Tower Group, Inc. Reports Strong First Quarter 2008 Operating Results

Business Wire, May 6, 2008

NEW YORK -- Tower Group, Inc. (NASDAQ: TWGP) today reported its financial results for the first quarter of 2008 including net income of $14.9 million as compared to net income of $11.6 million in the first quarter of 2007. Tower reported diluted earnings per share of $0.64 for the first quarter of 2008 as compared to $0.49 per share for the same period in 2007.

Key Operating Highlights (all percentage increases compare the first quarter 2008 results to the same period in 2007):

* Net income and diluted earnings per share excluding realized investment gains or losses(1), increased by 19.9% to $14.0 million and 22.4% to $0.60, respectively(2)

* Gross premiums written and produced(3) increased 42.0% to $157.4 million

* Commission and fee based revenue increased 93.1% to $30.9 million

* Net investment income up 23.1% to $9.8 million

* Continued underwriting profitability; combined ratio of 84.9% versus 86.0% in the prior year

(1) Note on Non-GAAP Financial Measures: Net income excluding realized investment gains or losses is a common performance measurement for insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. The tax rate used to calculate the net realized gains or losses on investments, net of tax, is 35%.

(2) The results for the three months ended March 31, 2007 include a $1.8 million gain, after-tax, from issuance of common stock by unconsolidated affiliate.

(3) Gross premiums written through our insurance subsidiaries and produced as managing general agent on behalf of other insurance companies.

Financial Summary ($ in thousands, except per share data):

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Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. stated, "We successfully executed our business strategies during the quarter and identified and took advantage of profitable growth opportunities. In this challenging market, we generated strong top line growth while maintaining our underwriting standards. We continue to see meaningful growth from our national wholesale expansion initiative that began last year. Our core Northeast franchise continues to produce excellent profitability as a result of our strong pricing discipline."

Gross premiums written increased to $135.1 million in the first quarter, which was 21.9% higher than in the first quarter of 2007.

Total revenues increased 31.0% to $110.5 million in the first quarter of 2008 as compared to $84.3 million in the prior year's first quarter. Net premiums earned represented 61.9% of total revenues for the three months ended March 31, 2008 compared to 71.6% for the same period in 2007. For the first quarter of 2008, we produced $21.8 million of premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $6.9 million in fee income.

Total commission and fee income increased 93.1% to $30.9 million in the first quarter of 2008 compared to $16.0 million in the first quarter of 2007.

Net investment income increased by 23.1% to $9.8 million for the three months ended March 31, 2008 compared to $8.0 million for the same period in 2007. On a tax equivalent basis, the yield was 5.3% as of March 31, 2008 compared to 5.7% as of March 31, 2007. We determined that seven real estate investment trusts ("REITs") securities were other-than-temporarily-impaired and recorded an impairment write-down of $2.4 million at March 31, 2008. These securities were sold in April 2008, and we no longer own any REITs.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended March 31, 2008 were $67.1 million and 49.7%, respectively, compared to $57.3 million and 52.8%, respectively, in the same period in 2007. The net loss ratio was 54.5% in the three months ended March 31, 2008 and 56.2% in the same period in 2007.

Operating expenses were $48.3 million for the three months ended March 31, 2008 as compared to $33.7 million for the same period in 2007. Our gross expense ratio was 30.7% for the three months ended March 31, 2008 as compared with 29.7% for the same period in 2007.

Additional Highlights and Disclosures:

Investments

Subsequent to March 31, 2008, the Company sold all of its REITs and realized a gain of $70,000.

Dividend Declaration

Tower Group, Inc. announced today that the Company's Board of Directors has approved a quarterly dividend of $0.05 per share payable June 27, 2008 to stockholders of record as of June 16, 2008.

2008 Guidance

We believe we are well positioned to support our premium growth and to generate commission and fee income to augment our return on equity. For the second quarter, we project net income to be in a range between $14.9 million and $15.8 million. We project diluted earnings per share in the second quarter to be in the range between $0.64 and $0.68 per diluted share. For the full year, we anticipate net income to be in a range between $67.5 million and $70.0 million and diluted earnings per share to be between $2.90 and $3.00 for the year. These projections do not include any amounts for realized investment gains or losses.