Tower Group, Inc. Reports 45% Increase in Net Income; Company Delivers Record Results for 2006

Business Wire, Feb 27, 2007

NEW YORK -- Tower Group, Inc. (NASDAQ: TWGP) today reported its financial results for the fourth quarter of 2006, including a 45% 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% 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.

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Note: The net effects of the commutation and novation transactions with PXRE in the second quarter of 2006, the gains recorded on the CastlePoint investment and warrant, and the CastlePoint start-up costs added $4.1 million to our net income and 2.2 percentage points to our return on average equity for the year ended December 31, 2006.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. commented, "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%. 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.