Exhibit 99.1
Tower Group, Inc. Reports 91% increase in Fourth Quarter 2004
Net Income and a 44% increase for the Full Year of 2004
NEW YORK--(BUSINESS WIRE)--Feb. 25, 2005--Tower Group, Inc.
(NASDAQ: TWGP) today reported a 91% increase in fourth quarter 2004
net income of $3.2 million as compared to fourth quarter 2003 net
income of $1.7 million. For the full year of 2004, net income
increased 44% to $9.0 million as compared to the full year of 2003 net
income of $6.3 million. Diluted earnings per share of $0.19 for the
fourth quarter of 2004 were based on weighted average diluted shares
of 16,851,503, as compared with $0.30 per share for the fourth quarter
of 2003, based on weighted average diluted shares of 5,636,532. For
the full year of 2004, Tower reported diluted earnings per share of
$1.06, based on 8,565,815 weighted average diluted shares, as compared
with $1.09 per diluted share for the full year of 2003 based on
weighted average diluted shares of 5,708,016.
Michael Lee, President and Chief Executive Officer of Tower Group,
Inc. said, "We made great strides during the fourth quarter which
included record net income, our initial public offering and an upgrade
to A- from A.M. Best. We have begun to deploy the capital raised in
the IPO by retaining more risk bearing business and embarking on a
controlled growth strategy as a newly public company. We look forward
to executing on our unique business model, generating strong earnings
and creating value for our shareholders."
Gross premiums written in the insurance operations reached $51.5
million in the fourth quarter, which was 70% higher than in the fourth
quarter of 2003, while premiums placed by the managing general agency
reached $18.2 million in the fourth quarter of 2004 which was 13%
higher than in the fourth quarter of 2003. For the year, gross
premiums written in the insurance operations reached $177.8 million,
which was 32% higher than in 2003, while premiums produced by the
managing general agency reached $53.4 million in 2004 which was 35%
higher than in 2003.
Return on average equity was 17.5% in the fourth quarter of 2004
as compared with 55.0% in the fourth quarter of 2003. For the year,
the return on average equity was 23.7% as compared with 56.8% for
2003. Although net income was significantly higher, in 2004 than in
2003, the lower return on average equity in each of these periods
resulted from the significant increase in average shareholders' equity
as the IPO was completed in the fourth quarter of 2004. For the fourth
quarter, the return was calculated by annualizing the fourth quarter
net income and dividing by an average shareholders' equity of $73.9
million. For the year, the return was calculated using an average
shareholders' equity of $38.1 million.
Net Premiums Written and Earned:
Net premiums written increased 239% to $98.1 million in the full
year of 2004 from $29.0 million in 2003. However, net earned premiums
of $45.6 million was only 46% of net premiums written in 2004 as
compared to net earned premium of $22.9 million which was 79% of net
written premium in 2003. This low earned percentage in 2004 reflects
the significant growth in net premiums written resulting from the
reduction in the percentage of business we ceded to our quota share
reinsurers effective October 1, 2004 . As a result, much of the net
premiums that Tower wrote in 2004 will flow through the company's
operating results in 2005. In future periods, while Tower expects
continued growth in net premiums written, the Company anticipates that
a greater percentage of net premiums written will be earned in the
year in which they are written.
Fourth Quarter 2004 Financial Highlights:
Total revenue increased 72% in the fourth quarter of 2004 as
compared to the prior year's fourth quarter. This increase was driven
primarily by an increase in net premium earned as well as increased
ceding commission and fee income and net investment income. Net
premiums earned represented 48% of total revenues in the fourth
quarter of 2004 as compared to 27% for the same period of 2003. Ceding
commission and fee income represented 46% of total revenue for the
fourth quarter of 2004 as compared to 70% in the fourth quarter of
2003. Net investment income, excluding realized gains, comprised 6% of
total revenues in the fourth quarter of 2004 and 3% in the same period
of 2003.
Net premiums earned more than tripled to $16.0 million as compared
to $5.1 million in the same quarter of 2003 due to overall growth in
gross premiums written and our decision to reduce the percentage of
business ceded under our quota share reinsurance treaties to 25% in
this current quarter as compared to 80% in the fourth quarter of 2003
in order to deploy the additional capital resulting from the IPO in
the fourth quarter of 2004.
Gross premiums written increased 70% in the fourth quarter of 2004
to $51.5 million as compared to $30.2 million in the fourth quarter of
2003. Net premiums written were $51.1 million in the fourth quarter as
compared to a slightly negative amount in the same quarter of 2003.
The increase resulted from the fourth quarter 2004 reduction in the
quota share ceding percentage and the novation and termination of
Converium Re's portion of the 2004 quota share treaty as a result of
Converium Re's rating downgrade (see additional details regarding
Converium in additional highlights below). To more effectively use the
increased capital from the IPO, we have retained the unearned premium
at December 31, 2004 that otherwise would have been ceded to Converium
Re. This action added $13.1 million of net written premiums in the
fourth quarter of 2004. These premiums will be earned in 2005. In
addition, as a result of our retention of these premiums, ceding
commission revenue in 2005 will be approximately $5 million less than
it would otherwise be.
Ceding commission revenue increased 8% to $9.6 million in the
fourth quarter reflecting a significant increase in gross premium
written that was largely offset by the lower quota share ceding
percentage. Ceding commission revenue caused the net expense ratio of
21.2% to be 10.4 percentage points lower than the gross expense ratio
of 31.6%.
The net loss ratio improved to 54.4% for the fourth quarter of
2004 as compared to 65.6% in the fourth quarter of 2003. The
improvement resulted from rate increases and other pricing actions in
both our insurance and reinsurance segments that reduced the accident
year loss ratio, as well as favorable development on prior years' loss
reserves.
The gross expense ratio increased 2.5 points to 31.6% in the
fourth quarter of 2004 as compared to the 29.1% in the fourth quarter
of 2003. The increase was primarily driven by costs related to the
transaction with OneBeacon Insurance Group including establishment of
two new branch offices in Long Island and Western New York, additional
staffing of key positions in preparation for a public company
environment and an increase in regulatory assessments. The net expense
ratio, which equals the gross expense ratio after applying ceding
commission revenue and policy billing fees to reduce underwriting
expenses, increased to 21.2% in the fourth quarter of 2004 as compared
to negative 6.3% in the same period of 2003 due to the lower level of
ceding commission revenue in the fourth quarter of 2004. 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 as in 2003.
The net combined ratio increased to 75.6% in the fourth quarter
from 59.3% in the prior year quarter due to the increase in the net
expense ratio. Nevertheless, the combined ratio remains extremely
favorable.
Investment income was a solid contributor to revenue growth in the
fourth quarter of 2004 as it increased 219 % to $2.0 million versus
$0.6 million in the fourth quarter of 2003. This growth was primarily
due to 298 % growth in invested assets to $228.4 million at year end
2004 from $57.3 million at year end 2003 from the proceeds from the
IPO and issuance of trust preferred securities, which increased
investment income by approximately $0.4 million, and strong operating
cash flow. The positive effects were offset by a decline in the
pre-tax investment yield to 3.9% on invested assets held at December
31, 2004 as compared to 5.0% for assets held as of December 31, 2003.
The decline in yield was primarily due to lower available interest
rates and an increased allocation to tax exempt securities. The tax
equivalent book yield as of December 31, 2004 was 4.4% compared to
5.3% as of December 31, 2003.
Interest expense increased to $1.0 million in the fourth quarter
of 2004 from $0.6 million in the fourth quarter of 2003. This is
primarily as a result of $0.4 million increase in interest on funds
held as collateral credited to ceding reinsurers and a $0.1 million
increase in interest on subordinated debentures underlying statutory
trust securities.
Pre tax income in our insurance services segment increased to $1.0
million in the fourth quarter of 2004 from $0.5 million in the same
quarter of 2003 primarily as a result of an increase in premiums
placed with issuing carriers
Full Year 2004 Financial Highlights:
Total revenue increased 44% for the full year of 2004 as compared
to 2003, driven primarily by net premiums earned as well as increased
ceding commission and fee income and investment income. Net premiums
earned represented 42% of total revenues for the full year of 2004 as
compared to 31% for 2003. The significant growth in net premiums
earned for 2004 reflected the overall growth in gross premiums written
and a reduced quota share ceding percentage in 2004. The gross
premiums written increase was attributable to a 12% increase in policy
count and an increase in average premium of 17% resulting primarily
from rate increases and other pricing actions.
Net premiums earned nearly doubled from 2003 due to the increase
in gross premiums earned and the reduction in the overall ceding
percentage from approximately 78% in 2003 to approximately 44% in
2004. Although ceding commission and fee income increased by 16% over
2003, its contribution to total revenue decreased to 53% in 2004 as
compared to 66% in 2003 as a result of the reduction in ceding
percentage. Net investment income, excluding realized gains, comprised
5% of total revenues for 2004 and 3% for the full year of 2003.
The net loss ratio improved to 59.4% in calendar year 2004 from
65.7% for the full calendar year of 2003. The improvement was due to
increases in pricing, an increase in net premiums earned over which to
spread costs of catastrophe reinsurance premiums, and favorable
development of prior year loss reserves of $0.2 million.
The gross expense ratio increased moderately for the full year of
2004 to 31.1% from 30.0% in 2003. The increase in expenses was due to
an increase in the number of employees from 217 at December 31, 2003
to 289 at December 31, 2004, including new hires at senior levels and
for other key positions in preparation for a public company
environment, costs related to the transaction with OneBeacon Insurance
Group including the establishment of two new branch offices in Long
Island and Western New York and additional regulatory assessments. The
net expense ratio increased to 16.2% for the full year of 2004 as
compared to 4.4% in 2003. The lower level of ceding commission revenue
in relation to net premiums earned as a result of the lower ceding
percentage on the quota share treaty was the primary driver of the
increase.
Net investment income grew 124% in 2004 to $5.1 million as
compared to $2.3 million in 2003, driven by the higher invested assets
from the IPO proceeds, strong operating cash flow of approximately $76
million and $20.6 million of net proceeds from the issuance of
subordinated debentures underlying statutory business trust securities
received in 2003. These factors resulted in a 298 % increase to
invested assets to $228.4 million in 2004 from $57.3 million in 2003.
Net investment income growth was somewhat constrained by lower
interest rates in 2004 and an increased allocation to tax-exempt
securities.
Interest expense increased to $3.1 million in 2004 as compared to
$1.5 million in 2003. The increase resulted from $1.1 million increase
in interest expense incurred as a result of crediting reinsurers on
funds withheld in segregated trusts as collateral for reinsurance
recoverables and a $1.0 million increase in interest on subordinated
debentures underlying statutory business trust securities. These
increases in interest expense were offset by a $0.5 million reduction
in interest on surplus notes repaid in 2003.
Pre tax income in our insurance services segment increased to
nearly $2 million from $1.5 million last year as a result of an
increase in premiums placed with issuing carriers.
- -0-
*T
Fourth Quarter Highlights
- ----------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total Underwriting Profit (Loss) $3,914 $2,099
- ----------------------------------------------------------------------
Insurance Services Segment Pre-Tax Income 969 477
- ----------------------------------------------------------------------
Net Investment Income 1,983 622
- ----------------------------------------------------------------------
Net Realized Investment Gains (20) 5
- ----------------------------------------------------------------------
Corporate Expenses (202) (6)
- ----------------------------------------------------------------------
Interest Expense (1,001) (615)
- ----------------------------------------------------------------------
Income Before Income Taxes 5,642 2,582
- ----------------------------------------------------------------------
Income Tax Expense 2,412 895
- ----------------------------------------------------------------------
Net Income $3,230 $1,687
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
EPS - Basic $0.20 $0.38
- ----------------------------------------------------------------------
EPS - Diluted $0.19 $0.30
- ----------------------------------------------------------------------
Consolidated Full Year Highlights
- ----------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total Underwriting Profit $11,106 $6,854
- ----------------------------------------------------------------------
Insurance Services Segment Pre-Tax Income 1,951 1,541
- ----------------------------------------------------------------------
Net Investment Income 5,070 2,268
- ----------------------------------------------------------------------
Net Realized Investment Gains 13 493
- ----------------------------------------------------------------------
Corporate Expenses (289) (40)
- ----------------------------------------------------------------------
Interest Expense (3,128) (1,462)
- ----------------------------------------------------------------------
Income Before Income Taxes 14,723 9,654
- ----------------------------------------------------------------------
Income Tax Expense 5,694 3,374
- ----------------------------------------------------------------------
Net Income $9,029 $6,280
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
EPS - Basic $1.23 $1.37
- ----------------------------------------------------------------------
EPS - Diluted $1.06 $1.09
- ----------------------------------------------------------------------
*T
Additional Highlights:
Shell Acquisition:
On January 18, 2005, we entered into a stock purchase agreement to
acquire North American Lumber Insurance Company, a shell company with
17 state licenses mostly on the east coast, including New Jersey,
Connecticut and various New England states. We plan to rename this
company Tower National Insurance Company after the close of the
transaction. The acquisition is consistent with our plans to expand
insurance operations territorially through becoming licensed in states
other than New York and is expected to close in March or April of
2005.
Long Term Debt:
We also raised an additional $26.8 million in debt capital through
two offerings of subordinated debentures underlying statutory business
trust securities with 30 year maturities, primarily to capitalize the
shell company. The interest for $13.4 million of these securities is
based on a fixed rate of 7.4% for the first five years and will float
quarterly thereafter at the three month LIBOR rate plus 340 basis
points. The interest for the remaining $13.4 million of these
securities floats for the entire term based on the three-month LIBOR
rate plus 340 basis points. We now have a total of $47.4 million in
debt, all of which is comprised of subordinated debentures underlying
statutory business trust securities. Our debt to total capital ratio
is 26%.
Converium Novation:
Converium Re was placed in run-off by its parent company following
a downgrade by A.M. Best to "B-" (Fair). Although reinsurance
recoverables related to Converium Re were fully collateralized, the
decision was made to terminate Converium Re's participation under the
quota share agreement on a cut-off basis effective November 1, 2004.
Subsequently, we reached an agreement with two other reinsurers to
novate Converium Re's obligations under the quota share treaty
effective January 1, 2004 as a result of which each reinsurer agreed
to assume 50% of Converium Re's obligations relating to premium earned
in 2004. In addition, we decided to retain the unearned premium that
would have been ceded to Converium Re as of December 31, 2004 which
increased net written premium and net unearned premium by
approximately $13.1 million. Net earned premium for the fourth quarter
was not affected by the novation. These premiums will be earned in
2005. In addition, as a result of our retention of these premiums,
ceding commission revenue in 2005 will be approximately $5 million
lower than it otherwise would have been.
2005 Guidance:
Although the overall P&C market is not expected to be as robust as
in recent years, we anticipate overall market conditions to remain
favorable for our products in 2005. With our demand driven approach
that emphasizes the delivery of our products in response to market
needs, we believe there remain strong growth opportunities in our
targeted markets. Through organic growth in our core markets,
additional business opportunities in new markets and the continued
rollout of business from the OneBeacon renewal rights transaction
completed in 2004, we expect total gross written premium by the
insurance company to be between $270 million and $280 million and
premiums produced by the managing general agency to be between $40 and
$45 million. We anticipate net income to increase to a range between
$19.7 million and $20.5 million and earnings per share to a range
between $0.98 and $1.02 per share. The increase in projected net
income from 2004 to 2005 will therefore be between 120% and 132%. For
the first quarter of 2005, we project net income to increase by
approximately 145% to 175% to the range between $3.2 million and $3.6
million compared to $1.3 million in the first quarter of 2004. We also
project the earnings per share in the first quarter to be in the range
of $0.16 and $0.18 per share. The weighted average diluted shares is
projected to increase to approximately 20.1 million shares in 2005
compared to 16.9 million shares in the fourth quarter of 2004 and 8.6
million shares for the full year 2004.
We project net premiums written to increase to a range between 65%
and 75% of the gross premiums written in our insurance company. We
anticipate that approximately 75% to 80% of the net premiums written
will be earned in 2005 in the range between $154 million and $162
million excluding the effects of the novation of the reinsurance
treaty with Converium Re. Return on average equity is expected to be
between 14% and 15% for the year.
The GAAP combined ratio is expected to be in the range of 88% to
92% for 2005, with the net loss ratio between 61% and 63% and the net
expense ratio between 27% and 29%. Insurance services income is
projected to represent an additional 2 to 3.5 percent of net premiums
earned.
Investment income is projected to continue increasing by 175%
to190% to a range between $13.5 and $14.2 million, with the invested
assets expected to increase to an amount between $340 and $360 million
by the end of 2005.
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," "plan," "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;
possible inability to achieve our targeted growth due to increased
competition on rates and 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; changes in the percentage of our premiums written that
we cede to reinsurers; 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, including changes
in interest rates; changes in regulations or laws applicable to us,
our subsidiaries, brokers or customers; acceptance of our products and
services, including new products and services; developments that may
delay or limit our ability to enter new markets as quickly as we
anticipate; 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.
About Tower Group, Inc.
In operation since 1990, Tower Group, Inc. is headquartered in New
York City and is the holding company for its two operating
subsidiaries, Tower Insurance Company of New York, ("TICNY") and Tower
Risk Management ("TRM"). TICNY, A.M. Best rated A- (Excellent),
develops and delivers specialized commercial lines insurance products
that provide property, liability, workers' compensation and automobile
insurance to select markets not well served by other carriers. It also
offers personal lines products that provide property and liability
insurance to homeowners throughout New York State. TRM, a non-risk
bearing insurance service company, offers managing general agency
services to underwrite risks, adjust claims and negotiate reinsurance
terms on behalf of other insurance companies.
For more information visit Tower's website at
http://www.twrgrp.com/.
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
Fourth Quarter
Fourth Fourth
Quarter Quarter %
2004 2003 Change
Revenues:
Earned Premiums:
Gross Premiums Earned $40,920 $29,325 39.5%
Less: Ceded Premiums Earned (24,883)(24,178) 2.9%
------- --------
Net Premiums Earned 16,037 5,147 211.6%
Ceded Commission Revenue 9,557 8,867 7.8%
Policy Billing Fees 167 128 30.5%
------- --------
Total 25,761 14,142 82.2%
Expenses:
Loss & Loss Adjustment Expenses
Gross Loss & Loss Adjustment Expenses 20,415 21,219 -3.8%
Less: Ceded Loss & Loss Adjustment Expenses (11,684)(17,845) -34.5%
------- --------
Net Loss & Loss Adjustment Expenses 8,731 3,374 158.8%
Underwriting Expenses
Commissions Paid to Producers 6,863 4,885 40.5%
Other Underwriting Expenses 6,253 3,784 65.2%
------- --------
Total Underwriting Expenses 13,116 8,669 51.3%
------- --------
Total Expenses 21,847 12,043 81.4%
------- --------
Underwriting Profit $3,914 $2,099 86.5%
======= ========
Key Measures:
Written Premiums
Gross $51,507 $30,229 70.4%
Ceded (417)(30,328) -98.6%
------- --------
Net $51,090 $(99) -
======= ========
Loss Ratios
Gross 49.9% 72.4%
Net 54.4% 65.6%
Accident Year Loss Ratios
Gross 52.9% 60.7%
Net 55.7% 55.7%
Expense Ratios
Gross 31.6% 29.1%
Net 21.2% -6.3%
Combined Ratios (GAAP)
Gross 81.5% 101.5%
Net 75.6% 59.3%
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
Full Year
%
2004 2003 Change
Revenues:
Earned Premiums:
Gross Premiums Earned $152,509 $122,023 25.0%
Less: Ceded Premiums Earned (106,945) (99,082) 7.9%
-------- ---------
Net Premiums Earned 45,564 22,941 98.6%
Ceded Commission Revenue 39,983 35,605 12.3%
Policy Billing Fees 671 545 23.1%
-------- ---------
Total 86,218 59,091 45.9%
Expenses:
Loss & Loss Adjustment Expenses
Gross Loss & Loss Adjustment Expenses 84,164 74,161 13.5%
Less: Ceded Loss & Loss Adjustment
Expenses (57,104) (59,090) -3.4%
-------- ---------
Net Loss & Loss Adjustment Expenses 27,060 15,071 79.6%
Underwriting Expenses
Commissions Paid to Producers 25,393 20,764 22.3%
Other Underwriting Expenses 22,659 16,402 38.1%
-------- ---------
Total Underwriting Expenses 48,052 37,166 29.3%
-------- ---------
Total Expenses 75,112 52,237 43.8%
-------- ---------
Underwriting Profit $11,106 $6,854 62.0%
======== =========
Key Measures:
Written Premiums
Gross $177,766 $134,482 32.2%
Ceded (79,691)(105,532) -24.5%
-------- ---------
Net $98,075 $28,950 238.8%
======== =========
Loss Ratios
Gross 55.2% 60.8%
Net 59.4% 65.7%
Accident Year Loss Ratios
Gross 56.2% 58.0%
Net 59.8% 64.0%
Expense Ratios
Gross 31.1% 30.0%
Net 16.2% 4.4%
Combined Ratios (GAAP)
Gross 86.3% 90.8%
Net 75.6% 70.1%
Insurance Services Segment Results of Operations
Fourth Quarter
Fourth Fourth
Quarter Quarter %
2004 2003 Change
Revenues:
Direct Commission Revenue from MGA $4,451 $3,398 31.0%
Claims Administration Revenue 1,038 952 9.0%
Reinsurance Intermediary Fees 115 300 -61.7%
Policy Billing Fees 4 - -
------- -------
Total 5,608 4,650 20.6%
Expenses:
Direct Commission Expense Paid to Producers 2,557 2,287 11.8%
Other Insurance Services Expenses 1,050 991 5.9%
Claims Expense Reimbursement to TICNY 1,032 895 15.3%
------- -------
Total Expenses 4,639 4,173 11.2%
------- -------
Insurance Services Pre-tax Income (Loss) $969 $477 103.3%
======= =======
Insurance Services Segment Results of Operations
Full Year
%
2004 2003 Change
Revenues:
Direct Commission Revenue from MGA $11,546 $7,984 44.6%
Claims Administration Revenue 4,105 3,746 9.6%
Reinsurance Intermediary Fees 730 1,100 -33.6%
Policy Billing Fees 8 - -
---------------
Total 16,389 12,830 27.7%
Expenses:
Direct Commission Expense Paid to Producers 7,432 5,394 37.8%
Other Insurance Services Expenses 2,987 2,247 32.9%
Claims Expense Reimbursement to TICNY 4,019 3,648 10.2%
---------------
Total Expenses 14,438 11,289 27.9%
---------------
Insurance Services Pre-tax Income (Loss) $1,951 $1,541 26.6%
===============
TOWER GROUP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE NET INCOME
($ in thousands, except share and per share amounts)
Three Months Ended Twelve Months Ended
December 31, December 31,
2004 2003 2004 2003
----------- --------- --------- ---------
REVENUES
Net premiums earned $16,037 $5,147 $45,564 $22,941
Ceding commission revenue 9,557 8,867 39,983 35,605
Insurance services revenue 5,604 4,650 16,381 12,830
Net investment income 1,983 622 5,070 2,268
Net realized gains (losses)
on investments (20) 5 13 493
Policy billing fees 171 128 679 545
----------- --------- --------- ---------
Total revenues 33,332 19,419 107,690 74,682
----------- --------- --------- ---------
EXPENSES
Loss and loss adjustment
expenses 8,731 3,374 27,060 15,071
Direct commission expense 9,420 7,172 32,825 26,158
Other operating expenses 8,538 5,676 29,954 22,337
Interest expense 1,001 615 3,128 1,462
----------- --------- --------- ---------
Total expenses 27,690 16,837 92,967 65,028
----------- --------- --------- ---------
Income before income taxes 5,642 2,582 14,723 9,654
Income tax expense 2,412 895 5,694 3,374
----------- --------- --------- ---------
Net income $3,230 $1,687 $9,029 $6,280
=========== ========= ========= =========
COMPREHENSIVE NET INCOME
Net income $3,230 $1,687 $9,029 $6,280
Other comprehensive income:
Gross unrealized gains in
investment holding gains
arising during period 143 81 44 617
Less: reclassification
adjustment for losses
(gains) included in net
income 20 (5) (13) (493)
----------- --------- --------- ---------
163 76 31 124
Income tax expense related
to items of other
comprehensive income (72) (26) (27) (42)
----------- --------- --------- ---------
Total other comprehensive
net income 91 50 4 82
----------- --------- --------- ---------
COMPREHENSIVE NET INCOME $3,321 $1,737 $9,033 $6,362
=========== ========= ========= =========
EARNINGS PER SHARE
Basic earnings per common
share $0.20 $0.38 $1.23 $1.37
=========== ========= ========= =========
Diluted earnings per common
share $0.19 $0.30 $1.06 $1.09
=========== ========= ========= =========
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING
Basic 16,118,761 4,407,433 7,335,286 4,453,717
Diluted 16,851,503 5,636,532 8,565,815 5,708,016
TOWER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2004 2003
---------- ---------
($ in thousands,
except par value and
share amounts)
ASSETS
Fixed-maturity securities, available-for-sale, at
fair value (amortized cost $223,562 in 2004 and
$53,265 in 2003) $ 224,523 $ 54,545
Equity securities, at fair value (cost $1,827 in
2004 and $1,877 in 2003) 2,485 2,184
Common trust securities - statutory business
trusts, equity method 1,426 620
---------- ---------
Total investments 228,434 57,349
Cash and cash equivalents 55,201 30,339
Investment income receivable 1,975 552
Agents' balances receivable 33,473 21,952
Assumed premiums receivable 1,197 997
Receivable for cancelled reinsurance -- 15,748
Ceding commission receivable 8,329 7,983
Notes and accrued interest receivable from
related parties -- 1,421
Reinsurance recoverable 101,173 84,760
Receivable -- claims paid by agency 1,622 1,812
Prepaid reinsurance premiums 28,391 55,645
Deferred acquisition costs net of deferred ceding
commission revenue 18,740 573
Federal income taxes and state taxes recoverable 1,975 --
Deferred income taxes -- 2,033
Intangible assets 4,978 --
Fixed assets, net of accumulated depreciation 5,420 4,040
Other assets 3,239 1,388
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Total Assets $494,147 $286,592
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LIABILITIES
Loss and adjustment expenses $128,722 $99,475
Unearned premium 95,505 70,248
Reinsurance balances payable 2,735 20,788
Payable to issuing carriers 18,652 12,726
Funds held as agent 785 796
Funds held under reinsurance agreements 54,152 24,943
Accounts payable and accrued expenses 12,410 4,934
Checks outstanding 2,726 4,936
Payable for securities -- 3,004
Dividends payable to stockholders -- 160
Federal and state income taxes payable -- 1,019
Deferred income taxes 1,587 --
Deferred compensation liability -- 1,294
Subordinated debentures 47,426 20,620
Long-term debt -- CIT -- 5,588
Series A cumulative redeemable preferred stock -- 3,000
--------- ---------
Total Liabilities 364,700 273,531
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (2004: $0.01 par value per share;
40,000,000 shares authorized, 19,826,135 shares
issued and 19,737,168 outstanding shares) 198 --
Class A common stock (2003: $0.01 par value per
share; 4,000,000 shares authorized, 2,069,936
shares issued and 1,977,369 outstanding shares) -- 21
Class B common stock (2003: $0.01 par value per
share; 4,000,000 shares authorized, 2,430,065
shares issued and outstanding shares) -- 24
Paid-in-capital 112,375 2,285
Accumulated other comprehensive net income 1,052 1,048
Retained earnings 18,224 10,197
Unearned compensation - restricted stock (1,908) --
Treasury stock (88,967 shares in 2004 and 92,567 in
2003) (494) (514)
--------- ---------
Total Stockholders' Equity 129,447 13,061
--------- ---------
Total Liabilities and Stockholders' Equity $494,147 $286,592
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CONTACT: Tower Group, Inc.
Andrew Colannino, 212-655-2107
acolannino@twrgrp.com