Exhibit 99.1
Tower Group, Inc. Reports 45% Increase in
Net Income; Company Delivers Record Results for 2006
NEW YORK--(BUSINESS WIRE)--Feb. 27, 2007--Tower Group, Inc.
(NASDAQ: TWGP) today reported its financial results for the fourth
quarter of 2006, including a 45% increase in net income to $9.5
million as compared to net income of $6.6 million in the fourth
quarter of 2005. For the year ended December 31, 2006, net income
increased 77% to $36.8 million as compared to $20.8 million for the
prior year.
Diluted earnings per share of $0.46 for the fourth quarter of 2006
were based on 20,483,388 weighted average diluted shares as compared
with $0.32 per share for the fourth quarter of 2005, based on
20,200,584 weighted average diluted shares. For the year, Tower
reported diluted earnings per share of $1.82, based on 20,147,318
weighted average diluted shares, as compared with $1.03 per diluted
share for the year ended December 31, 2005 based on 20,147,073
weighted average diluted shares.
Fourth Quarter and Twelve Month Highlights
Three Months Ended Twelve Months Ended
December 31, December 31,
--------------------- ---------------------
2006 2005 2006 2005
===================== =====================
Gross premiums written $121,066 $78,612 $432,663 $300,107
Net premiums written 65,059 55,845 245,070 211,782
Net premiums earned 55,080 51,503 223,988 164,436
Total commission and fee
income 15,583 10,980 52,237 40,213
Net investment income 7,151 4,504 23,026 14,983
Net realized gains
(losses) on investments 96 (92) 12 122
Total revenues 77,910 66,895 299,263 219,754
Other income 550 - 13,402 -
Net Income 9,513 6,564 36,764 20,754
EPS - Basic $0.47 $0.33 $1.85 $1.06
EPS - Diluted $0.46 $0.32 $1.82 $1.03
Return on Average Equity 20.7% 18.4% 22.2% 15.1%
Note: The net effects of the commutation and novation transactions
with PXRE in the second quarter of 2006, the gains recorded on the
CastlePoint investment and warrant, and the CastlePoint start-up costs
added $4.1 million to our net income and 2.2 percentage points to our
return on average equity for the year ended December 31, 2006.
Michael H. Lee, President and Chief Executive Officer of Tower
Group, Inc. commented, "Our operating results during the fourth
quarter and full year 2006 continue to be driven by the strength of
our business model which produced a return on equity in excess of 20%.
In addition, we are pleased that despite competitive pricing in
certain market segments, we successfully executed on our marketing and
underwriting strategies to achieve strong top line premium growth and
excellent underwriting results. With the establishment of our
strategic relationship with CastlePoint, the recently completed
capital raise for Tower and the pending acquisition of Preserver, we
are well positioned in 2007 to continue profitable premium growth
while maintaining our underwriting and expense discipline."
Fourth Quarter 2006 Financial Highlights
Total revenues increased 16.5% to $77.9 million in the fourth
quarter of 2006 as compared to $66.9 million in the same period in
2005. Net premiums earned increased by 6.9% to $55.1 million for the
three months ended December 31, 2006 compared to $51.5 million for the
same period in 2005. During the fourth quarter of 2006, we ceded to
CastlePoint Reinsurance $45.5 million, or approximately 38% of gross
premiums written in our insurance segment, under quota share
reinsurance agreements. This is compared to a 25% quota share ceding
percentage in the three months ended December 31, 2005.
Total commission and fee income increased 41.9% to $15.6 million
in the fourth quarter of 2006 as compared to $11.0 million in the
fourth quarter of 2005. Net investment income in the fourth quarter of
2006 increased 58.8% to $7.2 million versus $4.5 million in the fourth
quarter of 2005.
Gross loss and loss adjustment expenses and the gross loss ratio
for the Insurance and Reinsurance Segments combined for the three
months ended December 31, 2006 were $48.9 million and 49.5%,
respectively, compared to $41.4 million and 57.4%, respectively, for
the same period in 2005. The net loss ratio for the combined segments
was 54.6% for the three months ended December 31, 2006 as compared to
58.3% in the same period of 2005.
Operating expenses were $31.9 million for the three months ended
December 31, 2006 as compared to $25.5 million for the same period in
2005.
Net income for the fourth quarter of 2006 was $9.5 million
compared to $6.6 million in 2005. Our annualized return on average
equity was 20.7% for the fourth quarter of 2006 compared to 18.4% for
the same period in 2005.
On December 4, 2006, we issued $40 million of preferred stock
("Preferred Stock") to a subsidiary of CastlePoint Holdings, Ltd. As
of January 26, 2007 all of the Company's Preferred Stock was fully
redeemed.
Full Year 2006 Financial Highlights
Total revenues increased by 36.2% to $299.3 million for 2006
compared to $219.8 million for 2005. Net premiums earned increased by
36.2% to $224.0 million for the year ended December 31, 2006 compared
to $164.4 million for 2005. During the year, we ceded to CastlePoint
Reinsurance $155.2 million, or approximately 38% of gross premiums
written in our insurance segment, under quota share reinsurance
agreements. This is compared to a 25% quota share ceding percentage in
the year ended December 31, 2005.
Total commission and fee income increased 29.9% to $52.2 million
for the year ended December 31, 2006 as compared to $40.2 million in
2005. Net investment income in 2006 increased 53.7% to $23.0 million
versus $15.0 million in 2005. On a tax equivalent basis, the yield was
5.7% as of December 31, 2006 versus 5.2% as of December 31, 2005. The
increase in net investment income is due to an increase in invested
assets to $464.0 million as of December 31, 2006 compared to $357.2
million as of December 31, 2005. Net cash flow provided by operations
of $134.0 million contributed to the increase in invested assets along
with the issuance of trust preferred and Preferred Stock.
Gross loss and loss adjustment expenses and the gross loss ratio
for the Insurance and Reinsurance Segments combined for the year ended
December 31, 2006 were $199.9 million and 55.0%, respectively,
compared to $135.2 million and 56.8%, respectively, for 2005. The net
loss ratio for the combined segments was 60.3% for the year as
compared to 58.8% in 2005.
Operating expenses were $114.2 million for the year ended December
31, 2006 as compared to $86.5 million for 2005.
Our 2006 net income was $36.8 million compared to $20.8 million in
2005. Return on average equity was 22.2% for 2006 compared to 15.1% in
2005. For 2006, the return was calculated by dividing net income
available to common stockholders of $36.6 million by an average common
stockholders' equity of $164.6 million. For 2005, the return was
calculated by dividing net income of $20.8 million by an average
common stockholders' equity of $137.1 million.
The effective income tax rate was 34.9% in 2006 compared to 34.8%
in 2005.
Dividend Declaration
Tower Group, Inc. announced today that the Company's Board of
Directors approved a quarterly dividend on February 22, 2007 of $0.025
per share payable March 30, 2007 to stockholders of record as of March
15, 2007.
Additional Highlights
On January 25, 2007, the Company participated in a private
placement of $20.0 million of fixed/floating rate capital securities
issued by Tower Group Statutory Trust VI. Interest distributions are
initially at a fixed rate of 8.155% for the first five years and will
then reset quarterly for changes in the three-month London Interbank
Offered Rate ("LIBOR") plus 300 basis points. The net proceeds were
used to redeem $20.0 million of the Preferred Stock on January 26,
2007.
On January 26, 2007, the Company closed on its public offering of
2,704,000 shares of common stock at a public offering price of $31.25
per share. The Company's net proceeds were approximately $79.3
million. The Company used $20.0 million of these net proceeds to
redeem its remaining $20.0 million of Preferred Stock.
On February 5, 2007 the underwriters in the Company's common stock
offering, partially exercised their overallotment option to acquire
340,600 shares of common stock. The exercise of the over-allotment
option brings the Company's aggregate net proceeds from the offering
to approximately $89.4 million.
2007 Guidance
For the first quarter of 2007, we project net income to increase
from the first quarter of 2006 to a range between $9.9 million and
$10.8 million. We project the diluted earnings per share in the first
quarter to be in the range between $0.44 and $0.48 per diluted share.
We have historically experienced seasonality between the fourth and
first quarters with either lower or flat growth despite overall growth
for the year. For the full year, we anticipate net income to increase
to a range between $55 million and $57 million and diluted earnings
per share to be between $2.40 and $2.50 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 two insurance company
subsidiaries are Tower Insurance Company of New York, which 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, and Tower National Insurance Company, which
is also rated A- (Excellent) by A.M. Best Company. Tower Group's
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," "project",
"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; 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/.
Results of Operations
Insurance and Reinsurance Segments
Fourth Quarter
Revenues 2006 2005 % Change
Earned premiums
Gross premiums earned $ 98,714 $ 72,046 37.0%
Less: Ceded premiums earned (43,634) (20,543) 112.4%
--------- --------- ---------
Net premiums earned 55,080 51,503 6.9%
Ceded commission revenue 12,580 7,197 74.8%
Policy Billings Fees 304 215 41.5%
--------- --------- ---------
Total 67,964 58,915 15.4%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment
expenses 48,889 41,371 18.2%
Less: Ceded loss and loss
adjustment expenses (18,790) (11,344) 65.6%
--------- --------- ---------
Net loss and loss adjustment
expense 30,099 30,027 0.2%
Underwriting Expenses
Commissions paid to producers 16,524 11,577 42.7%
Other underwriting expenses 13,230 10,840 22.0%
--------- --------- ---------
Total Underwriting Expenses 29,754 22,417 32.7%
Underwriting Profit $ 8,111 $ 6,471 25.3%
========= ========= =========
Key Measures
Written Premiums
Gross $121,066 $ 78,612 54.0%
Ceded (56,007) (22,767) 146.0%
--------- --------- ---------
Net $ 65,059 $ 55,845 16.5%
========= ========= =========
Loss ratios
Gross 49.5% 57.4%
Net 54.6% 58.3%
Accident Year Loss Ratio
Gross 51.3% 57.5%
Net 56.6% 58.5%
Expense ratios
Gross 29.8% 30.8%
Net 30.6% 29.1%
Combined ratios (GAAP)
Gross 79.3% 88.2%
Net 85.2% 87.4%
Results of Operations
Insurance and Reinsurance Segments
Full Year
Revenues 2006 2005 % Change
Earned premiums
Gross premiums earned $ 363,425 $237,833 52.8%
Less: Ceded premiums earned (139,437) (73,397) 90.0%
---------- --------- ---------
Net premiums earned 223,988 164,436 36.2%
Ceded commission revenue 43,130 25,218 71.0%
Policy Billings Fees 1,129 868 30.1%
---------- --------- ---------
Total 268,247 190,522 40.8%
Expenses
Loss and Loss Adjustment Expenses
Gross loss and loss adjustment
expenses 199,863 135,198 47.8%
Less: Ceded loss and loss
adjustment expenses (64,738) (38,584) 67.8%
---------- --------- ---------
Net loss and loss adjustment
expense 135,125 96,614 39.9%
Underwriting Expenses
Commissions paid to producers 58,633 38,788 51.2%
Other underwriting expenses 46,738 35,436 31.9%
---------- --------- ---------
Total Underwriting Expenses 105,371 74,224 42.0%
Underwriting Profit $ 27,751 $ 19,684 41.0%
========== ========= =========
Key Measures
Written Premiums
Gross $ 432,663 $300,107 44.2%
Ceded (187,593) (88,325) 112.4%
---------- --------- ---------
Net $ 245,070 $211,782 15.7%
========== ========= =========
Loss ratios
Gross 55.0% 56.8%
Net 60.3% 58.8%
Accident Year Loss Ratio
Gross 55.8% 57.3%
Net 60.7% 59.0%
Expense ratios
Gross 28.7% 30.8%
Net 27.3% 29.3%
Combined ratios (GAAP)
Gross 83.7% 87.6%
Net 87.6% 88.1%
Results of Operations
Insurance Services Segment
Fourth Quarter
2006 2005 % Change
Revenue
Direct Commission Revenue from Managing
General Agency $1,175 $ 2,435 -51.8%
Claims Administration Revenue 621 981 -36.7%
Other Administration Revenue 737 - 0.0%
Reinsurance Intermediary Fees 166 147 12.9%
Policy Billing Fees - 5 0.0%
------- -------- ---------
Total Revenues 2,699 3,568 -24.4%
------- -------- ---------
Expenses
Direct Commissions Expense Paid to
Producers 380 1,523 -75.0%
Other Insurance Services Expenses 843 569 48.2%
Claims Expense Reimbursement to TICNY 620 979 -36.7%
------- -------- ---------
Total Expenses 1,843 3,071 -40.0%
------- -------- ---------
Insurance Services Pre-tax Income (Loss) $ 856 $ 497 72.2%
======= ======== =========
Premium Produced by TRM on behalf of
issuing companies $2,656 $10,289 -74.2%
======= ======== =========
Results of Operations
Insurance Services Segment
Full Year
2006 2005 % Change
Revenue
Direct Commission Revenue from Managing
General Agency $ 3,466 $ 9,148 -62.1%
Claims Administration Revenue 3,193 4,268 -25.2%
Other Administration Revenue 737 -
Reinsurance Intermediary Fees 577 688 -16.1%
Policy Billing Fees 5 23
-------- -------- ---------
Total Revenues 7,978 14,127 -43.5%
-------- -------- ---------
Expenses
Direct Commissions Expense Paid to
Producers 1,925 5,051 -61.9%
Other Insurance Services Expenses 1,578 1,981 -20.3%
Claims Expense Reimbursement to TICNY 3,176 4,255 -25.4%
-------- -------- ---------
Total Expenses 6,679 11,287 -40.8%
Insurance Services Pre-tax Income $ 1,299 $ 2,840 -54.3%
======== ======== =========
Premium Produced by TRM on behalf of
issuing companies $12,926 $35,177 -63.3%
======== ======== =========
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
($ in thousands, except per share and share
amounts)
Revenues
Net premiums earned $55,080 $51,503 $223,988 $164,436
Ceding commission
revenue 12,580 7,197 43,130 25,218
Insurance services
revenue 2,699 3,562 7,973 14,103
Net investment
income 7,151 4,504 23,026 14,983
Net realized gains
(losses) on
investments 96 (92) 12 122
Policy billing fees 304 221 1,134 892
----------- ----------- ----------- -----------
Total revenues 77,910 66,895 299,263 219,754
----------- ----------- ----------- -----------
Expenses
Loss and loss
adjustment expenses 30,099 30,027 135,125 96,614
Direct commission
expense 16,904 13,101 60,558 43,839
Other operating
expenses 14,957 12,367 53,675 42,632
Interest expense 1,804 1,286 6,870 4,853
----------- ----------- ----------- -----------
Total expenses 63,764 56,781 256,228 187,938
----------- ----------- ----------- -----------
Other Income
Equity income in
unconsolidated
affiliate 550 - 914 -
Gain from issuance
of common stock by
unconsolidated
affiliate - - 7,883 -
Warrant received
from unconsolidated
affiliate - - 4,605 -
Income before income
taxes 14,696 10,114 56,437 31,816
Income tax expense 5,183 3,550 19,673 11,062
----------- ----------- ----------- -----------
Net income $9,513 $6,564 $36,764 $20,754
=========== =========== =========== ===========
Comprehensive Net
Income
Net income $9,513 $6,564 $36,764 $20,754
Other comprehensive
income:
Gross unrealized
investment
holding gains
(losses) arising
during period 1,170 (2,240) 4,443 (6,664)
Equity in net
unrealized
(losses) gains in
investment in
unconsolidated
affiliate's
investment
portfolio (41) - 143 -
Less:
reclassification
adjustment for
net realized
(losses) gains
included in net
income (96) 92 (12) (122)
----------------------- -----------------------
1,033 (2,148) 4,574 (6,786)
Income tax
(expense) benefit
related to items
of other
comprehensive
income (362) 752 (1,659) 2,382
----------- ----------- ----------- -----------
Total other
comprehensive net
Income (losses) 671 (1,396) 2,915 (4,404)
----------- ----------- ----------- -----------
Comprehensive
Net Income $10,184 $5,168 $39,679 $16,350
=========== =========== =========== ===========
Earnings Per Share
Basic earnings per
common share $0.47 $0.33 $1.85 $1.06
=========== =========== =========== ===========
Diluted earnings
per common share $0.46 $0.32 $1.82 $1.03
=========== =========== =========== ===========
Weighted Average
Common Shares
Outstanding:
Basic 19,798,141 19,632,158 19,750,309 19,571,081
Diluted 20,483,388 20,200,584 20,147,318 20,147,073
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
December 31,
-----------------------
2006 2005
----------- -----------
($ in thousands)
Assets
Fixed-maturity securities, available-for-sale,
at fair value (amortized cost $416,642 in
2006 and $331,123 in 2005) $414,567 $326,681
Equity securities, available-for-sale, at fair
value (cost $47,971 in 2006 and $31,239 in
2005) 49,453 30,492
----------- -----------
Total investments 464,020 357,173
Cash and cash equivalents 100,598 38,760
Investment income receivable 4,767 3,337
Agents' balances receivable 65,578 46,004
Assumed premiums receivable 77 1,076
Ceding commission receivable 3,237 8,727
Reinsurance recoverable 118,003 104,811
Receivable -- claims paid by agency 5,186 2,309
Prepaid reinsurance premiums 94,063 43,319
Deferred acquisition costs net of deferred
ceding commission revenue 35,811 29,192
State income tax recoverable - 365
Deferred income taxes - 3,204
Intangible assets 5,423 5,835
Fixed assets, net of accumulated depreciation 20,563 7,920
Investment in unconsolidated affiliate 27,944 -
Investment in common trust securities -
statutory business trusts, equity method 2,045 1,426
Other assets 6,767 3,999
----------- -----------
Total Assets $954,082 $657,457
=========== ===========
Tower Group, Inc.
Consolidated Balance Sheets (Continued)
(Unaudited)
December 31,
-----------------------
2006 2005
----------- -----------
($ in thousands, except
par value and
share amounts)
Liabilities
Loss and loss adjustment expenses $302,541 $198,724
Unearned premium 227,017 157,779
Reinsurance balances payable 38,560 19,200
Payable to issuing carriers 662 5,252
Funds held as agent 8,181 8,191
Funds held under reinsurance agreements 51,527 59,042
Accounts payable and accrued expenses 18,267 13,694
Deferred rent liability 6,295 -
Payable for securities 2,922 -
Other liabilities 3,515 2,867
Federal and state income taxes payable 1,163 460
Deferred income taxes 1,255 -
Dividends payable 212 -
Subordinated debentures 68,045 47,426
----------- -----------
Total Liabilities 730,162 512,635
----------- -----------
Stockholders' Equity
Series A perpetual preferred stock ($0.01 par
value per share; 2,000,000 shares authorized;
40,000 shares issued and outstanding in 2006
with liquidation preference of $1,000 per
share, net of $0.4 million of issuance costs 39,600 -
Common stock ($0.01 par value per share;
40,000,000 shares authorized, 20,005,758 and
19,872,672 shares issued in 2006 and 2005 and
19,980,306 and 19,854,791 outstanding in 2006
and 2005) 200 199
Paid-in-capital 113,168 111,066
Accumulated other comprehensive net income (437) (3,352)
Retained earnings 71,596 37,019
Treasury stock (25,452 shares in 2006 and
17,881 in 2005) (207) (110)
----------- -----------
Total Stockholders' Equity 223,920 144,822
----------- -----------
Total Liabilities and Stockholders' Equity $954,082 $657,457
=========== ===========
CONTACT: Tower Group, Inc.
Thomas Song, 212-655-4789
Managing Vice President
tsong@twrgrp.com