Tower Group, Inc. Reports a 181% Increase in the First Quarter 2005 Net Income

Business Wire, May 2, 2005

NEW YORK -- Tower Group, Inc. (NASDAQ: TWGP) today reported a 181% increase in first quarter of 2005 net income of $3.7 million as compared to first quarter of 2004 net income of $1.3 million. Diluted earnings per share of $0.19 for the first quarter of 2005 were based on weighted average diluted shares of 20,076,884 as compared with $0.23 per share for the first quarter of 2004, based on weighted average diluted shares of 5,726,083. Net income for the first quarter of 2005, excluding realized gains, net of tax was $3.6 million.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. commented, "Our record first quarter net income was driven by continued strong growth in our core lines of business and geographic expansion outside of downstate New York while maintaining favorable margins through our disciplined underwriting. We continue to operate efficiently and differentiate Tower in the marketplace with our demand driven approach in which we focus on the needs of our producers."

First Quarter 2005 Financial Highlights:

Total revenues increased 97% to $42.7 million in the first quarter of 2005 as compared to $21.7 million in the prior year's first quarter. This increase was driven primarily by increases in net premiums earned, investment income and net realized investment gains partially offset by lower total commission and fee income. Net premiums earned represented 70% of total revenues for the first quarter of 2005 as compared to 37% for the same period of 2004. Ceding commission and fee income represented 23% of total revenue for the first quarter of 2005 as compared to 60% in the first quarter of 2004. This was reflective of the reduced ceding percentage under the quota share reinsurance agreement to 25% in the first quarter of 2005 versus 60% in the first quarter of 2004 in consideration of the increased capitalization of our insurance company. Net investment income, excluding realized gains, comprised 6% of total revenues in the first quarter of 2005 and 4% in the same period of 2004.

Return on average equity was 11.5% in the first quarter of 2005 as compared with 37.9% in the first quarter of 2004. Although net income was significantly higher in the first quarter of 2005 as compared to the similar period in the prior year, the lower return on average equity resulted from the significant increase in average shareholders' equity resulting primarily from capital raised from the initial public offering and concurrent private placement in October 2004. The returns on average equity for each of the first quarter of 2005 and first quarter of 2004 were calculated by dividing annualized net income by average shareholders' equity of $129.6 million and $13.9 million, respectively.

Gross premiums written in the insurance operations increased to $64.7 million in the first quarter, which were 62% higher than in the first quarter of 2004. This growth was driven by a 17.5% increase in policies in force and premium increases on renewed business which averaged 11% for personal lines and 6% for commercial lines. Premiums written on business subject to our commercial renewal rights agreement with OneBeacon Insurance Company LLC amounted to $8.8 million during the first quarter of 2005.

Premiums produced by the managing general agency reached $8.4 million in the first quarter of 2005 which were 30% higher than in the first quarter of 2004. Growth was primarily due to increases in premiums produced in the middle market, small business overflow programs and business written through former OneBeacon producers that we appointed in consequence of the renewal rights transaction.

Net premiums written increased 207% to $45.4 million in the first quarter of 2005 as compared to $14.8 million in the same period of 2004. The increase was driven by the growth in gross premiums written and a reduction in the quota share ceding percentage to 25 % beginning in 2005 compared with 60% during the first nine months of 2004.

Net premiums earned rose 279% to $30.0 million for the first quarter of 2005 as compared to $7.9 million in the same quarter of 2004 due to overall growth in gross premiums written and the decision to cede a lower percentage of premiums as mentioned above. In addition, the first quarter's net earned premium was increased by $5.5 million from the $13.1 million of retained unearned premiums and related risks by the Company as of December 31, 2004 that would have been ceded to Converium Reinsurance (North America) Inc. absent the 2004 novation.

Due to the significant reduction in quota share reinsurance beginning in the fourth quarter 2004, the ratio of net premiums earned to net premiums written declined to 46% in the fourth quarter 2004 and began its gradual increase to 66% in the first quarter 2005. We anticipate that this ratio will continue to gradually increase each quarter throughout 2005 and will average approximately 75 % to 80 % for the full year.

Ceding commission revenue declined 43% to $5.8 million in the first quarter of 2005 as compared to $10.3 million in the first quarter of 2004 reflecting the significant reduction in the quota share ceding percentage.