EX-99.1 2 a5677150ex99_1.htm EXHIBIT 99.1

Exhibit 99.1

Tower Group, Inc. Reports Strong First Quarter 2008 Operating Results

NEW YORK--(BUSINESS WIRE)--Tower Group, Inc. (NASDAQ: TWGP) today reported its financial results for the first quarter of 2008 including net income of $14.9 million as compared to net income of $11.6 million in the first quarter of 2007. Tower reported diluted earnings per share of $0.64 for the first quarter of 2008 as compared to $0.49 per share for the same period in 2007.

Key Operating Highlights (all percentage increases compare the first quarter 2008 results to the same period in 2007):

  • Net income and diluted earnings per share excluding realized investment gains or losses(1), increased by 19.9% to $14.0 million and 22.4% to $0.60, respectively(2)
  • Gross premiums written and produced(3) increased 42.0% to $157.4 million
  • Commission and fee based revenue increased 93.1% to $30.9 million
  • Net investment income up 23.1% to $9.8 million
  • Continued underwriting profitability; combined ratio of 84.9% versus 86.0% in the prior year

(1) Note on Non-GAAP Financial Measures: Net income excluding realized investment gains or losses is a common performance measurement for insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. The tax rate used to calculate the net realized gains or losses on investments, net of tax, is 35%.

(2) The results for the three months ended March 31, 2007 include a $1.8 million gain, after-tax, from issuance of common stock by unconsolidated affiliate.

(3) Gross premiums written through our insurance subsidiaries and produced as managing general agent on behalf of other insurance companies.

Financial Summary ($ in thousands, except per share data):

  Three Months Ended
March 31,
2008     2007  
Gross premiums written $135,113 $110,880
Premiums produced by managing general agency 23,291 (55 )
Net premiums written 68,356 48,032
Net premiums earned 68,430 60,383
Total commission and fee income 30,892 15,996
Net investment income 9,796 7,955
Net realized (losses) gains on investments 1,374 (17 )
 
Total revenues 110,492 84,317
Other income 760 3,394
Net Income 14,853 11,628
Earnings per share – Basic $0.65 $0.50
Earnings per share – Diluted $0.64 $0.49
Return on Average Equity 19.1 % 23.8 %
 

Reconciliation of non-GAAP financial measures:

Net income $14,853 $11,628
Net realized (losses) gains on investments, net of tax 893 (11 )

Net income excluding realized investment gains or losses

13,960 11,639

Excluding realized investment gains or losses:

Earnings per share – Basic $0.61 $0.50
Earnings per share – Diluted $0.60 $0.49
Return on Average Equity 18.1 % 23.8 %

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. stated, “We successfully executed our business strategies during the quarter and identified and took advantage of profitable growth opportunities. In this challenging market, we generated strong top line growth while maintaining our underwriting standards. We continue to see meaningful growth from our national wholesale expansion initiative that began last year. Our core Northeast franchise continues to produce excellent profitability as a result of our strong pricing discipline.”

Gross premiums written increased to $135.1 million in the first quarter, which was 21.9% higher than in the first quarter of 2007.

Total revenues increased 31.0% to $110.5 million in the first quarter of 2008 as compared to $84.3 million in the prior year's first quarter. Net premiums earned represented 61.9% of total revenues for the three months ended March 31, 2008 compared to 71.6% for the same period in 2007. For the first quarter of 2008, we produced $21.8 million of premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $6.9 million in fee income.

Total commission and fee income increased 93.1% to $30.9 million in the first quarter of 2008 compared to $16.0 million in the first quarter of 2007.

Net investment income increased by 23.1% to $9.8 million for the three months ended March 31, 2008 compared to $8.0 million for the same period in 2007. On a tax equivalent basis, the yield was 5.3% as of March 31, 2008 compared to 5.7% as of March 31, 2007. We determined that seven real estate investment trusts (“REITs”) securities were other-than-temporarily-impaired and recorded an impairment write-down of $2.4 million at March 31, 2008. These securities were sold in April 2008, and we no longer own any REITs.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended March 31, 2008 were $67.1 million and 49.7%, respectively, compared to $57.3 million and 52.8%, respectively, in the same period in 2007. The net loss ratio was 54.5% in the three months ended March 31, 2008 and 56.2% in the same period in 2007.

Operating expenses were $48.3 million for the three months ended March 31, 2008 as compared to $33.7 million for the same period in 2007. Our gross expense ratio was 30.7% for the three months ended March 31, 2008 as compared with 29.7% for the same period in 2007.

Additional Highlights and Disclosures:

Investments

Subsequent to March 31, 2008, the Company sold all of its REITs and realized a gain of $70,000.

Dividend Declaration

Tower Group, Inc. announced today that the Company's Board of Directors has approved a quarterly dividend of $0.05 per share payable June 27, 2008 to stockholders of record as of June 16, 2008.

2008 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, we project net income to be in a range between $14.9 million and $15.8 million. We project diluted earnings per share in the second quarter to be in the range between $0.64 and $0.68 per diluted share. For the full year, we anticipate net income to be in a range between $67.5 million and $70.0 million and diluted earnings per share to be between $2.90 and $3.00 for the year. These projections do not include any amounts for realized investment gains or losses.

About Tower Group, Inc.

Tower Group, Inc. offers property and casualty insurance products and services through its operating subsidiaries. Its insurance company subsidiaries offer insurance products to individuals and small to medium-sized businesses. Tower Group's insurance services subsidiaries provide underwriting, claims and reinsurance brokerage services to 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/.

Tower has changed the presentation of its business results by combining its previously reported Insurance Segment with its Reinsurance Segment since reporting this segment separately was no longer meaningful. This will result in reporting two operating segments: the Insurance Segment which offers a broad range of property and casualty insurance products and services to small to mid-sized businesses and to individuals primarily in the Northeast states and which assumes reinsurance and the Insurance Services Segment which provides insurance brokering, claim administration, reinsurance intermediary services and other administrative services.

Insurance Segment Results of Operations

($ in thousands)
     
Three Months Ended
March 31
Revenues 2008 2007

Change (%)

Premiums Earned
Gross premiums earned $135,137 $108,627 24.4 %
Less: Ceded premiums earned (66,707 ) (48,244 ) 38.3 %
Net premiums earned 68,430 60,383 13.3 %
Ceding commission revenue 20,654 14,234 45.1 %
Policy billings fees 502   302   66.2 %
Total 89,586 74,919 19.6 %
 
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 67,131 57,342 17.1 %
Less: ceded loss and loss adjustment expenses (29,834 ) (23,432 ) 27.3 %
Net loss and loss adjustment expenses 37,297 33,910 10.0 %
Underwriting expenses
Direct commission expense 23,238 18,629 24.7 %
Other underwriting expenses 18,748   13,908   34.8 %
Total underwriting expenses 41,986 32,537 29.0 %
 
Underwriting Profit $10,303   $8,472   21.6 %
 
Key Measures
Premiums written
Gross premiums written $135,113 $110,880 21.9 %
Less: ceded premiums written (66,757 ) (62,848 ) 6.2 %
Net premiums written $68,356   $48,032   42.3 %
Loss Ratios
Gross 49.7 % 52.8 %
Net 54.5 % 56.2 %
Accident Year Loss Ratios
Gross 50.5 % 53.1 %
Net 54.5 % 56.2 %
Underwriting Expense Ratios
Gross 30.7 % 29.7 %
Net 30.4 % 29.8 %
Combined Ratios
Gross 80.4 % 82.5 %
Net 84.9 % 86.0 %

Insurance Services Segment Results of Operations

($ in thousands)

   
Three Months Ended
March 31,
2008   2007

Change (%)

 
Revenues
Direct commission revenue from managing general agency $8,164 $488 1573.0 %
Claims administration revenue 957 565 69.4 %
Other administrative revenue(1) 371 251 47.7 %
Reinsurance intermediary fees(2) 168 156 7.7 %
Policy billing fees 76 -   NM
Total 9,736 1,460   566.8 %
Expenses
Direct commission expense paid to producers 3,371 7 NM
Other insurance services expenses(3) 1,574 257 512.3 %
Claims expense reimbursement to TICNY 957 565   69.4 %
Total 5,902 829   611.9 %
Insurance services pre-tax income (loss) $3,834 $631   507.6 %
Premiums produced by TRM on behalf of issuing companies $23,291 ($55 ) NM

(1) Other administration revenue includes amounts reimbursed by CastlePoint Reinsurance for services rendered pursuant to a service and expense sharing agreement.

(2) The reinsurance intermediary fees include commissions earned for placement of reinsurance on behalf of our insurance subsidiaries.

(3) Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing agreement.

Tower Group, Inc.

Consolidated Balance Sheets

 

 

 
(Unaudited)
March 31, 2008

December 31, 2007

($ in thousands, except par value
and share amounts)

Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $554,803 and $616,757) $529,557 $606,488
Equity securities, available-for-sale, at fair value (cost of $11,993 and $14,429) 10,810   12,580  
Total investments 540,367 619,068
Cash and cash equivalents 93,439 77,679
Receivable for securities 68,312 8,755
Investment income receivable 6,148 6,546
Agents' balances receivable 114,869 122,763
Reinsurance recoverable 215,959 207,828
Prepaid reinsurance premiums 130,041 124,834
Deferred acquisition costs, net of deferred ceding commission revenue 44,883 39,271
Deferred income taxes 19,938 22,802
Intangible assets 21,369 21,670
Goodwill 18,962 13,281
Fixed assets, net of accumulated depreciation 34,298 32,337
Investment in unconsolidated affiliate 32,591 32,615
Other assets 25,202   25,162  
Total Assets $1,366,378   $1,354,611  

Liabilities

Loss and loss adjustment expenses $505,705 $501,183
Unearned premium 275,389 272,774
Reinsurance balances payable 74,519 58,740
Payable to issuing carriers 36,992 42,855
Funds held under reinsurance agreements 32,841 36,841
Accounts payable and accrued expenses 14,099 14,205
Other liabilities 11,712 17,590
Subordinated debentures 101,036   101,036  
Total Liabilities 1,052,293   1,045,224  

Stockholders' Equity

Common stock ($0.01 par value per share; 40,000,000 shares authorized; 23,374,013 and 23,225,039 shares issued, and 23,326,346 and 23,185,173 shares outstanding) 234 232
Treasury stock (47,667 and 39,866 shares) (674 ) (493 )
Paid-in-capital 206,157 205,435
Accumulated other comprehensive net loss (17,865 ) (8,322 )
Retained earnings 126,233   112,535  
Total Stockholders' Equity 314,085   309,387  
Total Liabilities and Stockholders' Equity $1,366,378   $1,354,611  

Tower Group, Inc.

Consolidated Statements of Income and

Comprehensive Net Income

(Unaudited)

 
Three Months Ended
March 31,
2008   2007
($ in thousands, except share
and per share amounts)
Revenues

 

 

Net premiums earned $68,430 $60,383
Ceding commission revenue 20,654 14,234
Insurance services revenue 9,660 1,460
Net investment income 9,796 7,955
Net realized gains (losses) on investments 1,374 (17 )
Policy billing fees 578   302  
Total revenues 110,492   84,317  
Expenses
Loss and loss adjustment expenses 37,297 33,910
Direct and ceding commission expense 26,608 18,635
Other operating expenses 21,666 15,089
Interest expense 2,322   2,084  
Total expenses 87,893   69,718  

Other Income

Equity income in unconsolidated affiliate 760 689
Gain from issuance of common stock by unconsolidated affiliate -   2,705  
Income before income taxes 23,359 17,993
Income tax expense 8,506   6,365  
Net income $14,853   $11,628  
 

Gross unrealized investment holding gains (losses) arising during period

(12,524 ) 546

Equity in net unrealized gains in investment in unconsolidated affiliate’s investment portfolio

(784 ) 55

Less: reclassification adjustment for (gains) losses included in net income

(1,374 ) 17

Income tax (expense) benefit related to items of other comprehensive income

5,139   (216 )
Comprehensive net income $5,310   $12,030  
 
Basic and diluted earnings per share
Basic $0.65   $0.50  
Diluted $0.64   $0.49  
 
Weighted Average Common Shares Outstanding:
Basic 22,995,511 21,988,907
Diluted 23,187,773 22,621,230
Dividends declared and paid per common share:
Common stock $0.050 $0.025

CONTACT:
Tower Group, Inc.
Thomas Song, 212-655-4789
Managing Vice President
tsong@twrgrp.com