Tower Group, Inc. Reports 91% increase in Fourth Quarter 2004 Net Income and a 44% increase for the Full Year of 2004.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Tower Group, Inc. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on : TWGP) today reported a 91% increase in fourth quarter 2004 net income of $3.2 million as compared to fourth quarter 2003 net income of $1.7 million. For the full year of 2004, net income increased 44% to $9.0 million as compared to the full year of 2003 net income of $6.3 million. Diluted earnings per share diluted earnings per share An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of of $0.19 for the fourth quarter of 2004 were based on weighted average diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. shares of 16,851,503, as compared with $0.30 per share for the fourth quarter of 2003, based on weighted average diluted shares of 5,636,532. For the full year of 2004, Tower reported diluted earnings per share of $1.06, based on 8,565,815 weighted average diluted shares, as compared with $1.09 per diluted share for the full year of 2003 based on weighted average diluted shares of 5,708,016. Michael Lee Michael Lee may refer to:
Gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. in the insurance operations reached $51.5 million in the fourth quarter, which was 70% higher than in the fourth quarter of 2003, while premiums placed by the managing general agency reached $18.2 million in the fourth quarter of 2004 which was 13% higher than in the fourth quarter of 2003. For the year, gross premiums written in the insurance operations reached $177.8 million, which was 32% higher than in 2003, while premiums produced by the managing general agency reached $53.4 million in 2004 which was 35% higher than in 2003. Return on average equity was 17.5% in the fourth quarter of 2004 as compared with 55.0% in the fourth quarter of 2003. For the year, the return on average equity was 23.7% as compared with 56.8% for 2003. Although net income was significantly higher, in 2004 than in 2003, the lower return on average equity in each of these periods resulted from the significant increase in average shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. as the IPO was completed in the fourth quarter of 2004. For the fourth quarter, the return was calculated by annualizing Annualizing See: Annual basis. the fourth quarter net income and dividing by an average shareholders' equity of $73.9 million. For the year, the return was calculated using an average shareholders' equity of $38.1 million. Net Premiums Written and Earned: Net premiums written increased 239% to $98.1 million in the full year of 2004 from $29.0 million in 2003. However, net earned premiums Earned premium is the portion of an insurance written premium which is considered "earned" by the insurer, based on the part of the policy period that the insurance has been in effect, and during which the insurer has been exposed to loss. of $45.6 million was only 46% of net premiums written in 2004 as compared to net earned premium of $22.9 million which was 79% of net written premium in 2003. This low earned percentage in 2004 reflects the significant growth in net premiums written resulting from the reduction in the percentage of business we ceded to our quota share For This article is about quota shares (shares of the quota). For other usages of quota, see, see . A quota share is a specified number or percentage of the allotment as a whole (quota), that is prescribed to each individual entity (see Non-tariff barriers to trade). reinsurers effective October October: see month. 1, 2004 . As a result, much of the net premiums that Tower wrote in 2004 will flow through the company's operating results in 2005. In future periods, while Tower expects continued growth in net premiums written, the Company anticipates that a greater percentage of net premiums written will be earned in the year in which they are written. Fourth Quarter 2004 Financial Highlights: Total revenue increased 72% in the fourth quarter of 2004 as compared to the prior year's fourth quarter. This increase was driven primarily by an increase in net premium earned as well as increased ceding cede tr.v. ced·ed, ced·ing, cedes 1. To surrender possession of, especially by treaty. See Synonyms at relinquish. 2. commission and fee income and net investment income. Net premiums earned represented 48% of total revenues in the fourth quarter of 2004 as compared to 27% for the same period of 2003. Ceding commission and fee income represented 46% of total revenue for the fourth quarter of 2004 as compared to 70% in the fourth quarter of 2003. Net investment income, excluding realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. , comprised 6% of total revenues in the fourth quarter of 2004 and 3% in the same period of 2003. Net premiums earned more than tripled to $16.0 million as compared to $5.1 million in the same quarter of 2003 due to overall growth in gross premiums written and our decision to reduce the percentage of business ceded under our quota share reinsurance treaties Reinsurance Treaty (June 18, 1887) Secret agreement between Germany and Russia. Arranged by Otto von Bismarck after the collapse of the Three Emperors' League, it provided that each party would remain neutral if either became involved in a war with a third nation, and that to 25% in this current quarter as compared to 80% in the fourth quarter of 2003 in order to deploy the additional capital resulting from the IPO in the fourth quarter of 2004. Gross premiums written increased 70% in the fourth quarter of 2004 to $51.5 million as compared to $30.2 million in the fourth quarter of 2003. Net premiums written were $51.1 million in the fourth quarter as compared to a slightly negative amount in the same quarter of 2003. The increase resulted from the fourth quarter 2004 reduction in the quota share ceding percentage and the novation The substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement. A novation ordinarily arises when a new individual assumes an obligation to pay that was incurred by the original party and termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. of Converium Re's portion of the 2004 quota share treaty as a result of Converium Re's rating downgrade Downgrade A negative change in the rating of a security. Notes: For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. (see additional details regarding Converium in additional highlights below). To more effectively use the increased capital from the IPO, we have retained the unearned premium at December December: see month. 31, 2004 that otherwise would have been ceded to Converium Re. This action added $13.1 million of net written premiums in the fourth quarter of 2004. These premiums will be earned in 2005. In addition, as a result of our retention of these premiums, ceding commission revenue in 2005 will be approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $5 million less than it would otherwise be. Ceding commission revenue increased 8% to $9.6 million in the fourth quarter reflecting a significant increase in gross premium written that was largely offset by the lower quota share ceding percentage. Ceding commission revenue caused the net expense ratio of 21.2% to be 10.4 percentage points lower than the gross expense ratio of 31.6%. The net loss ratio improved to 54.4% for the fourth quarter of 2004 as compared to 65.6% in the fourth quarter of 2003. The improvement resulted from rate increases and other pricing actions in both our insurance and reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. segments that reduced the accident year loss ratio, as well as favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. development on prior years' loss reserves. The gross expense ratio increased 2.5 points to 31.6% in the fourth quarter of 2004 as compared to the 29.1% in the fourth quarter of 2003. The increase was primarily driven by costs related to the transaction with OneBeacon Insurance Group OneBeacon Insurance Group offers a range of specialty and segmented commercial and personal insurance products sold primarily through select independent agents. As one of the oldest property and casualty insurers in the United States, OneBeacon traces its roots to 1831 and including establishment of two new branch offices in Long Island and Western New York
Western New York refers to the westernmost region of New York State. , additional staffing of key positions in preparation for a public company environment and an increase in regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. assessments. The net expense ratio, which equals the gross expense ratio after applying ceding commission revenue and policy billing fees to reduce underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. expenses, increased to 21.2% in the fourth quarter of 2004 as compared to negative 6.3% in the same period of 2003 due to the lower level of ceding commission revenue in the fourth quarter of 2004. Although ceding commission revenue increased over the prior year quarter, the increase was less than it would have been had the ceding percentage remained the same as in 2003. The net combined ratio increased to 75.6% in the fourth quarter from 59.3% in the prior year quarter due to the increase in the net expense ratio. Nevertheless, the combined ratio remains extremely favorable. Investment income was a solid contributor to revenue growth in the fourth quarter of 2004 as it increased 219 % to $2.0 million versus $0.6 million in the fourth quarter of 2003. This growth was primarily due to 298 % growth in invested assets to $228.4 million at year end 2004 from $57.3 million at year end 2003 from the proceeds from the IPO and issuance of trust preferred securities, which increased investment income by approximately $0.4 million, and strong operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. . The positive effects were offset by a decline in the pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta investment yield to 3.9% on invested assets held at December 31, 2004 as compared to 5.0% for assets held as of December 31, 2003. The decline in yield was primarily due to lower available interest rates and an increased allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as to tax exempt securities Exempt securities Instruments exempt from the registration requirements of the Securities Act of 1933 or the margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis, commercial paper, and private placements. . The tax equivalent book yield as of December 31, 2004 was 4.4% compared to 5.3% as of December 31, 2003. Interest expense increased to $1.0 million in the fourth quarter of 2004 from $0.6 million in the fourth quarter of 2003. This is primarily as a result of $0.4 million increase in interest on funds held as collateral collateral (kəlăt`ərəl), something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although credited to ceding reinsurers and a $0.1 million increase in interest on subordinated debentures subordinated debenture An unsecured bond with a claim to assets that is subordinate to all existing and future debt. Thus, in the event that the issuer encounters financial difficulties and must be liquidated, all other claims must be satisfied before underlying statutory trust securities. Pre PRE Preformatted Text (HTML) PRE Physical Review E (American Physical Society journal of statistical, linear, & soft-matter physics) PRE Pura Raza Española (Spanish: pure Spanish breed) tax income in our insurance services segment increased to $1.0 million in the fourth quarter of 2004 from $0.5 million in the same quarter of 2003 primarily as a result of an increase in premiums placed with issuing carriers Full Year 2004 Financial Highlights: Total revenue increased 44% for the full year of 2004 as compared to 2003, driven primarily by net premiums earned as well as increased ceding commission and fee income and investment income. Net premiums earned represented 42% of total revenues for the full year of 2004 as compared to 31% for 2003. The significant growth in net premiums earned for 2004 reflected the overall growth in gross premiums written and a reduced quota share ceding percentage in 2004. The gross premiums written increase was attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to a 12% increase in policy count and an increase in average premium of 17% resulting primarily from rate increases and other pricing actions. Net premiums earned nearly doubled from 2003 due to the increase in gross premiums earned and the reduction in the overall ceding percentage from approximately 78% in 2003 to approximately 44% in 2004. Although ceding commission and fee income increased by 16% over 2003, its contribution to total revenue decreased to 53% in 2004 as compared to 66% in 2003 as a result of the reduction in ceding percentage. Net investment income, excluding realized gains, comprised 5% of total revenues for 2004 and 3% for the full year of 2003. The net loss ratio improved to 59.4% in calendar year 2004 from 65.7% for the full calendar year of 2003. The improvement was due to increases in pricing, an increase in net premiums earned over which to spread costs of catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). reinsurance premiums, and favorable development of prior year loss reserves of $0.2 million. The gross expense ratio increased moderately for the full year of 2004 to 31.1% from 30.0% in 2003. The increase in expenses was due to an increase in the number of employees from 217 at December 31, 2003 to 289 at December 31, 2004, including new hires at senior levels and for other key positions in preparation for a public company environment, costs related to the transaction with OneBeacon Insurance Group including the establishment of two new branch offices in Long Island and Western New York and additional regulatory assessments. The net expense ratio increased to 16.2% for the full year of 2004 as compared to 4.4% in 2003. The lower level of ceding commission revenue in relation to net premiums earned as a result of the lower ceding percentage on the quota share treaty was the primary driver of the increase. Net investment income grew 124% in 2004 to $5.1 million as compared to $2.3 million in 2003, driven by the higher invested assets from the IPO proceeds, strong operating cash flow of approximately $76 million and $20.6 million of net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). from the issuance of subordinated debentures underlying statutory business trust securities received in 2003. These factors resulted in a 298 % increase to invested assets to $228.4 million in 2004 from $57.3 million in 2003. Net investment income growth was somewhat constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. by lower interest rates in 2004 and an increased allocation to tax-exempt securities Tax-exempt security An obligation whose interest is tax-exempt, often called a municipal bond, offered by a country, state, town, or any political district. . Interest expense increased to $3.1 million in 2004 as compared to $1.5 million in 2003. The increase resulted from $1.1 million increase in interest expense incurred as a result of crediting reinsurers on funds withheld in segregated trusts as collateral for reinsurance recoverables and a $1.0 million increase in interest on subordinated debentures underlying statutory business trust securities. These increases in interest expense were offset by a $0.5 million reduction in interest on surplus notes repaid in 2003. Pre tax income in our insurance services segment increased to nearly $2 million from $1.5 million last year as a result of an increase in premiums placed with issuing carriers.
Fourth Quarter Highlights
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2004 2003
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Total Underwriting Profit (Loss) $3,914 $2,099
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Insurance Services Segment Pre-Tax Income 969 477
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Net Investment Income 1,983 622
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Net Realized Investment Gains (20) 5
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Corporate Expenses (202) (6)
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Interest Expense (1,001) (615)
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Income Before Income Taxes 5,642 2,582
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Income Tax Expense 2,412 895
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Net Income $3,230 $1,687
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EPS - Basic $0.20 $0.38
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EPS - Diluted $0.19 $0.30
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Consolidated Full Year Highlights
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2004 2003
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Total Underwriting Profit $11,106 $6,854
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Insurance Services Segment Pre-Tax Income 1,951 1,541
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Net Investment Income 5,070 2,268
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Net Realized Investment Gains 13 493
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Corporate Expenses (289) (40)
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Interest Expense (3,128) (1,462)
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Income Before Income Taxes 14,723 9,654
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Income Tax Expense 5,694 3,374
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Net Income $9,029 $6,280
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EPS - Basic $1.23 $1.37
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EPS - Diluted $1.06 $1.09
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Additional Highlights: Shell Acquisition: On January January: see month. 18, 2005, we entered into a stock purchase agreement to acquire North American North American named after North America. North American blastomycosis see North American blastomycosis. North American cattle tick see boophilusannulatus. Lumber lumber, term for timber that has been cut into boards for use as a building material. The major steps in producing lumber involve logging (the felling and preparation of timber for shipment to sawmills), sawing the logs into boards, grading the boards according to Insurance Company, a shell company with 17 state licenses mostly on the east coast, including New Jersey, Connecticut Connecticut, state, United States Connecticut (kənĕt`ĭkət), southernmost of the New England states of the NE United States. It is bordered by Massachusetts (N), Rhode Island (E), Long Island Sound (S), and New York (W). and various New England New England, name applied to the region comprising six states of the NE United States—Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut. The region is thought to have been so named by Capt. states. We plan to rename Re`name´ v. t. 1. To give a new name to. Verb 1. rename - assign a new name to; "Many streets in the former East Germany were renamed in 1990" this company Tower National Insurance Company after the close of the transaction. The acquisition is consistent with our plans to expand insurance operations territorially ter·ri·to·ri·al adj. 1. Of or relating to the geographic area under a given jurisdiction: the territorial limits of a country. 2. through becoming licensed in states other than New York and is expected to close in March or April of 2005. Long Term Debt: We also raised an additional $26.8 million in debt capital through two offerings of subordinated debentures underlying statutory business trust securities with 30 year maturities, primarily to capitalize To regard the cost of an improvement or other purchase as a capital asset for purposes of determining Income Tax liability. To calculate the net worth upon which an investment is based. To issue company stocks or bonds to finance an investment. the shell company. The interest for $13.4 million of these securities is based on a fixed rate of 7.4% for the first five years and will float quarterly thereafter at the three month LIBOR LIBOR See: London Interbank Offered Rate LIBOR See London interbank offered rate (LIBOR). rate plus 340 basis points. The interest for the remaining $13.4 million of these securities floats float v. float·ed, float·ing, floats v.intr. 1. a. To remain suspended within or on the surface of a fluid without sinking. b. for the entire term based on the three-month LIBOR rate plus 340 basis points. We now have a total of $47.4 million in debt, all of which is comprised of subordinated debentures underlying statutory business trust securities. Our debt to total capital ratio is 26%. Converium Novation: Converium Re was placed in run-off run-off n (in contest, election) → desempate m (= extra race); carrera de desempate run-off n (in contest, election) → by its parent company following a downgrade by A.M. Best to "B-" (Fair). Although reinsurance recoverables related to Converium Re were fully collateralized, the decision was made to terminate Terminate (terminat.exe) was a shareware modem terminal and host program for MS-DOS and compatible operating systems developed from the early to the late 1990s by the Dane Bo Bendtsen. The last release (5. Converium Re's participation under the quota share agreement on a cut-off cut-off Anesthesiology The point at which elongation of the carbon chain of the 1-alkanol family of anesthetics results in a precipitous drop in the anesthetic potential of these agents–eg, at > 12 carbons in length, there is little anesthetic activity, basis effective November November: see month. 1, 2004. Subsequently, we reached an agreement with two other reinsurers to novate Verb 1. novate - replace with something new, especially an old obligation by a new one jus civile, Justinian code, Roman law, civil law - the legal code of ancient Rome; codified under Justinian; the basis for many modern systems of civil law Converium Re's obligations under the quota share treaty effective January 1, 2004 as a result of which each reinsurer re·in·sure tr.v. re·in·sured, re·in·sur·ing, re·in·sures To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. agreed to assume 50% of Converium Re's obligations relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc premium earned in 2004. In addition, we decided to retain the unearned premium that would have been ceded to Converium Re as of December 31, 2004 which increased net written premium and net unearned premium by approximately $13.1 million. Net earned premium for the fourth quarter was not affected by the novation. These premiums will be earned in 2005. In addition, as a result of our retention of these premiums, ceding commission revenue in 2005 will be approximately $5 million lower than it otherwise would have been. 2005 Guidance: Although the overall P&C market is not expected to be as robust as in recent years, we anticipate overall market conditions to remain favorable for our products in 2005. With our demand driven approach that emphasizes the delivery of our products in response to market needs, we believe there remain strong growth opportunities in our targeted markets. Through organic growth in our core markets, additional business opportunities in new markets and the continued rollout of business from the OneBeacon OneBeacon Insurance Group is a property, casualty insurance company offering a range of specialty and segmented commercial and personal insurance products sold primarily through select independent agents. renewal rights transaction completed in 2004, we expect total gross written premium by the insurance company to be between $270 million and $280 million and premiums produced by the managing general agency to be between $40 and $45 million. We anticipate net income to increase to a range between $19.7 million and $20.5 million and earnings per share to a range between $0.98 and $1.02 per share. The increase in projected net income from 2004 to 2005 will therefore be between 120% and 132%. For the first quarter of 2005, we project net income to increase by approximately 145% to 175% to the range between $3.2 million and $3.6 million compared to $1.3 million in the first quarter of 2004. We also project the earnings per share in the first quarter to be in the range of $0.16 and $0.18 per share. The weighted average diluted shares is projected to increase to approximately 20.1 million shares in 2005 compared to 16.9 million shares in the fourth quarter of 2004 and 8.6 million shares for the full year 2004. We project net premiums written to increase to a range between 65% and 75% of the gross premiums written in our insurance company. We anticipate that approximately 75% to 80% of the net premiums written will be earned in 2005 in the range between $154 million and $162 million excluding the effects of the novation of the reinsurance treaty with Converium Re. Return on average equity is expected to be between 14% and 15% for the year. The GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). combined ratio is expected to be in the range of 88% to 92% for 2005, with the net loss ratio between 61% and 63% and the net expense ratio between 27% and 29%. Insurance services income is projected to represent an additional 2 to 3.5 percent of net premiums earned. Investment income is projected to continue increasing by 175% to190% to a range between $13.5 and $14.2 million, with the invested assets expected to increase to an amount between $340 and $360 million by the end of 2005. Cautionary Note Regarding Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. The Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995 provides a "safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. " 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 for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. terminology The terminology used in the computer and telecommunications field adds tremendous confusion not only for the lay person, but for the technicians themselves. What many do not realize is that terms are made up by anybody and everybody in a nonchalant, casual manner without any regard or such as "may," "will," "plan," "expect," "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 in·ef·fec·tive adj. 1. Not producing an intended effect; ineffectual: an ineffective plea. 2. Inadequate; incompetent: an ineffective teacher. or obsolescence ob·so·les·cent adj. 1. Being in the process of passing out of use or usefulness; becoming obsolete. 2. Biology Gradually disappearing; imperfectly or only slightly developed. 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; possible inability to achieve our targeted growth due to increased competition on rates and other factors; greater frequency or severity of claims and loss activity, including as a result of natural or man-made man-made or man·made adj. Made by humans rather than occurring in nature; synthetic: man-made fibers; a manmade lake. See Usage Note at man. catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data; changes in the percentage of our premiums written that we cede to reinsurers; the effects of acts of terrorism terrorism, the threat or use of violence, often against the civilian population, to achieve political or social ends, to intimidate opponents, or to publicize grievances. or war; developments in the world's financial and capital markets that adversely affect the performance of our investments, including changes in interest rates; changes in regulations or laws applicable to us, our subsidiaries, brokers or customers; acceptance of our products and services, including new products and services; developments that may delay or limit our ability to enter new markets as quickly as we anticipate; changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all; decreased demand for our insurance or reinsurance products; 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. About Tower Group, Inc. In operation since 1990, Tower Group, Inc. is headquartered in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. and is the holding company for its two operating subsidiaries An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity and rolling stock. , Tower Insurance Company of New York, ("TICNY TICNY Tower Insurance Company of New York ") and Tower Risk Management ("TRM"). TICNY, A.M. Best rated A- (Excellent), develops and delivers specialized spe·cial·ize v. spe·cial·ized, spe·cial·iz·ing, spe·cial·iz·es v.intr. 1. To pursue a special activity, occupation, or field of study. 2. commercial lines insurance products that provide property, liability, workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. and automobile automobile, self-propelled vehicle used for travel on land. The term is commonly applied to a four-wheeled vehicle designed to carry two to six passengers and a limited amount of cargo, as contrasted with a truck, which is designed primarily for the transportation of insurance to select markets not well served by other carriers. It also offers personal lines products that provide property and liability insurance to homeowners throughout New York State. TRM, a non-risk bearing insurance service company, offers managing general agency services to underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. risks, adjust claims and negotiate reinsurance terms on behalf of other insurance companies. For more information visit Tower's website at http://www.twrgrp.com/.
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
Fourth Quarter
Fourth Fourth
Quarter Quarter %
2004 2003 Change
Revenues:
Earned Premiums:
Gross Premiums Earned $40,920 $29,325 39.5%
Less: Ceded Premiums Earned (24,883)(24,178) 2.9%
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Net Premiums Earned 16,037 5,147 211.6%
Ceded Commission Revenue 9,557 8,867 7.8%
Policy Billing Fees 167 128 30.5%
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Total 25,761 14,142 82.2%
Expenses:
Loss & Loss Adjustment Expenses
Gross Loss & Loss Adjustment Expenses 20,415 21,219 -3.8%
Less: Ceded Loss & Loss Adjustment Expenses (11,684)(17,845) -34.5%
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Net Loss & Loss Adjustment Expenses 8,731 3,374 158.8%
Underwriting Expenses
Commissions Paid to Producers 6,863 4,885 40.5%
Other Underwriting Expenses 6,253 3,784 65.2%
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Total Underwriting Expenses 13,116 8,669 51.3%
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Total Expenses 21,847 12,043 81.4%
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Underwriting Profit $3,914 $2,099 86.5%
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Key Measures:
Written Premiums
Gross $51,507 $30,229 70.4%
Ceded (417)(30,328) -98.6%
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Net $51,090 $(99) -
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Loss Ratios
Gross 49.9% 72.4%
Net 54.4% 65.6%
Accident Year Loss Ratios
Gross 52.9% 60.7%
Net 55.7% 55.7%
Expense Ratios
Gross 31.6% 29.1%
Net 21.2% -6.3%
Combined Ratios (GAAP)
Gross 81.5% 101.5%
Net 75.6% 59.3%
Insurance Overall Results of Operations
Insurance and Reinsurance Segments
Full Year
%
2004 2003 Change
Revenues:
Earned Premiums:
Gross Premiums Earned $152,509 $122,023 25.0%
Less: Ceded Premiums Earned (106,945) (99,082) 7.9%
-------- ---------
Net Premiums Earned 45,564 22,941 98.6%
Ceded Commission Revenue 39,983 35,605 12.3%
Policy Billing Fees 671 545 23.1%
-------- ---------
Total 86,218 59,091 45.9%
Expenses:
Loss & Loss Adjustment Expenses
Gross Loss & Loss Adjustment Expenses 84,164 74,161 13.5%
Less: Ceded Loss & Loss Adjustment
Expenses (57,104) (59,090) -3.4%
-------- ---------
Net Loss & Loss Adjustment Expenses 27,060 15,071 79.6%
Underwriting Expenses
Commissions Paid to Producers 25,393 20,764 22.3%
Other Underwriting Expenses 22,659 16,402 38.1%
-------- ---------
Total Underwriting Expenses 48,052 37,166 29.3%
-------- ---------
Total Expenses 75,112 52,237 43.8%
-------- ---------
Underwriting Profit $11,106 $6,854 62.0%
======== =========
Key Measures:
Written Premiums
Gross $177,766 $134,482 32.2%
Ceded (79,691)(105,532) -24.5%
-------- ---------
Net $98,075 $28,950 238.8%
======== =========
Loss Ratios
Gross 55.2% 60.8%
Net 59.4% 65.7%
Accident Year Loss Ratios
Gross 56.2% 58.0%
Net 59.8% 64.0%
Expense Ratios
Gross 31.1% 30.0%
Net 16.2% 4.4%
Combined Ratios (GAAP)
Gross 86.3% 90.8%
Net 75.6% 70.1%
Insurance Services Segment Results of Operations
Fourth Quarter
Fourth Fourth
Quarter Quarter %
2004 2003 Change
Revenues:
Direct Commission Revenue from MGA $4,451 $3,398 31.0%
Claims Administration Revenue 1,038 952 9.0%
Reinsurance Intermediary Fees 115 300 -61.7%
Policy Billing Fees 4 - -
------- -------
Total 5,608 4,650 20.6%
Expenses:
Direct Commission Expense Paid to Producers 2,557 2,287 11.8%
Other Insurance Services Expenses 1,050 991 5.9%
Claims Expense Reimbursement to TICNY 1,032 895 15.3%
------- -------
Total Expenses 4,639 4,173 11.2%
------- -------
Insurance Services Pre-tax Income (Loss) $969 $477 103.3%
======= =======
Insurance Services Segment Results of Operations
Full Year
%
2004 2003 Change
Revenues:
Direct Commission Revenue from MGA $11,546 $7,984 44.6%
Claims Administration Revenue 4,105 3,746 9.6%
Reinsurance Intermediary Fees 730 1,100 -33.6%
Policy Billing Fees 8 - -
---------------
Total 16,389 12,830 27.7%
Expenses:
Direct Commission Expense Paid to Producers 7,432 5,394 37.8%
Other Insurance Services Expenses 2,987 2,247 32.9%
Claims Expense Reimbursement to TICNY 4,019 3,648 10.2%
---------------
Total Expenses 14,438 11,289 27.9%
---------------
Insurance Services Pre-tax Income (Loss) $1,951 $1,541 26.6%
===============
TOWER GROUP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE NET INCOME
($ in thousands, except share and per share amounts)
Three Months Ended Twelve Months Ended
December 31, December 31,
2004 2003 2004 2003
----------- --------- --------- ---------
REVENUES
Net premiums earned $16,037 $5,147 $45,564 $22,941
Ceding commission revenue 9,557 8,867 39,983 35,605
Insurance services revenue 5,604 4,650 16,381 12,830
Net investment income 1,983 622 5,070 2,268
Net realized gains (losses)
on investments (20) 5 13 493
Policy billing fees 171 128 679 545
----------- --------- --------- ---------
Total revenues 33,332 19,419 107,690 74,682
----------- --------- --------- ---------
EXPENSES
Loss and loss adjustment
expenses 8,731 3,374 27,060 15,071
Direct commission expense 9,420 7,172 32,825 26,158
Other operating expenses 8,538 5,676 29,954 22,337
Interest expense 1,001 615 3,128 1,462
----------- --------- --------- ---------
Total expenses 27,690 16,837 92,967 65,028
----------- --------- --------- ---------
Income before income taxes 5,642 2,582 14,723 9,654
Income tax expense 2,412 895 5,694 3,374
----------- --------- --------- ---------
Net income $3,230 $1,687 $9,029 $6,280
=========== ========= ========= =========
COMPREHENSIVE NET INCOME
Net income $3,230 $1,687 $9,029 $6,280
Other comprehensive income:
Gross unrealized gains in
investment holding gains
arising during period 143 81 44 617
Less: reclassification
adjustment for losses
(gains) included in net
income 20 (5) (13) (493)
----------- --------- --------- ---------
163 76 31 124
Income tax expense related
to items of other
comprehensive income (72) (26) (27) (42)
----------- --------- --------- ---------
Total other comprehensive
net income 91 50 4 82
----------- --------- --------- ---------
COMPREHENSIVE NET INCOME $3,321 $1,737 $9,033 $6,362
=========== ========= ========= =========
EARNINGS PER SHARE
Basic earnings per common
share $0.20 $0.38 $1.23 $1.37
=========== ========= ========= =========
Diluted earnings per common
share $0.19 $0.30 $1.06 $1.09
=========== ========= ========= =========
WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING
Basic 16,118,761 4,407,433 7,335,286 4,453,717
Diluted 16,851,503 5,636,532 8,565,815 5,708,016
TOWER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2004 2003
---------- ---------
($ in thousands,
except par value and
share amounts)
ASSETS
Fixed-maturity securities, available-for-sale, at
fair value (amortized cost $223,562 in 2004 and
$53,265 in 2003) $ 224,523 $ 54,545
Equity securities, at fair value (cost $1,827 in
2004 and $1,877 in 2003) 2,485 2,184
Common trust securities - statutory business
trusts, equity method 1,426 620
---------- ---------
Total investments 228,434 57,349
Cash and cash equivalents 55,201 30,339
Investment income receivable 1,975 552
Agents' balances receivable 33,473 21,952
Assumed premiums receivable 1,197 997
Receivable for cancelled reinsurance -- 15,748
Ceding commission receivable 8,329 7,983
Notes and accrued interest receivable from
related parties -- 1,421
Reinsurance recoverable 101,173 84,760
Receivable -- claims paid by agency 1,622 1,812
Prepaid reinsurance premiums 28,391 55,645
Deferred acquisition costs net of deferred ceding
commission revenue 18,740 573
Federal income taxes and state taxes recoverable 1,975 --
Deferred income taxes -- 2,033
Intangible assets 4,978 --
Fixed assets, net of accumulated depreciation 5,420 4,040
Other assets 3,239 1,388
---------- ---------
Total Assets $494,147 $286,592
========== =========
LIABILITIES
Loss and adjustment expenses $128,722 $99,475
Unearned premium 95,505 70,248
Reinsurance balances payable 2,735 20,788
Payable to issuing carriers 18,652 12,726
Funds held as agent 785 796
Funds held under reinsurance agreements 54,152 24,943
Accounts payable and accrued expenses 12,410 4,934
Checks outstanding 2,726 4,936
Payable for securities -- 3,004
Dividends payable to stockholders -- 160
Federal and state income taxes payable -- 1,019
Deferred income taxes 1,587 --
Deferred compensation liability -- 1,294
Subordinated debentures 47,426 20,620
Long-term debt -- CIT -- 5,588
Series A cumulative redeemable preferred stock -- 3,000
--------- ---------
Total Liabilities 364,700 273,531
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (2004: $0.01 par value per share;
40,000,000 shares authorized, 19,826,135 shares
issued and 19,737,168 outstanding shares) 198 --
Class A common stock (2003: $0.01 par value per
share; 4,000,000 shares authorized, 2,069,936
shares issued and 1,977,369 outstanding shares) -- 21
Class B common stock (2003: $0.01 par value per
share; 4,000,000 shares authorized, 2,430,065
shares issued and outstanding shares) -- 24
Paid-in-capital 112,375 2,285
Accumulated other comprehensive net income 1,052 1,048
Retained earnings 18,224 10,197
Unearned compensation - restricted stock (1,908) --
Treasury stock (88,967 shares in 2004 and 92,567 in
2003) (494) (514)
--------- ---------
Total Stockholders' Equity 129,447 13,061
--------- ---------
Total Liabilities and Stockholders' Equity $494,147 $286,592
========= =========
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