Tower Reports 22% Income Jump

New York-based Tower Group, which raised over $100 million in an initial public offering last month, and got an upgrade to "A-minus" from A.M. Best, said gross premiums written and produced of $161.5 million through nine months could jump to $220 million for the year.

A September renewal rights deal and a lack of competition in its core businesses partially explain the boost, according to executives of the company.

This morning, the group, which specializes in insuring and placing property-casualty insurance for small and midsized businesses and individuals, also reported third-quarter net income of $2.5 million, or 43 cents per share, up from the $2 million, or 36 cents per share, in the same quarter last year.

The third-quarter combined ratio was 75.7 for the quarter compared to 73.7 for third-quarter 2003.

The group's main subsidiaries are Tower Insurance Company of New York, an insurance company, and Tower Risk Management Corporation, a non-risk-bearing insurance services company that produces business on behalf of other insurance companies through a managing general agency.

President and Chief Executive Officer Michael Lee began a conference call this morning by thanking his staff, investment bankers and auditors for support during the firm's initial public offering process. He said the sale of more than 13 million shares at $8.50 per share at the end of October, and a concurrent private placement, resulted in net proceeds of $109 million to the group.

With $98 million of the proceeds going into the group's insurance company subsidiary, Tower Insurance Company of New York, A.M. Best boosted the rating from a prior-level of "B-double-plus."

Mr. Lee noted that results in the fourth quarter are predicted to differ significantly from the results of the third quarter?Tower's "last full quarter as private company"?because proceeds from IPO were used immediately to increase the premium retention of the insurance company subsidiary. With proceeds boosting net assets, investment income will also grow, he suggested.

Mr. Lee said that with the IPO proceeds increasing the insurance company surplus to $134 million after the IPO, from $36 million at the end of the third-quarter, the company will drop its quota-share reinsurance ceding percentage to 25 percent from the previous level of 60 percent. That will produce a significant jump in net premiums written, Mr. Lee said, although he didn't quantify the magnitude of the jump in net premiums.

He did, however, give some predicted gross written premiums figures, saying that Tower would likely write and produce $50-to-$60 million in gross premiums in the fourth quarter. Comparatively, in the third-quarter, gross premiums written were $42.4 million, up 23 percent from third-quarter 2003, while net premiums jumped 63 percent to$15.7 million.

Through nine months, gross premiums of $126.3 million were written in the insurance company and $35 million were produced by its MGA.

Looking ahead, Mr. Lee reported that for full-year 2004 premiums written and produced are expected to climb to $210-to-$220 million, with 80 percent of total being written through the insurance company.

He noted during the call that in September, the company entered into a renewal rights agreement with OneBeacon Insurance, acquiring rights to renew a block of New York commercial policies that generated more than $100 million in gross written premiums in 2003.

Mr. Lee noted that Tower is "not in any way a target" in New York Attorney General Eliot Spitzer's ongoing investigation of broker-insurer fee kickbacks, price-fixing and bid-rigging.

"Our business model vastly differs from companies cited by the attorney general," he said. He explained that Tower focuses on writing policies averaging less than $2,000 each, that its MGA produces business for other insurers with average policy premiums of $25,000 per policy, and that the MGA does not conduct business directly with policyholders.

He noted that the insurance company did pay contingent commissions to producers, but that the amount is projected to be less than $250,000 in 2004, adding that were its policy regarding contingents to change, that would have minimal impact on results.

Questioned about the company's growth strategy and how it is changing, Mr. Lee said that there is no change in strategy with respect to gross top-line growth in small-policy niches where there isn't a high degree of price competition. The IPO, however, will impact the net premium growth strategy, he reiterated, saying that net premium will jump because of the change in retention.