Exhibit 99.1
Tower Group, Inc. Reports a 75.1% Increase in the First Quarter 2006 Net Income
NEW YORK--(BUSINESS WIRE)--May 2, 2006--Tower Group, Inc. (NASDAQ:
TWGP) today reported its financial results for the first quarter of
2006 including a 75.1% increase in net income to $6.5 million as
compared to net income of $3.7 million in the first quarter of 2005.
Tower reported diluted earnings per share of $0.32 for the first
quarter of 2006 as compared to $0.19 per share for the first quarter
of 2005. During the first quarter of 2006, Tower, as a 100% owner of
CastlePoint Holdings, Ltd. ("CastlePoint"), a Bermuda holding company
with a reinsurance subsidiary that it sponsored, consolidated 100% of
the non-recurring start up expenses of approximately $500,000 incurred
by CastlePoint although its ownership in CastlePoint decreased to 8.6%
on April 4, 2006 following the completion of CastlePoint's
capitalization. Net income for the first quarter of 2006, excluding
the effects of the non-recurring start up expenses and realized
losses, net of tax, was $7.1 million or $0.35 per share.
- -- Net Income, first quarter of 2006 $6.5 million
- -- Realized Losses, net of tax $0.1
- -- Non-recurring CastlePoint start up costs $0.5
-----
- -- Net Income, excluding realized losses,
net of tax, and CastlePoint startup costs $7.1 million
Michael H. Lee, President and Chief Executive Officer of Tower
Group, Inc. commented, "Tower had another solid quarter and a strong
start to 2006 driven by gains in gross and net premiums written while
maintaining our disciplined underwriting approach. Excluding the
effects of non-recurring start-up expenses associated with
CastlePoint, our earnings exceeded the guidance we provided on our
last earnings call, and our return on equity continued to improve. We
were successful during the first quarter in forming CastlePoint and
expect our investment to contribute to the long term success of Tower
Group. We continued to focus on the markets that demand our products,
and in order to meet those demands, we have strengthened our growth
and return on equity focused business model."
First Quarter 2006 Financial Highlights:
Total revenues increased 66.8% to $71.2 million in the first
quarter of 2006 as compared to $42.7 million in the prior year's first
quarter. The improvement is primarily due to the increase in net
premiums earned and net investment income. Net premiums earned
represented 80.4% of total revenues for the three months ended March
31, 2006 compared to 70.3% for the same period in 2005. Net investment
income, excluding realized capital losses or gains, represented 6.5%
and 6.1% of total revenues for the three months ended March 31, 2006
and March 31, 2005, respectively. These increases were partially
offset by lower total commission and fee income for the three months
ended March 31, 2006 of $9.4 million, or 13.2% of total revenue,
compared to $9.8 million, or 23.0% of total revenue, for the same
period in 2005. During the three months ended March 31, 2006 there
were net realized capital losses of $145,000 from the sale of
automotive credit bonds and other securities as compared to net
realized capital gains of $209,000 for the same period of 2005.
Return on average equity was 17.7% in the first quarter of 2006 as
compared with 11.5% in the first quarter of 2005. The returns on
average equity for each of the first quarter of 2006 and first quarter
of 2005 were calculated by dividing annualized net income by average
shareholders' equity of $146.9 million and $129.6 million,
respectively. Excluding the effect of certain non-recurring start up
expenses relating to our sponsoring CastlePoint, our net income and
return on average equity would have been $7.0 million and 19.0%,
respectively, in the first quarter of 2006.
Gross premiums written in the insurance and reinsurance segments
increased to $87.4 million in the first quarter, which was 35.1%
higher than in the first quarter of 2005. This growth was driven by a
25.2% increase in policies in force and premium increases on renewed
business which averaged 7.5% for personal lines and 5.3% for
commercial lines.
Premiums produced by the managing general agency decreased to $4.0
million in the first quarter of 2006, or a decrease of 52.3% from the
first quarter of 2005. The decrease was primarily due to decreases in
premiums produced by the managing general agency on behalf of its
issuing companies as more policies previously produced for the issuing
companies were renewed in the insurance operations.
Net premiums written increased 82.7% to $82.9 million in the first
quarter of 2006 as compared to $45.4 million in the same period of
2005. The increase was driven by the growth in gross premiums written
and the absence of quota share reinsurance with respect to policies
that began in 2006 compared to the quota share ceding percentage of
25% during the first three months of 2005. Tower did not purchase any
quota share reinsurance in the first quarter in anticipation of its
agreement with CastlePoint's reinsurance subsidiary, CastlePoint
Reinsurance Company.
Net premiums earned rose 90.7% to $57.3 million for the first
quarter of 2006 as compared to $30.0 million in the same quarter of
2005 due to overall growth in gross premiums written and the absence
of quota share reinsurance for policies that began in 2006 as
mentioned above.
Ceding commission revenue increased 24.9% to $7.3 million in the
first quarter of 2006 as compared to $5.8 million in the first quarter
of 2005 reflecting growth in ceded premiums written in 2005, which
were continuing to be earned in 2006.
The net loss ratio improved to 58.0% for the first quarter of 2006
as compared to 60.2% in the first quarter of 2005. The improvement in
the net loss ratio in the first quarter of 2006 compared to the same
period in 2005 was due primarily to an increase in net premiums earned
that reduced the effect of catastrophe reinsurance premiums on the net
loss ratio, and to favorable development on prior accident years'
reserves.
The gross expense ratio decreased to 30.5% in the first quarter of
2006 as compared to 31.3% in the first quarter of 2005. The net
expense ratio decreased to 28.1% in the first quarter of 2006 as
compared to 28.3% the same period in 2005.
The net combined ratio decreased to 86.1% in the first quarter of
2006 from 88.5% in the same period in the prior year.
Pre-tax income in our insurance services segment decreased to
$34,000 in the first quarter of 2006 from $1.0 million in the same
quarter of 2005 as a result of the decrease in premiums produced and
an unfavorable adjustment in direct commission revenue of $348,000 in
the first quarter of 2006 due to unfavorable loss development on
premiums produced in prior years; this compares to a favorable
adjustment in direct commission revenue of $491,000 in the first
quarter of 2005 due to favorable loss development on premiums produced
in prior years.
Net investment income increased by 78.2% to $4.7 million for the
three months ended March 31, 2006 compared to $2.6 million for the
same period in 2005. This resulted from an increase in invested assets
to $379.6 million as of March 31, 2006 compared to $281.6 million as
of March 31, 2005, excluding our investments in statutory business
trusts underlying our trust preferred securities. Net cash flows
provided by operations of $38.8 million contributed to the increase in
invested assets during the three months ended March 31, 2006. On a tax
equivalent basis, the yield was 5.4% as of March 31, 2006 compared to
5.1% as of March 31, 2005.
Our interest expense increased for the three months ended March
31, 2006 to $1.4 million compared to $1.2 million for the same period
in 2005. The increase resulted from an increase in interest expense of
$113,000 on subordinated debentures underlying our trust preferred
securities and $72,000 as a result of crediting reinsurers on funds
withheld in segregated trusts as collateral for reinsurance
recoverables.
The effective income tax rate was 35.8% for the three months
ending March 31, 2006 compared to 35.2% for the same period in 2005.
The effective tax rate in 2006 was higher due to certain non-recurring
organizational and start up costs relating to our sponsoring
CastlePoint that are not deductible for tax purposes. The effective
tax rate of the first three months of 2006 would have been 34.3%
excluding the effects of the non-recurring expenses.
First Quarter Highlights
($ in thousands, except per share amounts)
First Quarter 2006 First Quarter 2005
------------------ ------------------
Total Underwriting Profit $7,963 $3,457
Insurance Services Segment Pre-
Tax Income 34 1,040
Net Investment Income 4,660 2,615
Net Realized Investment (Losses)
Gains (145) 209
Corporate Expenses (1,014) (422)
Interest Expense (1,350) (1,165)
Income Before Income Taxes 10,148 5,734
Income Tax Expense (3,638) (2,017)
Net Income $6,510 $3,717
EPS - Basic $0.33 $0.19
EPS - Diluted $0.32 $0.19
Additional Highlights and Disclosures:
Sponsoring a Bermuda Holding Company
Tower's financial statements as of March 31, 2006 include the
consolidation of CastlePoint, a Bermuda based holding company that
Tower sponsored with an initial investment of $15 million on February
6, 2006. On April 4, 2006, CastlePoint was capitalized with $265
million in a private offering. Following the capitalization of
CastlePoint, Tower's ownership stands at 8.6%. In addition, Tower has
been issued warrants to purchase CastlePoint's common shares that
would have resulted in an additional 3.7% of ownership if they had
been exercised on April 4, 2006. The warrants are exercisable at any
time up to the tenth anniversary of the warrant issuance. CastlePoint
was a wholly owned subsidiary of Tower during the first quarter of
2006, and therefore Tower consolidated CastlePoint at March 31, 2006.
The quarter ended March 31, 2006 includes approximately $500,000 of
non-recurring start up costs incurred by CastlePoint.
Subordinated Debentures
On March 31, 2006, Tower Group Statutory Trust V (the "Trust"), an
affiliated Delaware trust, issued $20,000,000 of fixed/floating rate
capital securities (the "Trust Preferred Securities") in a private
placement. The Trust Preferred Securities mature in April 2036, are
redeemable at the Trust's option at par beginning April 7, 2011, and
require quarterly distributions of interest by the Trust to the holder
of the Trust Preferred Securities. Distributions are initially at a
fixed rate of 8.5625% for the first five years and will then reset
quarterly for changes in the three-month London Interbank Offered Rate
("LIBOR") rate plus 330 basis points. The net proceeds to Tower from
the sale of the debenture to the Trust will be used by Tower to
acquire and capitalize a shell insurance company with multi-state
licensing and for working capital purposes.
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, 2006 to stockholders of record as of June 15, 2006.
2006 Guidance
We believe we are well positioned to support our premium growth
and to generate commission and fee income to augment our return on
equity. For the second quarter of 2006, we project net income to
increase to a range between $7.5 million and $7.9 million. We project
Tower's diluted earnings per share in the second quarter to be in the
range between $0.37 and $0.39 per diluted share. For the full year, we
anticipate net income to be in a range between $32.0 million and $34.0
million, and diluted earnings per share to be between $1.58 and $1.68
for the year.
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 two insurance company
subsidiaries are Tower Insurance Company of New York which is rated A-
(Excellent) by A.M. Best Company and Tower National Insurance Company
which is also rated A- (Excellent) by A.M. Best Company. Both
subsidiaries offer 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.
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," "project" 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; changes in the level of demand for our insurance
and reinsurance 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; 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
Three Months Ended March 31
2006 2005 % Change
-------- -------- ---------
($ in thousands)
Revenues
Premiums earned
Gross premiums earned $76,616 $45,868 67.0%
Less: Ceded premiums earned (19,360) (15,850) 22.1%
Net premiums earned 57,256 30,018 90.7%
Ceding commission revenue 7,302 5,846 24.9%
Policy billing fees 267 196 36.2%
Total 64,825 36,060 79.8%
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses $43,312 $26,078 66.1%
Less: Ceded loss and loss adjustment
expenses (10,102) (8,016) 26.0%
Net loss and loss adjustment expenses 33,210 18,062 83.9%
Underwriting Expenses
Commissions paid to producers 12,477 7,581 64.6%
Other underwriting expenses 11,175 6,960 60.6%
Total 23,652 14,541 62.7%
Underwriting Profit $7,963 $3,457 130.3%
Key Measures
Premiums Written
Gross $87,373 $64,668 35.1%
Ceded (4,495) (19,307) -76.7%
Net 82,878 45,361 82.7%
Loss ratios
Gross 56.5% 56.9%
Net 58.0% 60.2%
Accident Year Loss Ratio
Gross 57.6% 57.9%
Net 58.9% 60.1%
Expense ratios
Gross 30.5% 31.3%
Net 28.1% 28.3%
Combined ratios (GAAP)
Gross 87.0% 88.2%
Net 86.1% 88.5%
Insurance Services Segment Results of Operations
First Quarter
Three Months Ended
March 31
2006 2005 % Change
------- ------- ---------
($ in thousands)
Revenue
Direct commission revenue from managing
general agency $806 $2,525 -68.1%
Claims administration revenue 962 1,053 -8.6%
Reinsurance intermediary fees (1) 61 203 -70.0%
Policy billing fees 3 5 0.0%
---------------
Total Revenues 1,832 3,786 -51.6%
---------------
Expenses
Direct commission expense paid to producers $603 $1,211 -50.2%
Other insurance services expenses (2) 237 485 -51.1%
Claims expense reimbursement to TICNY 958 1,050 -8.8%
---------------
Total Expenses 1,798 2,746 -34.5%
---------------
---------------
Insurance Services Pre-tax Income $34 $1,040 -96.7%
===============
Premiums produced by TRM on behalf of
issuing companies $4,028 $8,444 -52.3%
(1) The reinsurance intermediary fees include commissions earned for
placement of reinsurance on behalf of TICNY.
(2) These are underwriting expenses reimbursed to TICNY pursuant to an
expense sharing agreement.
Tower Group, Inc.
Consolidated Balance Sheet
(Unaudited)
March 31, December 31,
2006 2005
------------ ------------
($ in thousands, except
par value and share
amounts)
Assets
Fixed-maturity securities, available-for-
sale, at fair value (amortized cost
$356,440 in 2006 and $331,123 in 2005) $ 348,536 $ 326,681
Equity securities, available-for-sale, at
fair value (cost $6,681 in 2006 and $6,681
in 2005) 6,284 5,934
Equity securities, at cost 24,802 24,558
Common trust securities - statutory business
trusts, equity method 2,045 1,426
----------- -----------
Total investments 381,667 358,599
Cash and cash equivalents 71,720 38,760
Investment income receivable 3,564 3,337
Agents' balances receivable 41,659 46,004
Assumed premiums receivable 3,486 1,076
Ceding commission receivable 8,727 8,727
Reinsurance recoverable 106,325 104,811
Receivable - claims paid by agency 2,252 2,309
Prepaid reinsurance premiums 28,375 43,319
Deferred acquisition costs net of deferred
ceding commission revenue 38,790 29,192
State income taxes recoverable 297 365
Deferred income taxes 2,480 3,204
Intangible assets 5,732 5,835
Fixed assets, net of accumulated
depreciation 8,398 7,920
Other assets 6,076 3,999
----------- -----------
Total Assets $ 709,548 $ 657,457
=========== ===========
Liabilities
Loss and loss adjustment expenses $ 219,927 $ 198,724
Unearned premium 168,456 157,779
Reinsurance balances payable 9,452 19,200
Payable to issuing carriers 6,029 5,252
Funds held as agent 8,195 8,191
Funds held under reinsurance agreements 62,157 59,042
Accounts payable and accrued expenses 12,243 13,694
Payable for securities 1,939 -
Other liabilities 2,867 2,867
Federal income taxes payable 1,312 460
Subordinated debentures 68,045 47,426
----------- -----------
Total Liabilities 560,622 512,635
----------- -----------
Stockholders' Equity
Common stock ($0.01 par value per share;
40,000,000 shares authorized; 19,907,498
and 19,872,672 shares issued in 2006 and
2005) 199 199
Paid-in-capital 111,326 111,066
Accumulated other comprehensive net income (5,525) (3,352)
Retained earnings 43,036 37,019
Treasury stock (17,881 shares in 2006 and in
2005) (110) (110)
----------- -----------
Total Stockholders' Equity 148,926 144,822
----------- -----------
Total Liabilities and Stockholders'
Equity $ 709,548 $ 657,457
=========== ===========
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended
March 31,
2006 2005
----------- -----------
($ in thousands, except
share and per share
amounts)
Revenues
Net premiums earned $ 57,256 $ 30,018
Ceding commission revenue 7,302 5,846
Insurance services revenue 1,829 3,781
Net investment income 4,660 2,615
Net realized (losses) gains on investments (145) 209
Policy billing fees 270 201
----------- -----------
Total revenues 71,172 42,670
----------- -----------
Expenses
Loss and loss adjustment expenses 33,210 18,062
Direct commission expense 13,080 8,792
Other operating expenses 13,384 8,917
Interest expense 1,350 1,165
----------- -----------
Total expenses 61,024 36,936
----------- -----------
Income before income taxes 10,148 5,734
Income tax expense 3,638 2,017
----------- -----------
Net income $ 6,510 $ 3,717
=========== ===========
Comprehensive Net Income
Net income $ 6,510 $ 3,717
Other comprehensive income:
Gross unrealized investment holding losses
arising during period (3,399) (4,486)
Less: reclassification adjustment for
losses (gains) included in net income 145 (209)
----------- -----------
(3,254) (4,695)
Income tax benefit related to items of
other comprehensive income 1,081 1,644
----------- -----------
Total other comprehensive net loss (2,173) (3,051)
----------- -----------
Comprehensive Net Income $ 4,337 $ 666
=========== ===========
Earnings Per Share
Basic earnings per common share $ 0.33 $ 0.19
=========== ===========
Diluted earnings per common share $ 0.32 $ 0.19
=========== ===========
Weighted Average Common Shares Outstanding:
Basic 19,684,902 19,521,111
Diluted 20,212,344 20,076,884
CONTACT: Tower Group, Inc.
Thomas Song, 212-655-4789
tsong@twrgrp.com
or
Investor Relations:
Makovsky + Company
Gene Marbach, 212-508-9600
gmarbach@makovsky.com