Net Income Rose 77% for Year at Tower Group

February 27, 2007

Tower Group, Inc. reported its financial results for the fourth quarter of 2006, including a 45 percent 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 percent 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.

Michael H. Lee, president and chief executive officer of Tower Group, Inc. commented that the company is continuing to grow.

“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 percent. 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.

The 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.

Tower Group, Inc.’s two insurance company subsidiaries are Tower Insurance Company of New York, which offers commercial insurance products to small to medium-size businesses and personal insurance products to individuals, and Tower National Insurance Co. Tower Risk Management acts as a managing general agency, adjusts claims and negotiates reinsurance terms on behalf of other insurance companies.

Was this article valuable?

Here are more articles you may enjoy.