EXHIBIT 99.1
Tower Group, Inc. Reports a 48% Increase in Third Quarter of 2006 Net Income
NEW YORK--(BUSINESS WIRE)--Nov. 2, 2006--Tower Group, Inc.
(NASDAQ: TWGP) today reported a 48% increase in third quarter of 2006
net income to $8.5 million ($0.42 per diluted share) as compared to
net income of $5.7 million ($0.28 per diluted share) in the third
quarter of 2005.
For the first nine months of 2006, net income increased 92% to
$27.3 million ($1.36 per diluted share) as compared to $14.2 million
($0.71 per diluted share) for the first nine months of 2005. Results
for the nine months of 2006 were affected by several significant items
which were discussed in our second quarter earnings release.
GAAP Financial Highlights:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2006 2005 2006* 2005
--------- --------- --------- ---------
($ in thousands)
Gross premiums written $ 99,810 $ 72,821 $311,597 $221,495
Net premiums written 51,660 51,391 180,011 155,937
Net premiums earned 52,366 45,324 168,908 112,933
Total commission and fee
income 14,700 10,497 36,654 29,233
Net investment income 5,923 4,131 15,875 10,479
Net realized gain on
investments 32 (15) (84) 214
Total revenues 73,021 59,937 221,353 152,859
Other income 418 - 12,852 -
Net Income 8,456 5,708 27,251 14,190
EPS - Basic $ 0.43 $ 0.29 $ 1.38 $ 0.73
EPS - Diluted $ 0.42 $ 0.28 $ 1.36 $ 0.71
Return on Average Equity 20.2% 16.5% 22.8% 14.1%
========= ========= ========= =========
* Unadjusted for the effects of the PXRE transactions and CastlePoint
items
Michael H. Lee, President and Chief Executive Officer of Tower
Group, Inc. commented, "We had yet another strong quarter of premium
and earnings growth. It has been two successful years since our
initial public offering, and I'm pleased that we were able to
successfully execute our business plan this past quarter to meet our
stated financial and business objectives. Our strong results during
this past quarter continue to be driven by profitable underwriting
results as reflected by our net combined ratio of 84% as well as the
continued growth in our core commercial and personal lines business. "
Total revenues increased by 21.8% to $73.0 million for the three
months ended September 30, 2006 compared to $59.9 million for the same
period in 2005. Net premiums earned increased by 15.5% to $52.4
million for the three months ended September 30, 2006 compared to
$45.3 million for the same period in 2005. During the third quarter of
2006 under quota share reinsurance agreements we ceded to CastlePoint
Reinsurance approximately 40% of our brokerage business, 50% of our
traditional program business and 85% of our specialty program
business. This is compared to a 25% quota share ceding percentage in
the three months ended September 30, 2005. In addition, ceded premiums
earned increased in the third quarter of 2006 as a result of ceding
unearned premiums to CastlePoint Reinsurance as of April 1, 2006 which
related to business written in 2005 that we had previously retained.
Total commission and fee income increased by 40.0% to $14.7
million in the third quarter of 2006 compared to $10.5 million in the
third quarter of 2005. Net investment income increased by 43.4% to
$5.9 million for the three months ended September 30, 2006 compared to
$4.1 million in the same period in 2005. On a tax equivalent basis,
the yield was 5.6% as of September 30, 2006 and 5.1% as of September
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 September 30, 2006 were $49.1 million and 53.1%,
respectively, compared to $36.3 million and 56.0%, respectively, for
the same period in 2005. The net loss ratio for the combined segments
was 58.0% for the three months ended September 30, 2006 as compared to
58.5% in the same period of 2005.
Operating expenses were $28.4 million for the three months ended
September 30, 2006 as compared to $23.3 million for the same period in
2005. Our gross expense ratio was 28.8% for the three months ended
June 30, 2006 as compared with 31.0% 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
25.7% for the three months ended September 30, 2006 as compared to
29.3% for the same period in 2005.
The gross combined ratio was 81.9% for the three months ended
September 30, 2006 as compared with 87.0% for the same period in 2005.
The net combined ratio was 83.7% for the three months ended September
30, 2006 as compared to 87.8% for the same period in 2005.
Additional Highlights:
Dividend Declaration
Tower Group, Inc. announced today that the Company's Board of
Directors approved a quarterly dividend on October 26, 2006 of $0.025
per share payable December 27, 2006 to stockholders of record as of
December 15, 2006.
Sale of Tower Indemnity Company of America
On October 30, 2006 Tower executed an agreement to sell all of the
issued and outstanding common shares of Tower Indemnity Company of
America ("TICA"), a New York property and casualty insurance company,
to CastlePoint Management Corp ("CastlePoint Management"), a
subsidiary of CastlePoint Holdings, Ltd. ("CastlePoint"). The purchase
price is an amount equal to TICA's aggregate statutory surplus as of
the closing date plus $350,000 for additional legal and other costs.
As of September 30, 2006 TICA's statutory surplus was $8.4 million.
Tower entered into this sale to facilitate its pooling arrangement
with CastlePoint. Tower does not expect to recognize any gain or loss
on this sale. TICA is a shell insurance company and has no net
liabilities for insurance losses.
2006 Guidance
For the fourth quarter of 2006, we project net income to increase
to a range between $8.8 million and $9.4 million. We project the
diluted earnings per share in the fourth quarter to be in the range
between $0.44 and $0.47 per diluted share. For the full year, we
anticipate net income to be in a range between $36.1 million and $36.7
million and diluted earnings per share to be between $1.80 and $1.83
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
Third Quarter
($ in thousands)
Three Months ended September 30,
2006 2005 % Change
Revenues
Earned premiums:
Gross premiums earned $ 92,527 $ 64,859 42.7%
Less: Ceded premiums earned (40,162) (19,535) 105.6%
-----------------------
Net premiums earned 52,365 45,324 15.5%
Ceded commission revenue 13,171 6,845 92.4%
Policy Billings Fees 286 227 26.0%
-----------------------
Total Revenue 65,822 52,396 25.6%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment
expenses 49,100 36,334 35.1%
Less: Ceded loss and loss adjustment
expenses (18,709) (9,822) 90.5%
-----------------------
Net loss and loss adjustment expense 30,391 26,512 14.6%
Underwriting Expenses
Commissions paid to producers 15,099 10,135 49.0%
Other underwriting expenses 11,824 10,226 15.6%
-----------------------
Total Underwriting Expense 26,923 20,361 32.2%
Underwriting Profit $ 8,508 $ 5,523 54.0%
=======================
Key Measures
Written Premiums
Gross $ 99,810 $ 72,821 37.1%
Ceded (48,150) (21,430) 124.7%
-----------------------
Net $ 51,660 $ 51,391 0.5%
=======================
Loss ratios
Gross 53.1% 56.0%
Net 58.0% 58.5%
Accident Year Loss Ratio
Gross 53.6% 56.5%
Net 59.2% 59.0%
Expense ratios
Gross 28.8% 31.0%
Net 25.7% 29.3%
Combined ratios (GAAP)
Gross 81.9% 87.0%
Net 83.7% 87.8%
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
First Nine Months
($ in thousands)
Nine Months ended September 30,
2006 2005 % Change
Revenues
Earned premiums:
Gross premiums earned $ 264,711 $ 165,787 59.7%
Less: Ceded premiums earned (95,803) (52,854) 81.3%
----------------------
Net premiums earned 168,908 112,933 49.6%
Ceded commission revenue 30,550 18,021 69.5%
Policy Billings Fees 825 653 26.3%
----------------------
Total Revenue 200,283 131,607 52.2%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment
expenses 150,974 93,828 60.9%
Less: Ceded loss and loss adjustment
expenses (45,948) (27,241) 68.7%
----------------------
Net loss and loss adjustment expense 105,026 66,587 57.7%
Underwriting Expenses
Commissions paid to producers 42,109 27,211 54.7%
Other underwriting expenses 33,508 24,596 36.2%
----------------------
Total Underwriting Expense 75,617 51,807 46.0%
Underwriting Profit $ 19,640 $ 13,213 48.6%
======================
Key Measures
Written Premiums
Gross $ 311,597 $ 221,495 40.7%
Ceded (131,586) (65,558) 100.7%
----------------------
Net $ 180,011 $ 155,937 15.4%
======================
Loss ratios
Gross 57.0% 56.6%
Net 62.2% 59.0%
Accident Year Loss Ratio
Gross 57.5% 57.2%
Net 62.0% 59.2%
Expense ratios
Gross 28.3% 30.9%
Net 26.2% 29.3%
Combined ratios (GAAP)
Gross 85.3% 87.5%
Net 88.4% 88.3%
Insurance Services Segment Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2006 2005 2006 2005
--------- --------- --------- ---------
($ in thousands)
Revenues
Direct commission revenue from
managing general agency $ 380 $ 2,022 $ 2,291 $ 6,713
Claims administration revenue 688 1,137 2,572 3,287
Reinsurance intermediary
fees(1) 176 259 411 541
Policy billing fees - 7 5 18
--------- --------- --------- ---------
Total Revenues 1,244 3,425 5,279 10,559
--------- --------- --------- ---------
Expenses
Direct commissions expense
paid to producers 211 1,143 1,545 3,528
Other insurance services
expenses(2) 193 472 735 1,412
Claims expense reimbursement
to TICNY 687 1,135 2,556 3,276
--------- --------- --------- ---------
Total Expenses 1,091 2,750 4,836 8,216
--------- --------- --------- ---------
Insurance Services Pre-tax
Income $ 153 $ 675 $ 443 $ 2,343
========= ========= ========= =========
Premium produced by TRM on
behalf of issuing companies $ 1,408 $ 8,013 $ 10,270 $ 24,888
========= ========= ========= =========
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
($ in thousands, except share and per share
amounts)
Revenues
Net premiums
earned $ 52,366 $ 45,324 $ 168,908 $ 112,933
Ceding commission
revenue 13,171 6,845 30,550 18,021
Insurance services
revenue 1,243 3,418 5,274 10,541
Net investment
income 5,923 4,131 15,875 10,479
Net realized gains
(losses) on
investments 32 (15) (84) 214
Policy billing
fees 286 234 830 671
------------ ------------ ------------ ------------
Total revenues 73,021 59,937 221,353 152,859
------------ ------------ ------------ ------------
Expenses
Loss and loss
adjustment
expenses 30,392 26,512 105,026 66,587
Direct commission
expense 15,309 11,277 43,654 30,738
Other operating
expenses 13,127 12,068 38,718 30,265
Interest expense 1,863 1,296 5,066 3,567
------------ ------------ ------------ ------------
Total expenses 60,691 51,153 192,464 131,157
------------ ------------ ------------ ------------
Other Income
Equity income in
unconsolidated
affiliate 418 - 364 -
Gain from issuance
of common stock
by unconsolidated
affiliate - - 7,883 -
Warrant received
from
unconsolidated
affiliate - - 4,605 -
------------ ------------ ------------ ------------
Income before
income taxes 12,748 8,784 41,741 21,702
Income tax expense 4,292 3,076 14,490 7,512
------------ ------------ ------------ ------------
Net income $ 8,456 $ 5,708 $ 27,251 $ 14,190
============ ============ ============ ============
Comprehensive Net
Income
Net income $ 8,456 $ 5,708 $ 27,251 $ 14,190
Other
comprehensive
income:
Gross unrealized
investment
holding gains
(losses) arising
during period 9,150 (4,765) 3,273 (4,424)
Equity in net
unrealized gains
in investment in
unconsolidated
affiliate's
investment
portfolio 296 - 184 -
Less:
reclassification
adjustment for
(gains) losses
included in net
income (32) 15 84 (214)
------------ ------------ ------------ ------------
9,414 (4,750) 3,541 (4,638)
Income tax
(expense)
benefit related
to items of
other
comprehensive
income (3,295) 1,669 (1,297) 1,630
------------ ------------ ------------ ------------
Total other
comprehensive
(loss) net
income 6,119 (3,081) 2,244 (3,008)
------------ ------------ ------------ ------------
Comprehensive
Net Income $ 14,575 $ 2,627 $ 29,495 $ 11,182
============ ============ ============ ============
Earnings Per Share
Basic earnings per
common share $ 0.43 $ 0.29 $ 1.38 $ 0.73
============ ============ ============ ============
Diluted earnings
per common share $ 0.42 $ 0.28 $ 1.36 $ 0.71
============ ============ ============ ============
Weighted Average
Common Shares
Outstanding:
Basic 19,776,188 19,575,728 19,734,365 19,550,722
Diluted 20,074,058 20,161,873 20,032,256 20,119,280
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2006 2005
------------- -------------
($ in thousands, except par
value and share amounts)
Assets
Fixed-maturity securities, available-for-
sale, at fair value (amortized cost
$402,668 in 2006 and $331,123 in 2005) $ 401,032 $ 326,681
Equity securities, available-for-sale, at
fair value (cost $42,676 in 2006 and
$6,681 in 2005) 42,646 5,934
Equity securities, at cost - 24,558
Common trust securities - statutory
business trusts, equity method 2,045 1,426
------------- -------------
Total investments 445,723 358,599
Cash and cash equivalents 40,533 38,760
Investment income receivable 4,123 3,337
Agents' balances receivable 55,245 46,004
Assumed premiums receivable 4,910 1,076
Ceding commission receivable - 8,727
Reinsurance recoverable 108,515 104,811
Receivable - claims paid by agency 3,633 2,309
Prepaid reinsurance premiums 79,102 43,319
Deferred acquisition costs net of deferred
ceding commission revenue 34,783 29,192
Federal and state income taxes recoverable 3,134 365
Deferred income taxes 242 3,204
Intangible assets 5,830 5,835
Fixed assets, net of accumulated
depreciation 23,912 7,920
Investment in unconsolidated affiliate 27,436 -
Other assets 4,342 3,999
------------- -------------
Total Assets $ 841,463 $ 657,457
============= =============
Liabilities
Loss and loss adjustment expenses $ 279,600 $ 198,724
Unearned premium 204,666 157,779
Reinsurance balances payable 24,851 19,200
Payable to issuing carriers 1,818 5,252
Funds held as agent 8,195 8,191
Funds held under reinsurance agreements 57,024 59,042
Accounts payable and accrued expenses 12,179 13,694
Deferred rent liability 6,040 -
Payable for securities 939 -
Other liabilities 3,580 2,867
Federal income taxes payable - 460
Subordinated debentures 68,045 47,426
------------- -------------
Total Liabilities 666,937 512,635
------------- -------------
Stockholders' Equity
Common stock ($0.01 par value per share;
40,000,000 shares authorized; and
20,005,758 shares issued in 2006 and
19,872,672 in 2005) 200 199
Paid-in-capital 112,824 111,066
Accumulated other comprehensive net income (1,108) (3,352)
Retained earnings 62,789 37,019
Treasury stock (23,720 shares in 2006 and
17,881 in 2005) (179) (110)
------------- -------------
Total Stockholders' Equity 174,526 144,822
------------- -------------
Total Liabilities and Stockholders'
Equity $ 841,463 $ 657,457
============= =============
CONTACT: Tower Group, Inc.
Thomas Song, 212-655-4789
Managing Vice President
tsong@twrgrp.com