NEW YORK, Mar 06, 2008 (BUSINESS WIRE) -- Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $6.7 million and $0.29 per diluted share for the fourth quarter and $45.1 million and $1.93 per diluted share for the full year of 2007. Net income excluding realized investment gains or losses(1) was $18.1 million and $0.78 per diluted share for the fourth quarter and $56.5 million and $2.43 per diluted share for the full year of 2007.
Fourth Quarter and Full Year 2007 Key Operating Highlights (all percentage increases compare the fourth quarter and full year results to the same period in 2006):
-- Net income and diluted earnings per share excluding realized investment gains or losses (1), increased by 91.3% and 69.6%, respectively during the fourth quarter and 53.6% and 33.5%, respectively for the full year.
-- Our return on equity, excluding realized investment gains or losses(1), increased to 23.8% from 20.7% in the fourth quarter and to 22.6% from 22.2% for the full year.
-- Our book value per share increased 44.5% to $13.34 from $9.23 in 2006.
-- Gross premiums written and produced(2) increased by 62.6% to $197.1 million in the fourth quarter and 44.4% to $608.4 million for the full year.
-- Commission and fee based revenue increased by 168.2% to $41.8 million in the fourth quarter and 103.6% to $106.3 million for the full year.
-- Net investment income increased by 35.4% to $9.7 million in the fourth quarter and 59.4% to $36.7 million for the full year.
-- Net combined ratio of 80.9% for the fourth quarter and 83.7% for the full year.
(1) Note on Non-GAAP Financial Measures: Net income excluding realized investment gains or losses is a common performance measurement for insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. The tax rate used to calculate the net realized gains or losses on investments, net of tax, is 35%.
(2) Gross premiums written through our insurance subsidiaries and produced as managing general agent on behalf of other insurance companies.
Financial Summary ($ in thousands, except per share data):
Three Months Twelve Months
Ended Ended
December 31, December 31,
2007 2006 2007 2006
-----------------------------------
Gross premiums written $136,628 $121,066 $524,015 $432,663
Premiums produced by managing
general agency 61,004 2,656 85,098 12,926
Net premiums written 74,708 65,059 259,183 245,070
Net premiums earned 78,564 55,080 286,106 223,988
Total commission and fee income 41,801 15,583 106,348 52,237
Net investment income 9,683 7,151 36,699 23,026
Net realized (losses) gains on
investments (17,521) 96 (17,511) 12
Net income 6,691 9,513 45,082 36,764
Earnings per share - Basic $0.29 $0.47 $1.95 $1.85
Earnings per share - Diluted $0.29 $0.46 $1.93 $1.82
Return on Average Equity 8.8% 20.7% 18.0% 22.2%
Reconciliation of non-GAAP
financial measures:
----------------------------------
Net income $6,691 $9,513 $45,082 $36,764
Net realized (losses) gains on
investments, net of tax (11,389) 62 (11,382) 8
Net income excluding realized
investment gains or losses 18,080 9,451 56,464 36,756
Excluding realized investment
gains or losses:
----------------------------------
Earnings per share - Basic $0.79 $0.47 $2.46 $1.85
Earnings per share - Diluted $0.78 $0.46 $2.43 $1.82
Return on Average Equity 23.8% 20.7% 22.6% 22.2%
Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. stated, "We were extremely pleased with our fourth quarter operating results. Despite challenging market conditions, we achieved very strong operating results as exhibited by our top line growth, a favorable combined ratio and significant contributions from commission and fee income. We are encouraged by our continued success in the Northeast and expansion into other parts of the country. Based upon the growth initiatives that we have developed in 2007, we anticipate that we will continue to achieve meaningful profitable growth in 2008. In response to the challenging investment environment in the second half of 2007, we took affirmative steps to maintain the quality of our investment portfolio by selling investments to reduce our exposures to sub-prime mortgages. We also wrote down certain investments that had unrealized losses. In doing so, a significant portion of our unrealized investment losses that were already reflected on our balance sheet at the end of the third quarter were realized in our income statement in the fourth quarter. As a result of these investment transactions, we believe our balance sheet has been further strengthened to support our growth in 2008."
Fourth Quarter 2007 Highlights
Gross premiums written in the insurance and reinsurance segments increased to $136.6 million in the fourth quarter, which was 12.9% higher than in the fourth quarter of 2006.
Total revenues increased 44.4% to $112.5 million in the fourth quarter of 2007 compared to $77.9 million for the same period in 2006. Net premiums earned represented 69.8% of total revenues for the three months ended December 31, 2007 compared to 70.7% for the same period in 2006. For the fourth quarter of 2007, we produced $60.3 million in premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $19.3 million of fee income.
Total commission and fee income increased 168.2% to $41.8 million for the fourth quarter of 2007 compared to $15.6 million in the fourth quarter of 2006.
Net investment income increased by 35.4% to $9.7 million for the three months ended December 31, 2007 compared to $7.2 million for the same period in 2006. On a tax equivalent basis, the yield was 5.6% as of December 31, 2007 compared to 5.7% as of December 31, 2006.
At the end of the third quarter, we had net unrealized investment losses of $20.6 million. In order to reduce our exposure to sub-prime and other real estate related investments, we realized $17.5 million of losses through sales or write downs, including additional unrealized losses on these investments and gains on other investments in the fourth quarter. Our net unrealized investment losses were reduced to $12.1 million at the end of the fourth quarter. These actions taken with respect to our investments reduced our sub-prime exposure to $11.5 million, which have an average rating of A. Overall, the fair value of our fixed income investments exceeded $600 million as of year end 2007 and substantially consists of high rated securities averaging AA with nearly half rated AAA.
Gross loss and loss adjustment expenses and the gross loss ratio for the insurance and reinsurance segments combined were $70.7 million and 49.1%, compared to $48.9 million and 49.5%, for the three months ended December 31, 2007 and 2006, respectively. The net loss ratio for the combined segments was 55.2% and 54.6% in the three months ended December 31, 2007 and 2006 respectively.
Operating expenses were $55.7 million for the three months ended December 31, 2007 as compared to $31.9 million for the same period in 2006. Our gross expense ratio was 28.0% for the three months ended December 31, 2007 as compared with 29.8% for the same period in 2006.
Full Year 2007 Highlights
Gross premiums written in the insurance and reinsurance segments increased to $524.0 million in 2007, which was 21.1% higher than in 2006. Policies in-force, before the effect of the Preserver acquisition, increased by 16.8% as of December 31, 2007 compared to December 31, 2006. During 2007, premium increases on renewed business averaged 9.3% in personal lines and 0.3% in commercial lines. For all brokerage business managed by Tower, the retention rate was 85% in personal lines and 79% in commercial lines.
Total revenues increased 37.6% to $411.6 million for 2007 compared to $299.3 million in 2006. Net premiums earned represented 69.5% of total revenues for 2007 compared to 74.8% in 2006. In 2007, we produced $84.2 million in premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $27.0 million of fee income.
Total commission and fee income increased 103.6% to $106.3 million for 2007 compared to $52.2 million in 2006.
Net investment income increased by 59.4% to $36.7 million for 2007 compared to $23.0 million in 2006.
Gross loss and loss adjustment expenses and the gross loss ratio for the insurance and reinsurance segments combined for 2007 were $264.7 million and 50.7%, respectively, compared to $199.9 million and 55.0%, respectively, in 2006. The net loss ratio for the combined segments was 55.2% for 2007 and 60.3% in 2006.
Operating expenses increased by 56.1% to $178.4 million for 2007 from $114.2 million in 2006. Our gross expense ratio was 29.2% for 2007 as compared with 28.7% in 2006.
Additional Highlights and Disclosures:
Dividend Declaration
Tower Group, Inc. announced today that the Company's Board of Directors approved a quarterly dividend of $0.05 per share payable March 27, 2008 to stockholders of record as of March 14, 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 first quarter, we project net income to be in a range between $13.5 million and $14.5 million. We project Tower's diluted earnings per share in the first quarter to be in the range between $0.58 and $0.62 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/.
Insurance Results of Operations
Insurance and Reinsurance Segments
Fourth Quarter
($ in thousands)
Three Months Ended
December 31,
------------------
(%)
Revenues 2007 2006 Change
----------------------------------------------------------------------
Premiums earned
Gross premiums earned $143,934 $98,714 45.8%
Less: Ceded premiums earned (65,370) (43,634) 49.8%
--------- --------
Net premiums earned 78,564 55,080 42.6%
Ceded commission revenue 20,143 12,580 60.1%
Policy billing fees 561 304 84.5%
--------- --------
Total Revenues 99,268 67,964 46.1%
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 70,692 48,889 44.6%
Less: Ceded loss and loss adjustment
expenses (27,314) (18,790) 45.4%
--------- --------
Net loss and loss adjustment expense 43,378 30,099 44.1%
Underwriting Expenses
Commissions paid to producers 24,070 16,524 45.7%
Other underwriting expenses 16,862 13,230 27.5%
--------- --------
Total Underwriting Expenses 40,932 29,754 37.6%
Underwriting Profit $14,958 $8,111 84.4%
========= ========
Key Measures
Premiums written
Gross $136,628 $121,066 12.9%
Ceded (61,920) (56,007) 10.6%
--------- --------
Net $74,708 $65,059 14.8%
========= ========
Loss Ratios
Gross 49.1% 49.5%
Net 55.2% 54.6%
Accident Year Loss Ratios
Gross 51.0% 51.3%
Net 56.6% 56.6%
Expense Ratios
Gross 28.0% 29.8%
Net 25.7% 30.6%
Combined Ratios
Gross 77.1% 79.3%
Net 80.9% 85.2%
Insurance Results of Operations
Insurance and Reinsurance Segments
Full Year
($ in thousands)
Twelve Months Ended
December 31,
-------------------
(%)
Revenues 2007 2006 Change
----------------------------------------------------------------------
Premiums earned
Gross premiums earned $521,934 $363,425 43.6%
Less: Ceded premiums earned (235,828) (139,437) 69.1%
--------- ---------
Net premiums earned 286,106 223,988 27.7%
Ceded commission revenue 71,010 43,130 64.6%
Policy billing fees 2,005 1,129 77.6%
--------- ---------
Total Revenues 359,121 268,247 33.9%
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 264,748 199,863 32.5%
Less: Ceded loss and loss adjustment
expenses (106,842) (64,738) 65.0%
--------- ---------
Net loss and loss adjustment expense 157,906 135,125 16.9%
Underwriting Expenses
Commissions paid to producers 86,976 58,633 48.3%
Other underwriting expenses 67,630 46,738 44.7%
--------- ---------
Total Underwriting Expenses 154,606 105,371 46.7%
Underwriting Profit $46,609 27,751 68.0%
========= =========
Key Measures
Premiums written
Gross $524,015 $432,663 21.1%
Ceded (264,832) (187,593) 41.2%
--------- ---------
Net $259,183 $245,070 5.8%
========= =========
Loss Ratios
Gross 50.7% 55.0%
Net 55.2% 60.3%
Accident Year Loss Ratios
Gross 51.5% 55.8%
Net 55.8% 60.7%
Expense Ratios
Gross 29.2% 28.7%
Net 28.5% 27.3%
Combined Ratios
Gross 79.9% 83.7%
Net 83.7% 87.6%
Results of Operations
Insurance Services Segment
Fourth Quarter
($ in thousands) 2007 2006 % Change
----------------------------------------------------------------------
Revenue
Direct commission revenue from managing
general agency $19,707 $1,175 1,577.2%
Claims administration revenue 690 621 11.1%
Other administration revenue (1) 497 737 -32.6%
Reinsurance intermediary fees (2) 175 166 5.4%
Policy billing fees 28 - 0.0%
----------------------------------------------------------------------
Total 21,097 2,699 681.7%
----------------------------------------------------------------------
Expenses
Direct commissions expense paid to producers 10,096 380 2,556.8%
Other insurance services expenses 3,491 843 314.1%
Claims expense reimbursement to TICNY (3) 684 620 10.3%
----------------------------------------------------------------------
Total 14,271 1,843 674.3%
----------------------------------------------------------------------
Insurance services pre-tax income (loss) 6,826 856 697.4%
----------------------------------------------------------------------
Premiums produced by TRM on behalf of issuing
companies $61,004 $2,656 2,196.8%
----------------------------------------------------------------------
(1) The other administration revenue includes amounts reimbursed by
CastlePoint Reinsurance for services rendered pursuant to a
service and expense sharing agreement.
(2) The reinsurance intermediary fees include commissions earned for
placement of reinsurance on behalf of TICNY and TNIC.
(3) Consists of underwriting expenses reimbursed to TICNY pursuant to
an expense sharing agreement and to CastlePoint Reinsurance
pursuant to a service and expense sharing agreement.
Results of Operations
Insurance Services Segment
Full Year
($ in thousands) 2007 2006 % Change
----------------------------------------------------------------------
Revenue
Direct commission revenue from managing
general agency $28,795 $3,466 730.8%
Claims administration revenue 2,314 3,193 -27.5%
Other administration revenue (1) 1,421 737 92.8%
Reinsurance intermediary fees (2) 770 577 33.4%
Policy billing fees 33 5 560.0%
----------------------------------------------------------------------
Total 33,333 7,978 317.8%
----------------------------------------------------------------------
Expenses
Direct commissions expense paid to producers 14,055 1,925 630.1%
Other insurance services expenses 5,793 1,578 267.1%
Claims expense reimbursement to TICNY (3) 2,302 3,176 -27.5%
----------------------------------------------------------------------
Total 22,150 6,679 231.6%
----------------------------------------------------------------------
Insurance services pre-tax income (loss) $11,183 $1,299 760.9%
----------------------------------------------------------------------
Premiums produced by TRM on behalf of issuing
companies $85,098 $12,926 558.3%
----------------------------------------------------------------------
(1) The other administration revenue includes amounts reimbursed by
CastlePoint Reinsurance for services rendered pursuant to a
service and expense sharing agreement.
(2) The reinsurance intermediary fees include commissions earned for
placement of reinsurance on behalf of TICNY and TNIC.
(3) Consists of underwriting expenses reimbursed to TICNY pursuant to
an expense sharing agreement and to CastlePoint Reinsurance
pursuant to a service and expense sharing agreement.
Tower Group, Inc.
Consolidated Balance Sheets
(Unaudited)
December 31,
-------------------
($ in thousands, except par value and share
amounts) 2007 2006
----------------------------------------------------------------------
Assets
Fixed-maturity securities, available-for-sale, at
fair value (amortized cost of
$616,757 and $416,642) $606,488 $414,567
Equity securities, available-for-sale, at fair
value (cost of $14,429 and $47,971) 12,580 49,453
----------------------------------------------------------------------
Total investments 619,068 464,020
Cash and cash equivalents 77,679 100,598
Investment income receivable 6,546 4,767
Agents' balances receivable 122,763 65,578
Reinsurance recoverable 207,828 118,003
Prepaid reinsurance premiums 125,174 94,063
Deferred acquisition costs, net of deferred ceding
commission revenue 39,271 35,811
Deferred income taxes 24,835 -
Intangible assets 21,670 5,423
Goodwill 13,281 -
Fixed assets, net of accumulated depreciation 32,337 20,563
Investment in unconsolidated affiliate 32,615 27,944
Other assets 33,452 17,312
----------------------------------------------------------------------
Total assets $1,356,519 $954,082
----------------------------------------------------------------------
Liabilities
Loss and loss adjustment expenses 501,183 302,541
Unearned premium 272,774 227,017
Reinsurance balances payable 58,740 38,560
Payable to issuing carriers 42,855 662
Funds held under reinsurance agreements 36,841 51,527
Accounts payable and accrued expenses 14,205 18,267
Other liabilities 17,590 21,125
Federal and state income taxes payable 1,908 1,163
Deferred income taxes - 1,255
Subordinated debentures 101,036 68,045
----------------------------------------------------------------------
Total liabilities 1,047,132 730,162
Stockholders' Equity
Series A perpetual preferred stock ($0.01 par
value; 2,000,000 shares authorized;
0 and 40,000 shares issued and outstanding,
liquidation preference of
$1,000 per share, net of $0.4 million of
issuance costs) - 39,600
Common stock ($0.01 par value; 40,000,000 shares
authorized, 23,225,039 and
20,005,758 shares issued, and 23,185,173 and
19,980,306 shares outstanding) 232 200
Treasury stock (39,866 and 25,452 shares) (493) (207)
Paid-in-capital 205,435 113,168
Accumulated other comprehensive net loss (8,322) (437)
Retained earnings 112,535 71,596
----------------------------------------------------------------------
Total stockholders' equity 309,387 223,920
----------------------------------------------------------------------
Total liabilities and stockholders' equity $1,356,519 $954,082
----------------------------------------------------------------------
Tower Group, Inc.
Consolidated Statements of Income and
Comprehensive Net Income
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
--------------------- ---------------------
($ in thousands, except
per share and share
amounts) 2007 2006 2007 2006
----------------------------------------------------------------------
Revenues
Net premiums earned $78,564 $55,080 $286,106 $223,988
Ceding commission revenue 20,143 12,580 71,010 43,130
Insurance services revenue 21,064 2,699 33,300 7,973
Policy billing fees 594 304 2,038 1,134
Net investment income 9,683 7,151 36,699 23,026
Net realized gains
(losses) on investments (17,521) 96 (17,511) 12
----------------------------------------------------------------------
Total revenues 112,527 77,910 411,642 299,263
Expenses
Loss and loss adjustment
expenses 43,378 30,099 157,906 135,125
Direct and ceding
commission expense 34,165 16,904 101,030 60,558
Other operating expenses 21,487 14,957 77,319 53,675
Interest expense 2,447 1,804 9,290 6,870
----------------------------------------------------------------------
Total expenses 101,477 63,764 345,545 256,228
Other Income
Equity income in
unconsolidated affiliate 269 550 2,438 914
Gain from issuance of
common stock by
unconsolidated affiliate - - 2,705 7,883
Warrant received from
unconsolidated affiliate - - - 4,605
----------------------------------------------------------------------
Income before income taxes 11,319 14,696 71,240 56,437
Income tax expense 4,628 5,183 26,158 19,673
----------------------------------------------------------------------
Net income 6,691 9,513 45,082 36,764
----------------------------------------------------------------------
Gross unrealized
investment holding gains
(losses) arising during
period (9,255) 1,170 (29,424) 4,443
Equity in net unrealized
gains in investment in
unconsolidated
affiliate's investment
portfolio 440 (41) (218) 143
Less: reclassification
adjustment for (gains)
losses included in net
income 17,521 (96) 17,511 (12)
Income tax (expense)
benefit related to items
of other
comprehensive income (3,047) (362) 4,246 (1,659)
----------------------------------------------------------------------
Comprehensive net
income $12,350 $10,184 $37,197 $39,679
----------------------------------------------------------------------
Basic and diluted earnings
per share
Basic $0.29 $0.47 $1.95 $1.85
----------------------------------------------------------------------
Diluted $0.29 $0.46 $1.93 $1.82
----------------------------------------------------------------------
Weighted average common
shares outstanding:
Basic 22,991,463 19,798,141 22,714,663 19,750,309
Diluted 23,215,462 20,483,388 22,968,097 20,147,318
Dividends declared and
paid per common share:
Common stock $0.05 $0.03 $0.15 $0.10
Note: Full year 2007 earnings per share calculated from net income available to common shareholders of $44,383,711 and 22,714,663 weighted average common shares for basic EPS and 22,968,097 weighted average common shares for diluted EPS.
Fourth quarter 2007 earnings per share calculated from net income available to common shareholders of $6,691,000 and 22,991,463 weighted average common shares for basic EPS and 23,215,462 weighted average common shares for diluted EPS.
SOURCE: Tower Group, Inc.
Tower Group, Inc. Thomas Song, 212-655-4789 Managing Vice President tsong@twrgrp.com
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