Exhibit 99.1
Tower Group, Inc. Reports a 181% Increase
in the First Quarter 2005 Net Income
NEW YORK--(BUSINESS WIRE)--May 2, 2005--Tower Group, Inc. (NASDAQ:
TWGP) today reported a 181% increase in first quarter of 2005 net
income of $3.7 million as compared to first quarter of 2004 net income
of $1.3 million. Diluted earnings per share of $0.19 for the first
quarter of 2005 were based on weighted average diluted shares of
20,076,884 as compared with $0.23 per share for the first quarter of
2004, based on weighted average diluted shares of 5,726,083. Net
income for the first quarter of 2005, excluding realized gains, net of
tax was $3.6 million.
Michael H. Lee, President and Chief Executive Officer of Tower
Group, Inc. commented, "Our record first quarter net income was driven
by continued strong growth in our core lines of business and
geographic expansion outside of downstate New York while maintaining
favorable margins through our disciplined underwriting. We continue to
operate efficiently and differentiate Tower in the marketplace with
our demand driven approach in which we focus on the needs of our
producers."
First Quarter 2005 Financial Highlights:
Total revenues increased 97% to $42.7 million in the first quarter
of 2005 as compared to $21.7 million in the prior year's first
quarter. This increase was driven primarily by increases in net
premiums earned, investment income and net realized investment gains
partially offset by lower total commission and fee income. Net
premiums earned represented 70% of total revenues for the first
quarter of 2005 as compared to 37% for the same period of 2004. Ceding
commission and fee income represented 23% of total revenue for the
first quarter of 2005 as compared to 60% in the first quarter of 2004.
This was reflective of the reduced ceding percentage under the quota
share reinsurance agreement to 25% in the first quarter of 2005 versus
60% in the first quarter of 2004 in consideration of the increased
capitalization of our insurance company. Net investment income,
excluding realized gains, comprised 6% of total revenues in the first
quarter of 2005 and 4% in the same period of 2004.
Return on average equity was 11.5% in the first quarter of 2005 as
compared with 37.9% in the first quarter of 2004. Although net income
was significantly higher in the first quarter of 2005 as compared to
the similar period in the prior year, the lower return on average
equity resulted from the significant increase in average shareholders'
equity resulting primarily from capital raised from the initial public
offering and concurrent private placement in October 2004. The returns
on average equity for each of the first quarter of 2005 and first
quarter of 2004 were calculated by dividing annualized net income by
average shareholders' equity of $129.6 million and $13.9 million,
respectively.
Gross premiums written in the insurance operations increased to
$64.7 million in the first quarter, which were 62% higher than in the
first quarter of 2004. This growth was driven by a 17.5% increase in
policies in force and premium increases on renewed business which
averaged 11% for personal lines and 6% for commercial lines. Premiums
written on business subject to our commercial renewal rights agreement
with OneBeacon Insurance Company LLC amounted to $8.8 million during
the first quarter of 2005.
Premiums produced by the managing general agency reached $8.4
million in the first quarter of 2005 which were 30% higher than in the
first quarter of 2004. Growth was primarily due to increases in
premiums produced in the middle market, small business overflow
programs and business written through former OneBeacon producers that
we appointed in consequence of the renewal rights transaction.
Net premiums written increased 207% to $45.4 million in the first
quarter of 2005 as compared to $14.8 million in the same period of
2004. The increase was driven by the growth in gross premiums written
and a reduction in the quota share ceding percentage to 25 % beginning
in 2005 compared with 60% during the first nine months of 2004.
Net premiums earned rose 279% to $30.0 million for the first
quarter of 2005 as compared to $7.9 million in the same quarter of
2004 due to overall growth in gross premiums written and the decision
to cede a lower percentage of premiums as mentioned above. In
addition, the first quarter's net earned premium was increased by $5.5
million from the $13.1 million of retained unearned premiums and
related risks by the Company as of December 31, 2004 that would have
been ceded to Converium Reinsurance (North America) Inc. absent the
2004 novation.
Due to the significant reduction in quota share reinsurance
beginning in the fourth quarter 2004, the ratio of net premiums earned
to net premiums written declined to 46% in the fourth quarter 2004 and
began its gradual increase to 66% in the first quarter 2005. We
anticipate that this ratio will continue to gradually increase each
quarter throughout 2005 and will average approximately 75 % to 80 %
for the full year.
Ceding commission revenue declined 43% to $5.8 million in the
first quarter of 2005 as compared to $10.3 million in the first
quarter of 2004 reflecting the significant reduction in the quota
share ceding percentage.
The net loss ratio improved to 60.2% for the first quarter of 2005
as compared to 63.3% in the first quarter of 2004. The improvement
resulted from the increase in net premiums earned which reduced the
proportional effect of catastrophe reinsurance premiums on the net
loss ratio. In addition, while 2005 was a harsh winter in our
operating territory, claims reported during the first quarter for our
property lines were favorable as compared to the same quarter in the
prior year.
The gross expense ratio increased modestly by 0.2 points to 31.3%
in the first quarter of 2005 as compared to 31.1% in the first quarter
of 2004. The increase was related to establishing two new branch
offices and additional expenses incurred as a public company. The net
expense ratio increased 11.8 percentage points in the first quarter of
2005 as compared to the same period in 2004 primarily due to the lower
ceding commission revenue discussed above. Ceding commission revenue
caused the net expense ratio of 28.3% to be 3.0 percentage points
lower than the gross expense ratio for the first quarter of 2005. In
the first quarter of 2004, ceding commission revenue caused the net
expense ratio of 16.5% to be 14.6 percentage points lower than the
gross expense ratio.
The net combined ratio increased to 88.5% in the first quarter of
2005 from 79.8% in the same period in the prior year primarily due to
the increase in the net expense ratio driven by the lower ceding
commission revenue. Nevertheless, the combined ratio remains extremely
favorable.
Pre-tax income in our insurance services segment increased to $1.0
million in the first quarter of 2005 from $0.5 million in the same
quarter of 2004 primarily as a result of a 73% increase in direct
commission revenue due to an increase in premiums placed with issuing
carriers and additional commission revenue of $491,000 resulting from
favorable loss development on the premiums produced. This increase was
partially offset by a 34% increase in expenses for the first quarter
of 2005 compared to the same period in 2004.
Net investment income was a strong contributor to revenue growth
in the first quarter of 2005, increasing 242% to $2.6 million versus
$0.8 million in the first quarter of 2004. The acceleration of net
investment income was primarily due to the growth in invested assets
provided by operations, net proceeds from subordinated debentures
underlying trust preferred securities in December 2004 for $26.8
million and net proceeds of $107.8 million from our initial public
offering (IPO) and concurrent private placement in October 2004. The
positive effects were offset by a slight decline in the yield on fixed
maturity investments held at March 31, 2005 as compared to the same
period in 2004. The pre-tax yield for our fixed income investments
held at March 31, 2005 and March 31, 2004 was 4.6% and 4.8%,
respectively. On a tax equivalent basis, the yield was 5.1% for
invested assets held both at March 31, 2005 and March 31, 2004.
Net realized capital gains were $0.2 million for the first quarter
of 2005 as compared to $11,000 in the same quarter of the prior year.
The increase resulted from the sale of common stocks for which the
proceeds were reinvested into higher dividend yielding securities.
Due to rising interest rates, the change in gross unrealized
investment losses was approximately $3.0 million net of a tax benefit
during the first quarter of 2005.
Interest expense increased to $1.2 million in the first quarter of
2005 from $0.7 million in the first quarter of 2004. This increase was
primarily a result of $0.5 million on subordinated debentures
underlying trust preferred securities issued in December 2004 and a
$0.2 million interest expense increase as a result of crediting
reinsurers on funds withheld in segregated trusts as collateral for
reinsurance recoverables effective January 1, 2004 with an annual
effective yield of 2.5%. These increases were offset by reductions of
$0.2 million of interest expenses on other borrowings and preferred
stock repaid in the fourth quarter of 2004.
The effective income tax rate was 35.2% and 39.2% for the first
quarter of 2005 and first quarter of 2004, respectively. The effective
tax rate in the first quarter of 2005 was lower due to the benefit of
tax-exempt interest income in the first quarter of 2005 of $0.7
million as compared to $0.1 million in the same period of 2004.
First Quarter Highlights
First First
Quarter Quarter
2005 2004
------------ -----------
Total Underwriting Profit (Loss) $ 3,457 $ 1,605
Insurance Services Segment Pre-Tax Income 1,040 472
Net Investment Income 2,615 764
Net Realized Investment Gains 209 11
Corporate Expenses (422) (28)
Interest Expense (1,165) (651)
Income Before Income Taxes 5,734 2,173
Income Tax Expense 2,017 851
Net Income $ 3,717 $ 1,322
EPS - Basic $ 0.19 $ 0.30
EPS - Diluted $ 0.19 $ 0.23
Book Value Per Share $ 6.57 $ 3.37
Additional Highlights and Disclosures:
Acquisition of Tower National Insurance Company :
On March 28, 2005, Tower Group, Inc. announced the completion of
the acquisition of Tower National Insurance Company (f/k/a North
American Lumber Insurance Company), an insurance company with nine
active licenses mostly on the east coast, including New Jersey,
Connecticut and various New England states. The acquisition is
consistent with our plans to expand insurance operations territorially
through becoming licensed in states other than New York.
Reinsurance Transactions:
Like many other insurance companies, we have received an inquiry
from the New York Insurance Department relating to risk transfer under
our reinsurance arrangements. We have been providing information to
the New York Insurance Department in response to these inquiries. We
believe that our reinsurance agreements demonstrate an appropriate
transfer of risk and proper accounting. Our auditors have confirmed
their agreement with our view as part of their audit of our 2004
financial statements.
Dividend Declaration:
Tower Group, Inc. announced today that the Company's Board of
Directors has approved a quarterly dividend of $0.025 per share
payable June 27, 2005 to stockholders of record as of June 15, 2005.
2005 Guidance:
We continue to believe that strong growth opportunities remain in
our targeted markets despite price softening in the broad P&C market.
We expect overall market conditions to remain favorable for our
products for the remainder of 2005 and remain on target with our
guidance for the full year of 2005 that was provided in our first
quarter earnings release. For the second quarter of 2005, we project
net income to increase to a range between $4.5 million and $4.9
million. We project the diluted earnings per share in the second
quarter to be in the range between $0.23 and $0.25 per diluted share.
For the full year, we anticipate net income to increase to a range
between $19.7 million and $ 20.5 million and diluted earnings per
share to be between $ 0.98 and $1.02 per diluted share.
About Tower Group, Inc.
Tower Group, Inc., headquartered in New York City, offers property
and casualty insurance products and services through its insurance
company and insurance service subsidiaries. Its insurance company
subsidiary, Tower Insurance Company of New York, is rated A-
(Excellent) by A.M. Best Company and offers commercial insurance
products to small to medium-size businesses and personal insurance
products to individuals. Its insurance services subsidiary, Tower Risk
Management, acts as a managing general agency, adjusts claims and
negotiates reinsurance terms on behalf of other insurance companies.
In March 2005, Tower Group, Inc. acquired its other insurance company
subsidiary, Tower National Insurance Company (f/k/a North American
Lumber Insurance Company).
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;
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.
For more information visit Tower's website at
http://www.twrgrp.com/.
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
First Quarter
First First
Quarter Quarter %
2005 2004 Change
--------- -------- --------
Revenues:
Earned Premiums:
Gross Premiums Earned $ 45,868 $ 37,342 22.8%
Less: Ceded Premiums Earned (15,850) (29,412) -46.1%
-------- --------
Net Premiums Earned 30,018 7,930 278.5%
Ceded Commission Revenue 5,846 10,301 -43.2%
Policy Billing Fees 196 174 12.6%
-------- --------
Total 36,060 18,405 95.9%
Expenses:
Loss & Loss Adjustment Expenses
Gross Loss & Loss Adjustment Expenses 26,078 21,505 21.3%
Less: Ceded Loss & Loss Adjustment
Expenses (8,016) (16,488) -51.4%
-------- --------
Net Loss & Loss Adjustment Expenses 18,062 5,017 260.0%
Underwriting Expenses
Commissions Paid to Producers 7,581 6,136 23.5%
Other Underwriting Expenses 6,960 5,647 23.3%
-------- --------
Total Underwriting Expenses 14,541 11,783 23.4%
-------- --------
Total Expenses 32,603 16,800 94.1%
-------- --------
Underwriting Profit $ 3,457 $ 1,605 115.4%
======== ========
Key Measures:
Written Premiums
Gross $ 64,668 $ 40,013 61.6%
Ceded (19,307) (25,223) -23.5%
-------- --------
Net $ 45,361 $ 14,790 206.7%
======== ========
Loss Ratios
Gross 56.9% 57.6%
Net 60.2% 63.3%
Accident Year Loss Ratios
Gross 57.9% 56.3%
Net 60.1% 62.7%
Expense Ratios
Gross 31.3% 31.1%
Net 28.3% 16.5%
Combined Ratios (GAAP)
Gross 88.2% 88.7%
Net 88.5% 79.8%
Insurance Services Segment Results of Operations
First Quarter
First First
Quarter Quarter %
2005 2004 Change
--------- ------- --------
Revenues:
Direct Commission Revenue from MGA $ 2,525 $ 1,457 73.3%
Claims Administration Revenue 1,053 869 21.2%
Reinsurance Intermediary Fees 203 198 2.5%
Policy Billing Fees 5 - -
-------- -------
Total 3,786 2,524 50.0%
Expenses:
Direct Commission Expense Paid to Producers 1,211 950 27.5%
Other Insurance Services Expenses 485 300 61.7%
Claims Expense Reimbursement to TICNY 1,050 802 30.9%
-------- -------
Total Expenses 2,746 2,052 33.8%
-------- -------
Insurance Services Pre-tax Income (Loss) $ 1,040 $ 472 120.3%
======== =======
Tower Group, Inc.
Consolidated Balance Sheet
(Unaudited)
March December
31, 31,
2005 2004
------------ -----------
($ in thousands, except
par value
and share amounts)
ASSETS
Fixed-maturity securities, available-for-sale,
at fair value (amortized cost $255,034 in
2005 and $223,562 in 2004) $ 251,929 $ 224,523
Equity securities, at fair value (cost
$29,681 in 2005 and $1,827 in 2004) 29,710 2,485
Common trust securities - statutory business
trusts, equity method 1,426 1,426
----------- -----------
Total investments 283,065 228,434
Cash and cash equivalents 24,130 55,201
Investment income receivable 2,449 1,975
Agents' balances receivable 34,126 33,473
Assumed premiums receivable 1,144 1,197
Ceding commission receivable 8,727 8,329
Reinsurance recoverable 100,454 101,173
Receivable -- claims paid by agency 2,251 1,622
Prepaid reinsurance premiums 31,847 28,391
Deferred acquisition costs net of deferred
ceding commission revenue 22,223 18,740
Federal income taxes and state taxes
recoverable - 1,975
Deferred income taxes 480 -
Intangible assets 6,039 4,978
Fixed assets, net of accumulated depreciation 5,620 5,420
Other assets 3,860 3,239
----------- -----------
Total Assets $ 526,415 $ 494,147
=========== ===========
LIABILITIES
Loss and loss adjustment expenses $ 140,518 $ 128,722
Unearned premium 114,306 95,505
Reinsurance balances payable 8,867 2,735
Payable to issuing carriers 15,473 18,652
Funds held as agent 782 785
Funds held under reinsurance agreements 53,559 54,152
Accounts payable and accrued expenses 11,240 12,410
Checks outstanding 2,694 2,726
Payable for securities 1,272 -
Federal and state income taxes payable 459 -
Deferred income taxes - 1,587
Subordinated debentures 47,426 47,426
----------- -----------
Total Liabilities 396,596 364,700
----------- -----------
STOCKHOLDERS' EQUITY
Common stock ($0.01 par value per share;
40,000,000 shares authorized; 19,835,635 and
19,826,135 shares issued in 2005 and 2004) 198 198
Paid-in-capital 112,478 112,375
Accumulated other comprehensive net income (1,999) 1,052
Retained earnings 21,453 18,224
Unearned compensation - restricted stock (1,817) (1,908)
Treasury stock (88,967 shares in 2005 and
2004) (494) (494)
----------- -----------
Total Stockholders' Equity 129,819 129,447
----------- -----------
Total Liabilities and Stockholders'
Equity $ 526,415 $ 494,147
=========== ===========
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended
March 31,
2005 2004
----------- ----------
($ in thousands, except
share
and per share amounts)
Revenues
Net premiums earned $ 30,018 $ 7,930
Ceding commission revenue 5,846 10,301
Insurance services revenue 3,781 2,524
Net investment income 2,615 764
Net realized gains on investments 209 11
Policy billing fees 201 174
----------- ----------
Total revenues 42,670 21,704
----------- ----------
Expenses
Loss and loss adjustment expenses 18,062 5,017
Direct commission expense 8,792 7,086
Other operating expenses 8,917 6,777
Interest expense 1,165 651
----------- ----------
Total expenses 36,936 19,531
----------- ----------
Income before income taxes 5,734 2,173
Income tax expense 2,017 851
----------- ----------
Net income $ 3,717 $ 1,322
=========== ==========
Comprehensive Net Income
Net income $ 3,717 $ 1,322
Other comprehensive income:
Gross unrealized investment holding
(losses) gains arising during period (4,486) 947
Less: reclassification adjustment for
gains included in net income (209) (11)
----------- ----------
(4,695) 936
Income tax benefit (expense) related to
items of other comprehensive income 1,644 (318)
----------- ----------
Total other comprehensive net (loss)
income (3,051) 618
----------- ----------
Comprehensive Net Income $ 666 $ 1,940
=========== ==========
Earnings Per Share
Basic earnings per common share $ 0.19 $ 0.30
=========== ==========
Diluted earnings per common share $ 0.19 $ 0.23
=========== ==========
Weighted Average Common Shares Outstanding:
Basic 19,521,111 4,407,434
Diluted 20,076,884 5,726,083
CONTACT: Tower Group, Inc.
Investor Relations:
Andrew Colannino, 212-655-2107
acolannino@twrgrp.com