Exhibit 99.1
Tower Group, Inc. Reports a 158% Increase in Second Quarter of 2006 Net Income
NEW YORK--(BUSINESS WIRE)--Aug. 3, 2006--Tower Group, Inc.
(NASDAQ: TWGP) today reported a 158% increase in second quarter of
2006 net income to $12.3 million ($0.61 per diluted share) as compared
to net income of $4.8 million ($0.24 per diluted share) in the second
quarter of 2005.
For the first six months of 2006, net income increased 122% to
$18.8 million ($0.93 per diluted share) as compared to $8.5 million
($0.42 per diluted share) for the first six months of 2005.
GAAP Financial Highlights:
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -------------------
2006 2005 2006 2005
--------- -------- --------- ---------
($ in thousands)
Gross premiums written $124,414 $84,006 $211,787 $148,674
Net premiums written 45,473 59,185 128,351 104,546
Net premiums earned 59,286 37,591 116,542 67,609
Total commission and fee income 12,553 8,908 21,954 18,736
Net investment income 5,292 3,733 9,952 6,348
Net realized gain on
investments 29 20 (116) 229
Total revenues 77,160 50,252 148,332 92,922
Other income 12,434 - 12,434 -
Net Income 12,285 4,765 18,795 8,482
EPS - Basic $0.62 $0.24 $0.95 $0.43
EPS - Diluted $0.61 $0.24 $0.93 $0.42
Return on Average Equity 31.8% 14.3% 24.7% 12.7%
========= ======== ========= =========
During the three and six months ended June 30, 2006, significant
events affected the consolidated results of Tower and the exclusion of
these is more indicative of Tower's operating performance. The
following table reconciles the effect of these events to GAAP results.
Non-GAAP Financial Measures:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2006 2005 2006 2005
-------- -------- -------- --------
($ in thousands)
Pre-tax GAAP income as reported $18,845 $ 7,184 $28,993 $12,918
Significant Events:
Less: Gain on CastlePoint Shares (7,883) - (7,883) -
Less: Warrant received from
unconsolidated affiliate (4,605) - (4,605) -
Add: PXRE commutation/novation 5,459 - 5,459 -
Add: CastlePoint start-up costs - - 472 -
Adjusted pre-tax income 11,816 7,184 22,436 12,918
Income tax expense (excludes the
tax effect of adjustments) 4,100 2,419 7,738 4,436
Adjusted net income 7,716 4,765 14,698 8,482
Adjusted EPS - Diluted $0.38 $0.24 $0.73 $0.42
Adjustment to return on average
equity (11.6%) (5.1%)
Return on average equity, excluding
the effects of the PXRE
transactions and CastlePoint items 20.2% 14.3% 19.6% 12.7%
======== ======== ======== ========
Michael H. Lee, President and Chief Executive Officer of Tower
Group, Inc. commented, "Our second quarter results established new
records for both revenue and earnings as reflected by our increasing
return on equity. During the quarter, we achieved strong growth in
gross and net premiums earned and investment income while continuing
to maintain a disciplined underwriting approach. In addition, we
eliminated our exposure to reinsurance recoverables from an unrated
reinsurer at favorable terms to further strengthen our balance sheet.
This was also our first quarter with CastlePoint Re as our quota share
reinsurer, and this relationship further strengthened our business
model by supporting our growth and improving our return on average
equity to the upper end of our target range for the year."
During the three months ended June 30, 2006 significant events
that affected the consolidated results of operations included the
execution of commutation and novation agreements between us and PXRE
Reinsurance Company ("PXRE") to eliminate our exposure to
uncollateralized reinsurance recoverables from PXRE, which had
requested the withdrawal of its financial strength and issuer rating
from A.M.Best. Tower recorded charges totaling $5.5 million as a
result of these agreements. Additionally, Tower recognized a gain
relating to its investment in CastlePoint Holdings, Ltd.
("CastlePoint") as result of the sale of unissued common shares by
CastlePoint in a private offering. This resulted in an increase in the
book value per share of Tower's existing investment in CastlePoint
which resulted in a $7.9 million gain for Tower. Tower recognized its
share of CastlePoint's operating results and investment portfolio fair
value change for the three months ending June 30, 2006 using the
equity method of accounting. Additionally, Tower received a warrant to
purchase additional CastlePoint shares valued at $4.6 million in
exchange for sponsorship services, which includes management,
organizational and industry expertise to establish CastlePoint and
prepare for CastlePoint's private placement offering. The warrant was
valued at the high end of the previously announced range. The net
effect of these transactions and gains on pre-tax income was $7.0
million in the second quarter of 2006.
Total revenues increased by 53.5% to $77.2 million for the three
months ended June 30, 2006 compared to $50.3 million for the same
period in 2005. Net premiums earned increased by 57.7% to $59.3
million for the three months ended June 30, 2006 compared to $37.6
million for the same period in 2005. The increase in net premiums
earned was due to the overall increase in gross premiums written in
the second quarter of 2006 and the novation agreements with PXRE,
which added $11.4 million of net premiums earned in the second quarter
of 2006. Consideration received under novation agreements is recorded
as premiums written and earned. Since Tower did not place quota share
reinsurance during the first quarter of 2006, we ceded to CastlePoint
Reinsurance $40.9 million of unearned premiums as of April 1, 2006,
and $30.0 million of premiums written on policies that incepted during
the second quarter of 2006 with both cessions reflecting a 30% quota
share ceding percentage as compared to 25% in the three months ended
June 30, 2005.
Total commission and fee income increased by 40.9% to $12.6
million in the second quarter of 2006 compared to $8.9 million in the
second quarter of 2005. Net investment income increased by 41.8% to
$5.3 million for the three months ended June 30, 2006 compared to $3.7
million for the same period in 2005. On a tax equivalent basis, the
investment yield was 5.4% as of June 30, 2006 and 5.1% as of June 30,
2005.
Gross loss and loss adjustment expenses and the gross loss ratio
for the insurance and reinsurance segments combined for the three
months ended June 30, 2006 were $58.6 million and 61.3%, respectively,
compared to $31.4 million and 57.1%, respectively, for the same period
in 2005. The net loss ratio for the combined segments was 69.9% for
the three months ended June 30, 2006, which reflected charges
resulting from the commutation and novation agreements with PXRE, as
compared to 58.6% in the same period of 2005. The effects of these
agreements added 12.2% to the net loss ratio for the combined segments
for the three months ended June 30, 2006.
Underwriting expenses for the insurance and reinsurance segments
combined, which include direct commission expenses and other
underwriting expenses, were $25.0 million for the three months ended
June 30, 2006 as compared with $16.9 million for the same period in
2005. Our gross expense ratio was 25.9% for the three months ended
June 30, 2006 as compared with 30.3% for the same period in 2005.
The net underwriting expense ratio, which reflects the benefit of
ceding commission revenue that lowers the gross expense ratio, was
24.8% for the three months ended June 30, 2006 as compared to 30.2%
for the same period in 2005. The net expense ratio was adversely
affected by the reduction in ceding commissions of $3.2 million
resulting from the commutations with PXRE. The effect of this charge
added 0.9% to the net expense ratio which included the benefit of
additional ceding commission revenue during the second quarter due to
the additional ceded earned premiums arising from the ceded unearned
premium as of April 1, 2006.
The gross combined ratio was 87.2% for the three months ended June
30, 2006 as compared with 87.4% for the same period in 2005. The net
combined ratio was 94.7% for the three months ended June 30, 2006 as
compared to 88.8% for the same period in 2005. The effect of the
commutation and novation added 13.1% to the net combined ratio.
Additional Highlights:
Catastrophe Reinsurance
Tower successfully completed the placement of its catastrophe
reinsurance program during very difficult conditions in the property
catastrophe reinsurance market. The property catastrophe models
utilized in the insurance industry had changed recently to reflect on
more significant loss scenarios, and this increased the level of
protection required above the growth rate in exposures. Reinsurance
protection was renewed on July 1, and Tower will continue to actively
monitor the exposure.
Dividend Declaration
Tower Group, Inc. announced today that the Company's Board of
Directors approved a quarterly dividend on July 27, 2006 of $0.025 per
share payable September 27, 2006 to stockholders of record as of
September 15, 2006.
2006 Guidance
For the third quarter of 2006, we project net income to increase
to a range between $8.2 million and $8.7 million. We project the
diluted earnings per share in the third quarter to be in the range
between $0.41 and $0.43 per diluted share. For the full year, we
anticipate net income to be in a range between $36.5 million and $37.5
million and diluted earnings per share to be between $1.80 and $1.85
on a GAAP basis which includes the effects of the PXRE transactions,
CastlePoint items and increased catastrophe reinsurance costs.
About Tower Group, Inc.
Tower Group, Inc. 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.
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 Web site at
http://www.twrgrp.com/.
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
Second Quarter
($ in thousands)
Three Months ended June 30,
%
2006 2005 Change
Revenues
Earned premiums:
Gross premiums earned $ 95,568 $ 55,060 73.6%
Less: Ceded premiums earned (36,281) (17,469) 107.7%
Net premiums earned 59,287 37,591 57.7%
Ceded commission revenue 10,077 5,330 89.1%
Policy Billings Fees 272 230 18.3%
--------------------
Total Revenue 69,636 43,151 61.4%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment expenses 58,562 31,419 86.4%
Less: Ceded loss and loss adjustment
expenses (17,137) (9,406) 82.2%
--------------------
Net loss and loss adjustment expense 41,425 22,013 88.2%
Underwriting Expenses
Commissions paid to producers 14,533 9,495 53.1%
Other underwriting expenses 10,509 7,410 41.8%
--------------------
Total Underwriting Expense 25,042 16,905 48.1%
Underwriting Profit $ 3,169 $ 4,233 -25.1%
====================
Key Measures
Written Premiums
Gross $124,414 $ 84,006 48.1%
Ceded (78,941) (24,821) 218.0%
--------------------
Net $ 45,473 $ 59,185 -23.2%
====================
Loss ratios
Gross 61.3% 57.1%
Net 69.9% 58.6%
Accident Year Loss Ratio
Gross 61.2% 57.9%
Net 67.4% 60.1%
Expense ratios
Gross 25.9% 30.3%
Net 24.8% 30.2%
Combined ratios (GAAP)
Gross 87.2% 87.4%
Net 94.7% 88.8%
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
First Six Months
($ in thousands)
Six Months ended June 30,
%
2006 2005 Change
Revenues
Earned premiums:
Gross premiums earned $172,184 $100,928 70.6%
Less: Ceded premiums earned (55,641) (33,319) 67.0%
Net premiums earned 116,543 67,609 72.4%
Ceded commission revenue 17,379 11,176 55.5%
Policy Billings Fees 539 426 26.5%
--------------------
Total Revenue 134,461 79,211 69.8%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment expenses 101,874 57,495 77.2%
Less: Ceded loss and loss adjustment
expenses (27,239) (17,420) 56.4%
--------------------
Net loss and loss adjustment expense 74,635 40,075 86.2%
Underwriting Expenses
Commissions paid to producers 27,010 17,076 58.2%
Other underwriting expenses 21,684 14,370 50.9%
--------------------
Total Underwriting Expense 48,694 31,446 54.8%
Underwriting Profit $ 11,132 $ 7,690 44.8%
====================
Key Measures
Written Premiums
Gross $211,787 $148,674 42.5%
Ceded (83,436) (44,128) 89.1%
--------------------
Net $128,351 $104,546 22.8%
====================
Loss ratios
Gross 59.2% 57.0%
Net 64.0% 59.3%
Accident Year Loss Ratio
Gross 59.6% 57.9%
Net 63.3% 60.1%
Expense ratios
Gross 28.0% 30.7%
Net 26.4% 29.4%
Combined ratios (GAAP)
Gross 87.2% 87.7%
Net 90.4% 88.7%
Insurance Services Segment Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------
2006 2005 2006 2005
------- --------- -------- ----------
($ in thousands)
Revenues
Direct commission revenue from
managing general agency $1,105 $ 2,166 $ 1,911 $ 4,691
Claims administration revenue 922 1,097 1,884 2,150
Reinsurance intermediary fees(1) 174 79 235 282
Policy billing fees 2 6 5 11
------- --------- -------- ----------
Total Revenues 2,203 3,348 4,035 7,134
------- --------- -------- ----------
Expenses
Direct commissions expense paid
to producers 731 1,174 1,334 2,385
Other insurance services
expenses(2) 305 455 542 940
Claims expense reimbursement to
TICNY 911 1,091 1,869 2,141
------- --------- -------- ----------
Total Expenses 1,947 2,720 3,745 5,466
------- --------- -------- ----------
Insurance Services Pre-tax
Income $ 256 $ 628 $ 290 $ 1,668
======= ========= ======== ==========
Premium produced by TRM on
behalf of issuing companies $4,834 $ 8,431 $ 8,862 $ 16,875
======= ========= ======== ==========
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- -----------
($ in thousands, except share and per share
amounts)
Revenues
Net premiums earned $ 59,286 $ 37,591 $ 116,542 $ 67,609
Ceding commission
revenue 10,077 5,330 17,379 11,176
Insurance services
revenue 2,202 3,342 4,031 7,123
Net investment income 5,292 3,733 9,952 6,348
Net realized gains on
investments 29 20 (116) 229
Policy billing fees 274 236 544 437
---------- ---------- ---------- -----------
Total revenues 77,160 50,252 148,332 92,922
---------- ---------- ---------- -----------
Expenses
Loss and loss adjustment
expenses 41,424 22,013 74,634 40,075
Direct commission
expense 15,265 10,669 28,345 19,461
Other operating expenses 12,207 9,280 25,591 18,197
Interest expense 1,853 1,106 3,203 2,271
---------- ---------- ---------- -----------
Total expenses 70,749 43,068 131,773 80,004
---------- ---------- ---------- -----------
Other Income
Equity in (loss) of
unconsolidated
affiliate (54) - (54) -
Gain from issuance of
common stock of
unconsolidated
affiliate 7,883 - 7,883 -
Warrant received from
unconsolidated
affiliate 4,605 - 4,605 -
---------- ---------- ---------- -----------
Income before income
taxes 18,845 7,184 28,993 12,918
---------- ---------- ---------- -----------
Income tax expense 6,560 2,419 10,198 4,436
---------- ---------- ---------- -----------
Net income $ 12,285 $ 4,765 $ 18,795 $ 8,482
========== ========== ========== ===========
Comprehensive Net Income
Net income $ 12,285 $ 4,765 $ 18,795 $ 8,482
Other comprehensive
income:
Gross unrealized
investment holding
(losses) gains
arising during
period (2,478) 4,827 (5,877) 341
Equity in net
unrealized (losses)
gains in investment
in unconsolidated
affiliate's
investment portfolio (112) - (112) -
Less:
reclassification
adjustment for
(gains) losses
included in net
income (29) (20) 116 (229)
---------- ---------- ---------- -----------
(2,619) 4,807 (5,873) 112
Income tax benefit
(expense) related to
items of other
comprehensive
income 917 (1,683) 1,998 (39)
---------- ---------- ---------- -----------
Total other
comprehensive net
(loss) income (1,702) 3,124 (3,875) 73
---------- ---------- ---------- -----------
Comprehensive Net
Income $ 10,583 $ 7,889 $ 14,920 $ 8,555
========== ========== ========== ===========
Earnings Per Share
Basic earnings per
common share $ 0.62 $ 0.24 $ 0.95 $ 0.43
========== ========== ========== ===========
Diluted earnings per
common share $ 0.61 $ 0.24 $ 0.93 $ 0.42
========== ========== ========== ===========
Weighted Average Common
Shares Outstanding:
Basic 19,742,004 19,555,327 19,713,453 19,538,219
Diluted 20,265,054 20,108,917 20,241,611 20,093,198
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30, Dec. 31
2006 2005
----------- ---------
($ in thousands,
except par value
and share amounts)
Assets
Fixed-maturity securities, available-for-sale, at
fair value (amortized cost $374,300 in 2006 and
$331,123 in 2005) $363,562 $326,681
Equity securities, available-for-sale, at fair
value (cost $6,681 in 2006 and $6,681 in 2005) 6,624 5,934
Equity securities, at cost 25,191 24,558
Common trust securities - statutory business
trusts, equity method 2,045 1,426
--------- ---------
Total investments 397,422 358,599
Cash and cash equivalents 81,829 38,760
Investment income receivable 4,057 3,337
Agents' balances receivable 54,307 46,004
Assumed premiums receivable 6,983 1,076
Ceding commission receivable - 8,727
Reinsurance recoverable 95,987 104,811
Receivable - claims paid by agency 3,167 2,309
Prepaid reinsurance premiums 73,449 43,319
Deferred acquisition costs net of deferred ceding
commission revenue 32,855 29,192
State income taxes recoverable 84 365
Deferred income taxes 5,536 3,204
Intangible assets 5,940 5,835
Fixed assets, net of accumulated depreciation 11,027 7,920
Investment in unconsolidated affiliate 26,849 -
Other assets 6,350 3,999
--------- ---------
Total Assets $805,842 $657,457
========= =========
Liabilities
Loss and loss adjustment expenses $254,412 $198,724
Unearned premium 199,718 157,779
Reinsurance balances payable 33,121 19,200
Payable to issuing carriers 3,585 5,252
Funds held as agent 8,195 8,191
Funds held under reinsurance agreements 59,792 59,042
Accounts payable and accrued expenses 12,495 13,694
Other liabilities 2,867 2,867
Federal income taxes payable 3,696 460
Subordinated debentures 68,045 47,426
--------- ---------
Total Liabilities 645,926 512,635
--------- ---------
Stockholders' Equity
Common stock ($0.01 par value per share;
40,000,000 shares authorized;
and 19,956,606 shares issued in 2006 and
19,872,672 in 2005) 199 199
Paid-in-capital 112,293 111,066
Accumulated other comprehensive net income (7,226) (3,352)
Retained earnings 54,827 37,019
Treasury stock (23,457 shares in 2006 and 17,881
in 2005) (177) (110)
--------- ---------
Total Stockholders' Equity 159,916 144,822
--------- ---------
Total Liabilities and Stockholders' Equity $805,842 $657,457
========= =========
CONTACT: Tower Group, Inc.
Thomas Song, 212-655-4789
tsong@twrgrp.com