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02.05.2006 12:50:00
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Tower Group, Inc. Reports a 75.1% Increase in the First Quarter 2006 Net Income
-- 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 TowerGroup, Inc. commented, "Tower had another solid quarter and a strongstart to 2006 driven by gains in gross and net premiums written whilemaintaining our disciplined underwriting approach. Excluding theeffects of non-recurring start-up expenses associated withCastlePoint, our earnings exceeded the guidance we provided on ourlast earnings call, and our return on equity continued to improve. Wewere successful during the first quarter in forming CastlePoint andexpect our investment to contribute to the long term success of TowerGroup. We continued to focus on the markets that demand our products,and in order to meet those demands, we have strengthened our growthand return on equity focused business model."
First Quarter 2006 Financial Highlights:
Total revenues increased 66.8% to $71.2 million in the firstquarter of 2006 as compared to $42.7 million in the prior year's firstquarter. The improvement is primarily due to the increase in netpremiums earned and net investment income. Net premiums earnedrepresented 80.4% of total revenues for the three months ended March31, 2006 compared to 70.3% for the same period in 2005. Net investmentincome, excluding realized capital losses or gains, represented 6.5%and 6.1% of total revenues for the three months ended March 31, 2006and March 31, 2005, respectively. These increases were partiallyoffset by lower total commission and fee income for the three monthsended 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 sameperiod in 2005. During the three months ended March 31, 2006 therewere net realized capital losses of $145,000 from the sale ofautomotive credit bonds and other securities as compared to netrealized capital gains of $209,000 for the same period of 2005.
Return on average equity was 17.7% in the first quarter of 2006 ascompared with 11.5% in the first quarter of 2005. The returns onaverage equity for each of the first quarter of 2006 and first quarterof 2005 were calculated by dividing annualized net income by averageshareholders' equity of $146.9 million and $129.6 million,respectively. Excluding the effect of certain non-recurring start upexpenses relating to our sponsoring CastlePoint, our net income andreturn 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 segmentsincreased 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 a25.2% increase in policies in force and premium increases on renewedbusiness which averaged 7.5% for personal lines and 5.3% forcommercial lines.
Premiums produced by the managing general agency decreased to $4.0million in the first quarter of 2006, or a decrease of 52.3% from thefirst quarter of 2005. The decrease was primarily due to decreases inpremiums produced by the managing general agency on behalf of itsissuing companies as more policies previously produced for the issuingcompanies were renewed in the insurance operations.
Net premiums written increased 82.7% to $82.9 million in the firstquarter of 2006 as compared to $45.4 million in the same period of2005. The increase was driven by the growth in gross premiums writtenand the absence of quota share reinsurance with respect to policiesthat began in 2006 compared to the quota share ceding percentage of25% during the first three months of 2005. Tower did not purchase anyquota share reinsurance in the first quarter in anticipation of itsagreement with CastlePoint's reinsurance subsidiary, CastlePointReinsurance Company.
Net premiums earned rose 90.7% to $57.3 million for the firstquarter of 2006 as compared to $30.0 million in the same quarter of2005 due to overall growth in gross premiums written and the absenceof quota share reinsurance for policies that began in 2006 asmentioned above.
Ceding commission revenue increased 24.9% to $7.3 million in thefirst quarter of 2006 as compared to $5.8 million in the first quarterof 2005 reflecting growth in ceded premiums written in 2005, whichwere continuing to be earned in 2006.
The net loss ratio improved to 58.0% for the first quarter of 2006as compared to 60.2% in the first quarter of 2005. The improvement inthe net loss ratio in the first quarter of 2006 compared to the sameperiod in 2005 was due primarily to an increase in net premiums earnedthat reduced the effect of catastrophe reinsurance premiums on the netloss ratio, and to favorable development on prior accident years'reserves.
The gross expense ratio decreased to 30.5% in the first quarter of2006 as compared to 31.3% in the first quarter of 2005. The netexpense ratio decreased to 28.1% in the first quarter of 2006 ascompared to 28.3% the same period in 2005.
The net combined ratio decreased to 86.1% in the first quarter of2006 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 samequarter of 2005 as a result of the decrease in premiums produced andan unfavorable adjustment in direct commission revenue of $348,000 inthe first quarter of 2006 due to unfavorable loss development onpremiums produced in prior years; this compares to a favorableadjustment in direct commission revenue of $491,000 in the firstquarter of 2005 due to favorable loss development on premiums producedin prior years.
Net investment income increased by 78.2% to $4.7 million for thethree months ended March 31, 2006 compared to $2.6 million for thesame period in 2005. This resulted from an increase in invested assetsto $379.6 million as of March 31, 2006 compared to $281.6 million asof March 31, 2005, excluding our investments in statutory businesstrusts underlying our trust preferred securities. Net cash flowsprovided by operations of $38.8 million contributed to the increase ininvested assets during the three months ended March 31, 2006. On a taxequivalent basis, the yield was 5.4% as of March 31, 2006 compared to5.1% as of March 31, 2005.
Our interest expense increased for the three months ended March31, 2006 to $1.4 million compared to $1.2 million for the same periodin 2005. The increase resulted from an increase in interest expense of$113,000 on subordinated debentures underlying our trust preferredsecurities and $72,000 as a result of crediting reinsurers on fundswithheld in segregated trusts as collateral for reinsurancerecoverables.
The effective income tax rate was 35.8% for the three monthsending March 31, 2006 compared to 35.2% for the same period in 2005.The effective tax rate in 2006 was higher due to certain non-recurringorganizational and start up costs relating to our sponsoringCastlePoint that are not deductible for tax purposes. The effectivetax rate of the first three months of 2006 would have been 34.3%excluding the effects of the non-recurring expenses.
First Quarter Highlights
($ 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 theconsolidation of CastlePoint, a Bermuda based holding company thatTower sponsored with an initial investment of $15 million on February6, 2006. On April 4, 2006, CastlePoint was capitalized with $265million in a private offering. Following the capitalization ofCastlePoint, Tower's ownership stands at 8.6%. In addition, Tower hasbeen issued warrants to purchase CastlePoint's common shares thatwould have resulted in an additional 3.7% of ownership if they hadbeen exercised on April 4, 2006. The warrants are exercisable at anytime up to the tenth anniversary of the warrant issuance. CastlePointwas a wholly owned subsidiary of Tower during the first quarter of2006, and therefore Tower consolidated CastlePoint at March 31, 2006.The quarter ended March 31, 2006 includes approximately $500,000 ofnon-recurring start up costs incurred by CastlePoint.
Subordinated Debentures
On March 31, 2006, Tower Group Statutory Trust V (the "Trust"), anaffiliated Delaware trust, issued $20,000,000 of fixed/floating ratecapital securities (the "Trust Preferred Securities") in a privateplacement. The Trust Preferred Securities mature in April 2036, areredeemable at the Trust's option at par beginning April 7, 2011, andrequire quarterly distributions of interest by the Trust to the holderof the Trust Preferred Securities. Distributions are initially at afixed rate of 8.5625% for the first five years and will then resetquarterly for changes in the three-month London Interbank Offered Rate("LIBOR") rate plus 330 basis points. The net proceeds to Tower fromthe sale of the debenture to the Trust will be used by Tower toacquire and capitalize a shell insurance company with multi-statelicensing and for working capital purposes.
Dividend Declaration
Tower Group, Inc. announced today that the Company's Board ofDirectors has approved a quarterly dividend of $0.025 per sharepayable June 27, 2006 to stockholders of record as of June 15, 2006.
2006 Guidance
We believe we are well positioned to support our premium growthand to generate commission and fee income to augment our return onequity. For the second quarter of 2006, we project net income toincrease to a range between $7.5 million and $7.9 million. We projectTower's diluted earnings per share in the second quarter to be in therange between $0.37 and $0.39 per diluted share. For the full year, weanticipate net income to be in a range between $32.0 million and $34.0million, and diluted earnings per share to be between $1.58 and $1.68for the year.
About Tower Group, Inc.
Tower Group, Inc., headquartered in New York City, offers propertyand casualty insurance products and services through its insurancecompany and insurance service subsidiaries. Its two insurance companysubsidiaries are Tower Insurance Company of New York which is rated A-(Excellent) by A.M. Best Company and Tower National Insurance Companywhich is also rated A- (Excellent) by A.M. Best Company. Bothsubsidiaries offer commercial insurance products to small tomedium-size businesses and personal insurance products to individuals.Its insurance services subsidiary, Tower Risk Management, acts as amanaging general agency, adjusts claims and negotiates reinsuranceterms 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 anyother written or oral statements made by or on behalf of the Companymay include forward-looking statements that reflect the Company'scurrent views with respect to future events and financial performance.All statements other than statements of historical fact included inthis release are forward-looking statements. Forward-lookingstatements can generally be identified by the use of forward-lookingterminology such as "may," "will," "plan," "expect," "intend,""estimate," "anticipate," "believe," "project" or "continue" or theirnegative or variations or similar terminology. All forward-lookingstatements address matters that involve risks and uncertainties.Accordingly, there are or will be important factors that could causeour actual results to differ materially from those indicated in thesestatements. We believe that these factors include but are not limitedto ineffectiveness or obsolescence of our business strategy due tochanges in current or future market conditions; increased competitionon the basis of pricing, capacity, coverage terms or other factors;greater frequency or severity of claims and loss activity, includingas a result of natural or man-made catastrophic events, than ourunderwriting, reserving or investment practices anticipate based onhistorical experience or industry data; the effects of acts ofterrorism or war; developments in the world's financial and capitalmarkets 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 insuranceand reinsurance products and services, including new products andservices; changes in the availability, cost or quality of reinsuranceand failure of our reinsurers to pay claims timely or at all; loss ofthe services of any of our executive officers or other key personnel;the effects of mergers, acquisitions and divestitures; changes inrating agency policies or practices; changes in legal theories ofliability under our insurance policies; changes in accounting policiesor practices; and changes in general economic conditions, includinginflation and other factors. Forward-looking statements speak only asof the date on which they are made, and the Company undertakes noobligation to update publicly or revise any forward-looking statement,whether as a result of new information, future developments orotherwise.
For more information visit Tower's website athttp://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
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