EX-99.1 2 a6389517-ex991.htm EXHIBIT 99.1

Exhibit 99.1

Tower Group, Inc. Reports Second Quarter 2010 Results; Quarterly Dividend Increased by 78.6% to $0.125 per share

NEW YORK--(BUSINESS WIRE)--August 9, 2010--Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $28.3 million and diluted earnings per share of $0.63 for the second quarter 2010. Operating income(1) and operating earnings per share(1) were $25.3 million and $0.57 for the second quarter of 2010, respectively.

Key Highlights (all percentage increases compare the second quarter 2010 results to the results for the same period in 2009 except as noted otherwise):

  • Gross premiums written and produced(2) increased by 26.7% to $331 million.
  • For the combined insurance segments, the net combined ratio was 93% for the second quarter of 2010 compared with 84.6% for the same period last year.
    • The net loss ratio was 58.6% for the second quarter of 2010 compared with 52.2% for the same period last year.
    • The net expense ratio was 34.4% for the second quarter of 2010 compared with 32.4% for the same period last year.
  • Net investment income increased by 37.4% to $23.9 million.
  • Book value per share of $24.81 at June 30, 2010 represents an increase of 3.9% during the quarter, 6.3% since year end 2009 and 18.5% year over year.
  • During the second quarter of 2010, Tower repurchased 1.8 million shares of common stock at a total cost of $39.7 million or an average price per share of $21.51. Since the repurchase program was initiated in March 2010, Tower has repurchased 2.2 million shares and at June 30, 2010, $52.8 million remains available under the repurchase program.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., stated, “During the quarter, we were able to continue to profitably grow our business by successfully integrating recent acquisitions while maintaining our underwriting discipline. In addition, as previously announced, Tower completed the acquisition of the Personal Lines Division of OneBeacon Insurance Group on July 1, 2010. With this and other transactions, we have successfully executed our strategy that we began after the CastlePoint acquisition in 2009 to fully deploy CastlePoint’s capital by building a larger and more diversified insurance business. Beginning in the third quarter, with the added business from the OneBeacon transaction, we anticipate that we will be able to achieve greater scale and efficiency as well as generate a significant amount of fee income from managing the reciprocal insurance companies associated with this transaction. Consistent with our focus on capital management, we are pleased to announce that our Board has authorized a 78.6% increase in our quarterly dividends from 7 cents per share to 12.5 cents per share to stockholders of record as of September 10, 2010. In addition to the higher dividend payment, we will maintain focus on enhancing value to our shareholders through the continuation of our share repurchase plan and evaluation of strategic acquisition opportunities to further expand and diversify our business.”

Financial Summary ($ in thousands, except per share data):
         
Three Months Ended Six Months Ended
June 30, June 30,
2010 2009 2010 2009
Gross premiums written $ 331,826 $ 260,741 $ 614,911 $ 460,685
Premiums produced by managing general agency (821) 479 - 11,208
Net premiums written 292,601 235,818 539,735 422,082
Total commission and fee income 9,713 7,673 21,228 26,044
Net investment income 23,931 17,417 47,106 31,950
Net realized investment gains (losses) 5,166 442 5,906 (230)
 
Total revenues 311,777 254,983 615,253 455,305
Gain on investment in acquired unconsolidated affiliate - - - 7,388
Other expense - - (466) -
Net income 28,256 30,627 45,729 48,604
Earnings per share—Basic $ 0.64 $ 0.76 $ 1.02 $ 1.31
Earnings per share—Diluted $ 0.63 $ 0.75 $ 1.02 $ 1.30
Return on average equity 11.4% 15.0% 9.2% 18.6%
 
Combined Brokerage and Specialty Segments
Net premiums earned 272,967 229,451 541,013 397,541
Net loss ratio 58.6% 52.2% 60.8% 52.8%
Net expense ratio 34.4% 32.4% 34.0% 32.7%
 
Brokerage Insurance Segment
Net premiums earned 183,434 195,970 372,860 341,666
Net loss ratio 53.5% 52.2% 58.2% 52.2%
Net expense ratio 35.0% 33.3% 35.2% 33.1%
 
Specialty Business Segment
Net premiums earned 89,533 33,481 168,153 55,875
Net loss ratio 69.0% 52.5% 66.7% 56.8%
Net expense ratio 33.1% 27.5% 31.4% 30.0%
 
Reconciliation of non-GAAP financial measures:
Net income $ 28,256 $ 30,627 $ 45,729 $ 48,604
Net realized gains (losses) on investments, net of tax 3,358 287 3,839 (150)
Acquisition-related transaction costs, net of tax (3) (364) 868 (1,158) (9,055)
Operating income $ 25,262 $ 29,472 $ 43,048 $ 57,809
 
Operating earnings per share—Basic

$

0.57

$

0.73

$

0.96

$

1.56
Operating earnings per share—Diluted $ 0.57 $ 0.73 $ 0.96 $ 1.55
Operating return on average equity 10.2% 14.4% 8.7% 22.2%

Second Quarter 2010 Highlights

Gross premiums written increased to $331.8 million in the second quarter of 2010, which was 27.3% higher than in the second quarter of 2009. Excluding SUA, policies in-force for our Brokerage Insurance business increased by 11.2% as of June 30, 2010 compared to June 30, 2009. For the three months ended June 30, 2010, premiums on renewed Brokerage Insurance business increased 3.4% and 0.1%, respectively in personal and commercial lines, resulting in an overall premium increase on renewal business of 1.3%. During the same time period, Brokerage Insurance renewal retention was 91% in personal lines and 81% in commercial lines resulting in overall retention of 86%.

Total revenues increased 22.3% to $311.8 million in the second quarter of 2010 as compared to $255 million in the prior year's second quarter. The growth was primarily due to increased net premiums earned and net investment income resulting from the acquisition of SUA in the fourth quarter of 2009. Net premiums earned represented 87.6% of total revenues for the three months ended June 30, 2010 compared to 90% for the same period in 2009.

Net investment income increased 37.4% to $23.9 million for the three months ended June 30, 2010 compared to $17.4 million for the same period in 2009. The tax equivalent investment yield at amortized cost was 5.2% at June 30, 2010 compared to 5.7% at June 30, 2009. Net realized investment gains were $5.2 million for the three months ended June 30, 2010 compared to a gain of $0.4 million in the same period last year. The second quarter gains include other-than-temporarily impaired credit losses of $0.3 million as compared to $4.1 million of such losses in the second quarter of 2009.

Total commission and fee income increased 26.6% to $9.7 million in the second quarter of 2010 compared to $7.7 million in the second quarter of 2009.

For the combined segments, the gross loss ratio for the three months ended June 30, 2010 was 59.4% compared to 50.5% in the same period in 2009. The net loss ratio was 58.6% for the three months ended June 30, 2010 compared to 52.2% during the same period in 2009.

For the combined segments, our gross expense ratio was 31.9% for the three months ended June 30, 2010 as compared to 30.5% in the same period in 2009. Our net expense ratio was 34.4% for the three months ended June 30, 2010 as compared to 32.4% during the same period in 2009.

Interest expense increased by $0.6 million and $1.7 million, respectively, for the three and six months ended June 30, 2010 compared to the same periods in 2009. Interest expense increased for the six month period mainly due to subordinated debentures assumed as a result of the merger with CastlePoint.

Additional Highlights and Disclosures:

Acquisition of OneBeacon’s Personal Lines Division

On July 1, 2010, Tower completed the acquisition of the Personal Lines Division of OneBeacon Insurance Group. Tower acquired Massachusetts Homeland Insurance Company, York Insurance Company of Maine and two management companies. The management companies are the attorneys-in-fact for Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer, and its New Jersey domiciled stock insurance subsidiary, New Jersey Skylands Insurance Company. The total consideration for this acquisition was $167 million, subject to post-closing adjustments.

Dividend Declaration

Tower’s Board of Directors approved a quarterly dividend on August 6, 2010 of $0.125 per share payable on September 24, 2010 to stockholders of record as of September 10, 2010.

2010 Guidance

Tower expects third quarter 2010 operating earnings per share to be in a range of $0.75 to $0.80. For the full year 2010, Tower projects its operating earnings per share to be in a range between $2.55 and $2.65.

Notes on Non-GAAP Financial Measures

(1) Operating income excludes realized gains and losses and acquisition-related transaction costs, net of tax. This is a common measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, these measures are a key internal management performance standard. Operating earnings per share is operating income divided by diluted weighted average shares outstanding. Operating return on equity is annualized operating income divided by average common stockholders’ equity.

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

(3) For the three and six month periods ended June 30, 2010, $0.3 million and $1.0 million, respectively, of acquisition-related transaction costs were not deemed deductible for tax purposes. A tax rate of 35% was used for those acquisition-related transaction costs that were tax deductible.

Conference Call

Tower will host a conference call and webcast to discuss these results today at 10:00 a.m. ET. This conference call will be broadcast live over the Internet. To access a listen-only webcast over the Internet, please visit the Investor Information section of Tower Group, Inc.’s website, www.twrgrp.com, or use this link: http://investor.twrgrp.com/events.cfm.

Please access the website at least 15 minutes prior to the call to register and to download any necessary audio software. If you are unable to participate during the live conference call, a webcast will be archived in the Investor Information section of Tower Group, Inc.'s website at www.twrgrp.com.

About Tower Group, Inc.

Tower Group, Inc. offers diversified 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 through its network of retail and wholesale agents and specialty business through program underwriting agents. Tower'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 press release and any other written or oral statements made by or on behalf of Tower may include forward-looking statements that reflect Tower's current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press 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" and "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 the actual results of Tower to differ materially from those indicated in these statements. Please refer to Tower’s filings with the SEC, including among others Tower’s Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent filings on Form 10-Q, for a description of the important factors that could cause the actual results of Tower to differ materially from those indicated in these statements. Forward-looking statements speak only as of the date on which they are made, and Tower undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Brokerage Insurance & Specialty Business Combined

($ in thousands)

(Unaudited)

                 
Three Months Ended June 30, Six Months Ended June 30,
2010 2009 Change(%) 2010 2009 Change(%)
Revenues

Premiums earned

Gross premiums earned $ 320,937 $ 267,641 19.9% $ 642,755 $ 483,699 32.9%
Less: ceded premiums earned (47,970) (38,190) 25.6% (101,742) (86,158) 18.1%
Net premiums earned 272,967 229,451 19.0% 541,013 397,541 36.1%
Ceding commission revenue 8,453 7,164 18.0% 18,641 20,741 -10.1%
Policy billing fees 1,009 709 42.3% 1,780 1,241 43.4%
Total 282,429 237,324 19.0% 561,434 419,523 33.8%
Expenses

Loss and loss adjustment expenses

Gross loss and loss adjustment expenses 190,536 135,042 41.1% 387,230 264,481 46.4%
Less: ceded loss and loss adjustment
expenses (30,667) (15,216) 101.5% (58,025) (54,398) 6.7%
Net loss and loss adjustment expenses 159,869 119,826 33.4% 329,205 210,083 56.7%
Underwriting expenses
Direct commission expense 58,536 53,352 9.7% 116,475 98,334 18.4%
Other underwriting expenses 44,783 28,975 54.6% 87,968 53,606 64.1%
Total underwriting expenses 103,319 82,327 25.5% 204,443 151,940 34.6%
Underwriting profit $ 19,241 $ 35,171 -45.3% $ 27,786 $ 57,500 -51.7%
 

Key Measures

Premiums written

Gross premiums written $ 331,826 $ 260,741 27.3% $ 614,911 $ 460,685 33.5%
Less: ceded premiums written (39,225) (24,923) 57.4% (75,176) (38,603) 94.7%
Net premiums written $ 292,601 $ 235,818 24.1% $ 539,735 $ 422,082 27.9%
 
Loss Ratios
Gross 59.4% 50.5% 60.2% 54.7%
Net 58.6% 52.2% 60.8% 52.8%
Accident Year Loss Ratios
Gross 56.3% 53.4% 58.5% 54.4%
Net 57.8% 52.0% 60.5% 54.4%
Underwriting Expense Ratios
Gross 31.9% 30.5% 31.5% 31.2%
Net 34.4% 32.4% 34.0% 32.7%
Combined Ratios
Gross 91.3% 81.0% 91.7% 85.9%
Net 93.0% 84.6% 94.8% 85.5%
 
 
Brokerage Insurance Segment Information
($ in thousands)
(Unaudited)
      Three Months Ended   Six Months Ended
June 30,   June 30,
2010   2009 2010   2009
Revenues
Premiums earned
Gross premiums earned $ 223,705 $ 227,560 $ 460,927 $ 417,474
Less: ceded premiums earned (40,271) (31,590) (88,067) (75,808)
Net premiums earned 183,434 195,970 372,860 341,666
Ceding commission revenue 7,342 5,966 15,752 19,077
Policy billing fees 1,009 709 1,780 1,241
Total 191,785 202,645 390,392 361,984
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 130,646 111,504 271,576 225,051
Less: ceded loss and loss adjustment
expenses (32,591) (9,264) (54,565) (46,694)
Net loss and loss adjustment expenses 98,055 102,240 217,011 178,357
Underwriting expenses
Direct commission expenses 36,722 45,864 77,391 84,048
Other underwriting expenses 35,842 26,058 71,283 49,449
Total underwriting expenses 72,564 71,922 148,674 133,497
Underwriting profit $ 21,166 $ 28,483 $ 24,707 $ 50,130
 
Key Measures
Premiums written
Gross premiums written $ 251,133 $ 229,427 $ 463,870 $ 400,293
Less: ceded premiums written (33,137) (15,433) (63,773) (28,089)
Net premiums written $ 217,996 $ 213,994 $ 400,097 $ 372,204
 
Loss Ratios
Gross 58.4% 49.0% 58.9% 53.9%
Net 53.5% 52.2% 58.2% 52.2%
Accident Year Loss Ratios
Gross 55.5% 52.1% 57.2% 53.3%
Net 53.6% 51.3% 58.3% 53.7%
Underwriting Expense Ratios
Gross 32.0% 31.3% 31.9% 31.7%
Net 35.0% 33.3% 35.2% 33.1%
Combined Ratios
Gross 90.4% 80.3% 90.8% 85.6%
Net 88.5% 85.5% 93.4% 85.3%
 
 
Specialty Business Segment Information
($ in thousands)
(Unaudited)
      Three Months Ended     Six Months Ended
June 30,     June 30,
  2010   2009   2010   2009
Revenues
Premiums earned
Gross premiums earned $ 97,232 $ 40,081 $ 181,828 $ 66,225
Less: ceded premiums earned (7,699) (6,600) (13,675) (10,350)
Net premiums earned 89,533 33,481 168,153 55,875
Ceding commission revenue 1,111 1,198 2,889 1,664
Total 90,644 34,679 171,042 57,539
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 59,890 23,538 115,654 39,430
Less: ceded loss and loss adjustment
expenses 1,924 (5,952) (3,460) (7,704)
Net loss and loss adjustment expenses 61,814 17,586 112,194 31,726
Underwriting expenses
Direct commission expense 21,814 7,488 39,084 14,286
Other underwriting expenses 8,941 2,917 16,685 4,157
Total underwriting expenses 30,755 10,405 55,769 18,443
Underwriting profit $ (1,925) $ 6,688 $ 3,079 $ 7,370
 
Key Measures
Premiums written
Gross premiums written $ 80,693 $ 31,314 $ 151,041 $ 60,392
Less: ceded premiums written (6,088) (9,490) (11,403) (10,514)
Net premiums written $ 74,605 $ 21,824 $ 139,638 $ 49,878
 
Loss Ratios
Gross 61.6% 58.7% 63.6% 59.5%
Net 69.0% 52.5% 66.7% 56.8%
Accident Year Loss Ratios
Gross 58.2% 61.0% 61.8% 60.9%
Net 66.3% 55.8% 65.3% 58.7%
Underwriting Expense Ratios
Gross 31.6% 26.0% 30.7% 27.8%
Net 33.1% 27.5% 31.4% 30.0%
Combined Ratios
Gross 93.2% 84.7% 94.3% 87.3%
Net 102.1% 80.0% 98.1% 86.8%
 
 
Insurance Services Segment Results of Operations
($ in thousands)
(Unaudited)
 

 

Three Months Ended

    Six Months Ended
June 30,  

 

June 30,

2010   2009 2010   2009
Revenue
Direct commission revenue from managing general agent $ (387) $ (824) $ (439) $ 2,283
Claims administration revenue 117 136 291 982
Other administration revenue 70 221 172 416
Reinsurance intermediary fees 450 207 782 302
Policy billing fees 1 60 1 79
Total revenue 251 (200) 807 4,062
Expenses
Direct commission expenses paid to producers 139 125 260 1,616
Other insurance services expenses 277 181 524 1,040
Claims expense reimbursement to TICNY 4 136 8 982
Total 420 442 792 3,638
Insurance services pre-tax income

$

(169)

$

(642)

$

15

$

424
 
Premiums produced by TRM on behalf of issuing companies $ (821) $ 479 $ - $ 11,208
 
 
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
       
June 30, December 31,
($ in thousands, except par value and share amounts)   2010   2009
Assets
Available-for-sale investments, at fair value
Fixed-maturity securities (amortized cost of $1,594,918 and $1,729,117) $ 1,685,727 $ 1,783,596
Equity securities (cost of $37,105 and $78,051) 36,825 76,733
  Short-term investments (cost of $0 and $36,500)     -     36,500
Total available-for-sale investments, at fair value 1,722,552 1,896,829
Cash and cash equivalents 348,451 164,882
Investment income receivable 19,414 20,240
Premiums receivable 308,766 308,075
Reinsurance recoverable on paid losses 14,715 14,819
Reinsurance recoverable on unpaid losses 237,963 199,687
Prepaid reinsurance premiums 67,889 94,818
Deferred acquisition costs, net of deferred ceding commission revenue 183,725 170,652
Deferred income taxes 25,038 41,757
Intangible assets 50,686 53,350
Goodwill 243,748 244,690
Fixed assets, net of accumulated depreciation 79,423 66,429
Other assets     77,704     36,724
Total assets  

$

3,380,074  

$

3,312,952
Liabilities
Loss and loss adjustment expenses $ 1,188,375 $ 1,131,989
Unearned premium 631,094 658,940
Reinsurance balances payable 48,661 89,080
Funds held under reinsurance agreements 69,269 13,737
Other liabilities 81,714 133,647
Debt     291,058     235,058
Total liabilities 2,310,171 2,262,451
Stockholders' equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 45,497,009 and
45,092,321 shares issued, and 43,129,415 and 44,984,953 shares outstanding) 455 451
Treasury stock (2,367,594 and 107,368 shares) (50,603) (1,995)
Paid-in-capital 755,992 751,878
Accumulated other comprehensive income 58,843 34,554
Retained earnings     305,216     265,613
Total stockholders' equity     1,069,903     1,050,501
Total liabilities and stockholders' equity  

$

3,380,074  

$

3,312,952
 
 
Tower Group, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
           
Three Months Ended Six Months Ended
June 30,

June 30,

(in thousands, except per share amounts)     2010   2009   2010   2009
Revenues
Net premiums earned $ 272,967 $ 229,451 $ 541,013 $ 397,541
Ceding commission revenue 8,453 7,167 18,641 20,741
Insurance services revenue 250 (293 ) 806 3,983
Policy billing fees 1,010 799 1,781 1,320
Net investment income 23,931 17,417 47,106 31,950
Net realized investment gains (losses)
Other-than-temporary impairments (2,836 ) (6,139 ) (8,982 ) (14,871 )
Portion of loss recognized in other comprehensive income 2,505 2,011 5,720 7,517
  Other net realized investment gains     5,497       4,570       9,168       7,124  
    Total net realized investment gains (losses)     5,166       442       5,906       (230 )
Total revenues 311,777 254,983 615,253 455,305
Expenses
Loss and loss adjustment expenses 159,868 119,828 329,205 210,083
Direct and ceding commission expense 58,619 52,541 116,664 99,949
Other operating expenses 45,719 31,419 89,927 58,163
Acquisition-related transaction costs 393 - 1,250 11,348
Interest expense     5,214       4,659       10,095       8,442  
Total expenses 269,813 208,447 547,141 387,985
Other income (expense)
Equity in loss of unconsolidated affiliate - - - (777 )
Gain on investment in acquired unconsolidated affiliate - - - 7,388
Other expense     -       -       (466 )     -  
Income before income taxes 41,964 46,536 67,646 73,931
Income tax expense     13,708       15,909       21,917       25,327  
Net income   $ 28,256     $ 30,627     $ 45,729     $ 48,604  
Gross unrealized investment holding gains arising during periods
Gross unrealized investment holding gains arising during periods 19,463 43,493 43,274 48,559
Cumulative effect of adjustment resulting from adoption of
new accounting guidance - - - (2,497 )
Equity in net unrealized gains on investment in
unconsolidated affiliate's investment portfolio - - - 3,124
Less: reclassification adjustment for (gains) losses included in net
income (5,166 ) (442 ) (5,906 ) 230
Income tax (expense) related to items of other comprehensive
  income     (5,485 )     (14,345 )     (13,079 )     (16,573 )
Comprehensive net income  

$

37,068    

$

59,333    

$

70,018    

$

81,447  
Basic and diluted earnings per share
Basic-Common stock:
Basic

$

0.64

$

0.76

$

1.02

$

1.31
  Diluted  

$

0.63    

$

0.75    

$

1.02    

$

1.30  
Weighted average common shares outstanding
Basic 44,330 40,467 44,706 37,110
  Diluted     44,515       40,606       44,900       37,256  
Dividends declared and paid per common share   $ 0.07     $ 0.07     $ 0.14     $ 0.12  

CONTACT:
Tower Group, Inc.
Thomas Song, 212-655-4789
Managing Vice President
tsong@twrgrp.com
For more information visit Tower's website at
http://www.twrgrp.com/