenue for the three months ended September 30, 2004 and 2003,
respectively.
Net premiums earned increased by 61.3% to $12.1 million for the
three months ended September 30, 2004 compared with $7.5 million in
the same period in 2003. The increase in net premiums earned was due
the overall increase in gross premiums written through September 30,
2004 and to our decision to cede less business in 2004 than 2003.
For the third quarter, operating results were affected by a
reduction in the ceding percentage to 60% from 70% in 2003 to better
leverage capital.
Gross premiums written of $42.4 million increased 23.4%. Policy
count in the insurance segment increased 10% and rate increases and
other pricing actions increased the average premium 12%. Ceded premium
written of $26.7 increased 7.8% from prior year quarter due to lower
ceding percentage in 2004. Accordingly net premium written increased
63% from prior year quarter and net premiums earned increased 61%.
Ceding commission revenue increased 5.6% despite lower ceding
percentage due to growth in gross and ceded premiums earned. Third
quarter includes a reduction of $400,000 from an increase in ceded
loss ratio on a prior year treaty. The effect on the expense ratio was
to lower the gross expense ratio from 29.0% to 14.3% or 14.7 points.
Gross loss ratio of 55.7% improved from prior year quarter of
56.3%. Net loss ratio of 61.4% improved from prior year quarter of
65.6% due to higher net earned premium over which to spread costs of
catastrophe and excess reinsurance premiums. There was minimal
favorable development on prior years' loss reserves. This quarter
marks the seventh straight quarter without any adverse development of
prior years' reserves.
The gross expense ratio declined from prior year quarter. The net
expense ratio, which equals the gross expense ratio less ceding
commission revenue and policy billing fees increased due to reduced
effects of ceding commission revenue that resulted from the lower
ceding percentage. Although ceding commission revenue increased over
the prior year quarter, the increase was less than it would have been
had the ceding percentage remained the same in 2004 as in 2003.
The net expense ratio of 75.7% increased from 73.7% in the prior
year quarter due to the increase in the net expense ratio.
Investment income was $1.2 million which increased 117% over the
prior year quarter. Invested assets at the end of the quarter were
$129.2 million as compared to $51.9 million at the end of the prior
year quarter. Invested assets increased due to strong operating cash
flows of $15 million including an increase of $2 million in funds held
as collateral for reinsurance recoverables. The yield for fixed income
and short term assets held at the end of the quarter was 4.5% as
compared to 5.1% in the prior year quarter.
Interest expense increased to $0.8 million from $0.4 million in
the prior year quarter due to the $10 million subordinated debt
underlying trust preferred securities issued in September 2003, $3
million additional debt issued in December 2003 which was repaid from
the proceeds of the public offering in October 2004 and $.03 million
of interest on funds held as collateral credited to ceding reinsurers.
Year-To-Date Consolidated Results Highlights
Net written and earned premiums increased 62% and 66%,
respectively, from growth in gross premiums written premium of 21.1%
and a lowered ceding percentage to 60% from 70% in 2003.
Ceding commission revenue increased 14% despite lower ceding
percentage due to growth in gross premiums. Commissions increased
$200,000 due to a decrease in prior years' loss ratio.
Gross loss ratio remained at 57.1%. Net loss ratio improved 3.6
points from higher net earned premiums on which to spread excess and
cat premiums.
The gross expense ratio of 30.9% was up slightly from 30.3% in
2003 from increased staffing. Headcount is at 249 at September 30, up
from 212 in 2003.
Net combined ratio 75.7% up slightly from 74% in 2003 due to
reduced effects of ceding commissions which increased the net expense
ratio.
Investment income increased 87.5% from increase in invested assets
from strong operating cash flows of $61 million including a $22.5
million an increase in funds withheld as collateral.
Interest expense increased to $2.1 million from $0.8 million in
2003 due to the $20 million subordinated debt underlying trust
preferred securities issued in May and September 2003, $6 million
additional debt issued in February and December 2003, which was repaid
from the proceeds of the public offering in October, 2004, dividends
on redeemable preferred stock which was redeemed from the proceeds of
the public offering in October, 2004, and $.07 million of interest on
funds held as collateral credited to ceding reinsurers.
Consolidated Third Quarter Highlights
Third Third
Quarter Quarter
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2004 2003 %
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Gross Premiums Written $42,399 $34,372 23.4%
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Insurance Services Premiums Produced 10,285 9,948 3.4%
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Total Premiums 52,684 44,320 18.9%
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Net Written Premium 15,703 9,610 63.4%
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Net Earned Premium 12,082 7,489 61.3%
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Ceding Commission Revenue 9,375 8,883 5.5%
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Insurance Services Pre-Tax Income 217 723 (70.0%)
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Net Investment Income 1,224 564 117.0%
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Net Income 2,478 2,029 22.1%
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Net Combined Ratio 75.7% 73.7% 2.7%
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EPS - Basic $0.55 $0.46 19.6%
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EPS - Diluted $0.43 $0.36 19.4%
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Consolidated Nine Months Highlights
Nine Month Nine Months
Ended 9/30 Ended 9/30
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2004 2003 %
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Gross Premiums Written $126,259 $104,253 21.1%
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Insurance Services Premiums Produced 35,289 23,474 50.3%
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Total Premiums 161,548 127,727 26.5%
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Net Written Premium 46,985 29,049 61.7%
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Net Earned Premium 29,527 17,794 65.9%
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Ceding Commission Revenue 30,426 26,738 13.8%
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Insurance Services Pre-Tax Income 982 1,064 (7.7%)
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Net Investment Income 3,087 1,646 87.5%
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Net Income 5,799 4,593 26.3%
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Net Combined Ratio 75.7% 73.3% 3.3%
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EPS - Basic $1.31 $0.99 32.3%
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EPS - Diluted $1.01 $0.79 27.8%
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Additional Highlights
-- Tower Group Inc. Completes Initial Public Offering and
Concurrent Private Placement
On October 20, 2004 the Company announced the completion of its
initial public offering of 13,000,000 shares at $8.50 per share. The
Company received net cash proceeds of $102,115,773 from this offering
after the underwriting discounts, commissions and certain offering
expenses. Also, on October 20, 2004 Tower Group Inc. offered a
concurrent private placement of 500,000 shares of its common stock to
an affiliate of Friedman, Billings, Ramsey & Co., Inc., the lead
underwriter for the Company's public offering, at the public offering
price of $8.50 per share. The Company received net cash proceeds of
$3,952,500 after deducting underwriting fees.
-- AmRe Redemption
Immediately before the closing of the public offering on October
26, 2004, the Company redeemed 30,000 of its Series A cumulative
Redeemable Preferred Shares for $1.5 million plus any accrued
interest.
-- Company Enters Into a Commercial Renewal Rights Agreement
On September 13, the Company entered into a Commercial Renewal
Rights Agreement with OneBeacon Insurance Group LLC under which it has
acquired OneBeacon's rights to seek to renew a block of commercial
lines insurance policies in New York State that generated more than
$100 million in gross written premiums in 2003. Under the terms of the
agreement, the Company would not acquire any in-force business or
historical liabilities associated with the policies. Based upon the
initial review of the subject policies and the Company's current
underwriting guidelines, the Company currently intends to seek to
renew policies generating at least $40 million in annual gross written
premiums, but there is no guarantee that the Company will be able to
write any particular level of renewals.
-- A.M. Best Company Issues ''A-'' -Excellent- Rating to Tower
Insurance Company of New York
On October 26th, Tower Group, Inc. announced that its wholly owned
insurance company subsidiary, Tower Insurance Company of New York,
received a rating upgrade from A.M. Best to "A-" (Excellent) from
"B++" (Very Good).
Outlook for 2004
"As a result of the completion of the IPO, the upgrade by A.M.
Best to A- and the completion of the One Beacon transaction, our
outlook for the fourth quarter is very positive," said Mr. Lee. "We
project our gross premiums written in the insurance company and
produced in the managing general agency to fall within the range from
$210 million to $220 million with 80% of such amount being written
through our own insurance company. The quota share ceding percentage
will decrease in the fourth quarter to 25% from 60% reported during
the first nine months in 2004. Barring any unexpected events, we
expect the net loss ratio to remain in the same range as we have
experienced thus far this year. Our gross expense ratio will increase
slightly as we will incur certain expenses related to the acquisition
of the One Beacon renewal rights including the hiring of a number of
former One Beacon employees and the opening of two new branches to
service the 280 new One Beacon agents. Since our ceding percentage
will decline to 25%, the benefit of ceding commission revenue to the
expense ratio will decrease from the third quarter level. Our
investment income is expected to increase primarily due to the IPO
proceeds and continuing strong operating cash flow. Net fee income
from the insurance services segment is projected to improve slightly
overt the third quarter.
Conference Call
The management of Tower Group Inc. will discuss the contents of
this release via webcast at 10:30 a.m. EDT on Monday, November 15,
2004. Following the live event, an audio playback of the webcast will
be archived at the Company's web site.
To listen to the webcast or the playback, visit the "Webcasts &
Presentations" section of the Tower Group Inc investor relations web
site at: http://phx.corporate-ir.net/phoenix.zhtml?c=179906&p=irol-
presentations . (Due to the length of this URL, it may be necessary to
copy and paste it into your Internet browser's URL address field. You
may also need to remove an extra space in the URL if one exists.)
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor'' for forward-looking statements. This release or any
other written or oral statements made by or on behalf of the Company
may include forward-looking statements that reflect the Company's
current views with respect to future events and financial performance.
All statements other than statements of historical fact included in
this release are forward-looking statements. Forward-looking
statements can generally be identified by the use of forward-looking
terminology such as "may,'' "will,'' "expect,'' "intend,''
"estimate,'' "anticipate,'' "believe'' or "continue'' or their
negative or variations or similar terminology. 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 ineffectiveness or obsolescence of our business strategy due to
changes in current or future market conditions; increased competition
on the basis of pricing, capacity, coverage terms or other factors;
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; the effects of acts of
terrorism or war; developments in the world's financial and capital
markets that adversely affect the performance of our investments;
changes in regulations or laws applicable to us, our subsidiaries,
brokers or customers; acceptance of our products and services,
including new products and services; changes in the availability, cost
or quality of reinsurance and failure of our reinsurers to pay claims
timely or at all; decreased demand for our insurance or reinsurance
products; loss of the services of any of our executive officers or
other key personnel; the effects of mergers, acquisitions and
divestitures; changes in rating agency policies or practices; changes
in legal theories of liability under our insurance policies; changes
in accounting policies or practices; and changes in general economic
conditions, including inflation and other factors. Forward looking
statements speak only as of the date on which they are made, and the
Company undertakes no obligation to update publicly or revise any
forward looking statement, whether as a result of new information,
future developments or otherwise.
TOWER GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE NET INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues
Net premiums
earned $ 12,082 $ 7,489 $ 29,527 $ 17,794
Ceding commission
revenue 9,375 8,883 30,426 26,738
Insurance services
revenue 3,572 3,413 10,777 8,180
Net investment
income 1,224 564 3,087 1,646
Net realized gains
on
Investments 35 39 33 488
Policy billing
fees 176 148 508 417
---------- ---------- ---------- ----------
Total
revenues 26,464 20,536 74,358 55,263
---------- ---------- ---------- ----------
Expenses
Loss and loss
adjustment
Expenses 7,420 4,915 18,329 11,697
Direct commission
expense 7,751 6,556 23,405 18,986
Other operating
expenses 6,912 5,770 21,416 16,661
Interest expense 752 401 2,127 847
---------- ---------- ---------- ----------
Total
expenses 22,835 17,642 65,277 48,191
---------- ---------- ---------- ----------
Income before income
taxes 3,629 2,894 9,081 7,072
Income tax expense 1,151 865 3,282 2,479
---------- ---------- ---------- ----------
Net Income $ 2,478 $ 2,029 $ 5,799 $ 4,593
========== ========== ========== ==========
Comprehensive Net
Income
Net income $ 2,478 $ 2,029 $ 5,799 $ 4,593
Other comprehensive
income:
Gross unrealized
gains / (losses)
in investment
holding gains
arising
during period 2,145 (494) (99) 536
Less: reclassification
adjustment
for gains included in
net income (35) (39) (33) (488)
---------- ---------- ---------- ----------
2,110 (533) (132) 48
Income tax
(expense) /
benefit
related to items
of other
comprehensive
income (717) 181 45 (16)
---------- ---------- ---------- ----------
Total other
comprehensive net
income/(loss) income 1,393 (352) (87) 32
Comprehensive Net
Income $ 3,871 $ 1,677 $ 5,712 $ 4,625
========== ========== ========== ==========
Earnings Per Share
Basic earnings per
common share $ 0.55 $ 0.46 $ 1.31 $ 0.99
========== ========== ========== ==========
Diluted earnings per
common share $ 0.43 $ 0.36 $ 1.01 $ 0.79
========== ========== ========== ==========
Weighted-Average Common
Shares Outstanding
Basic 4,502,831 4,407,433 4,439,233 4,469,144
Diluted 5,858,366 5,652,883 5,794,807 5,720,194
TOWER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September December
30, 2004 31, 2003
--------- ---------
($ In thousands,
except par value
and share amounts)
Assets
Fixed-maturity securities, available-for-sale, at
fair value
(amortized cost: $116,464 in 2004; $53,265 in
2003) $117,737 $ 54,545
Equity securities, at fair value
(cost: $1,877 in 2004 and 2003) 2,059 2,184
Short-term Investments 9,426 9,407
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Total Investments 129,222 66,136
Cash and cash equivalents 16,129 20,932
Investment income receivable 1,030 552
Agents' balances receivable 21,125 21,952
Assumed premiums receivable 635 997
Receivable for cancelled reinsurance - 15,748
Contingent commission receivable 8,769 7,983
Notes and accrued interest receivable from related
parties 1,459 1,421
Reinsurance recoverable 99,776 84,760
Receivable- claims paid by agency 2,707 1,812
Prepaid reinsurance premiums 52,857 55,645
Deferred acquisition costs net of deferred ceding
commission revenue 5,006 573
Deferred income taxes 1,722 2,033
Intangible assets 5,000 -
Fixed assets, net of accumulated depreciation 4,882 4,040
Other assets 3,371 1,388
-------- --------
Total Assets $353,690 $285,972
======== ========
Liabilities and Stockholders' Equity
Liabilities
Loss and loss adjustment expenses $121,893 $ 99,475
Unearned premium 84,918 70,248
Reinsurance balances payable 19,687 20,788
Payable to issuing carriers 11,584 12,726
Funds held as agent 801 796
Funds held under reinsurance agreement 47,475 24,943
Accounts payable and accrued expenses 8,088 4,934
Bank overdrafts and checks outstanding 8,006 4,936
Payable for securities 5,565 3,004
Dividends payable to stockholders 175 160
Federal and state income taxes payable 277 1,019
Deferred compensation liability 330 1,294
Subordinated debentures 20,000 20,000
Long-term debt - CIT 4,950 5,588
Series A cumulative redeemable preferred stock 1,500 3,000
-------- --------
Total Liabilities $335,249 $272,911
-------- --------
Stockholders' Equity
Class A common stock ($0.01 par value per share;
4,000,000 shares authorized; 2,147,561 shares
issued in 2004 and 2,069,936 in 2003; 2,058,594
outstanding in 2004 and 1,977,369 in 2003) 21 21
Class B common stock ($0.01 par value per share;
4,000,000 shares authorized; 2,561,953 shares
issued in 2004 and 2,430,065 in 2003; 2,561,953
outstanding in 2004 and 2,430,065 in 2003) 26 24
Paid-in-capital 4,432 2,285
Accumulated other comprehensive net income 961 1,048
Retained earnings 15,486 10,197
Unearned compensation - restricted stock (1,991) -
Treasury stock- Class A common stock (88,967 shares
in 2004 and 92,567 in
2003, at cost) (494) (514)
-------- --------
Total Stockholders' Equity 18,441 13,061
-------- --------
Total Liabilities, Redeemable Preferred
Stock and Stockholders' Equity $353,690 $285,972
======== ========
CONTACT: Tower Group, Inc.
Steven G. Fauth 212-655-2006