August 9, 2005

Tower Group, Inc. Reports a 138% Increase in Second Quarter of 2005 Net Income

Tower Group, Inc. Reports a 138ncrease in Second Quarter of 2005 Net Income

NEW YORK--(BUSINESS WIRE)--Aug. 9, 2005--Tower Group, Inc. (NASDAQ: TWGP) today reported a 138% increase in second quarter of 2005 net income to $4.8 million as compared to net income of $2.0 million in the second quarter of 2004. For the first six months of 2005, net income increased 155% to $8.5 million as compared to $3.3 million for the first six months of 2004.

Diluted earnings per share of $0.24 for the second quarter of 2005 were based on 20,108,917 weighted average diluted shares as compared with $0.35 per share for the second quarter of 2004, based on 5,819,870 weighted average diluted shares. For the first six months of 2005, Tower reported diluted earnings per share of $0.42, based on 20,093,198 weighted average diluted shares, as compared with $0.58 per diluted share for the first six months of 2004 based on 5,772,977 weighted average diluted shares. Net income, excluding realized gains, net of taxes, was $4.8 million for the second quarter of 2005 and $8.3 million for the first six months of 2005.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. commented, "We are pleased with our record second quarter net income which was driven primarily by strong growth in gross premiums written as well as significantly higher net premiums earned and investment income resulting from the higher net premium retention after the IPO. In addition, despite our significant gross and net premium growth, we were able to continue to achieve a favorable loss ratio by maintaining our underwriting and pricing discipline."

Second Quarter 2005 Financial Highlights:

Total revenues increased 92% to $50.3 million in the second quarter of 2005 as compared to $26.2 million in the same period in 2004. This increase was driven primarily by increases in net premiums earned and net investment income partially offset by lower total commission and fee income. Net premiums earned represented 75% of total revenues for the second quarter of 2005 as compared to 36% for the same period of 2004. Ceding commission and fee income represented 18% of total revenue for the second quarter of 2005 as compared to 60% in the second quarter of 2004. This reflected the reduced ceding percentage under the quota share reinsurance agreements to 25% in the second quarter of 2005 versus 60% in the second quarter of 2004 in consideration of the increased capitalization of our insurance company. In addition, due to an increase in the loss ratio on a prior year's quota share reinsurance treaty, we recorded a $0.9 million adjustment to ceding commission revenue in the second quarter of 2005 that reduced commission and fee income as compared to no adjustment in the same period of 2004. Net investment income, excluding realized gains, was 7% of total revenues in the second quarter of 2005 and 4% in the same period of 2004.

Return on average equity was 14.3% in the second quarter of 2005 as compared with 54.4% in the second quarter of 2004. Although net income was significantly higher in the second quarter of 2005 as compared to the same period in the prior year, the lower return on average equity resulted from the significant increase in average stockholders' equity resulting primarily from capital raised from the initial public offering (IPO) and concurrent private placement in October 2004. The return on average equity for the second quarter of 2005 was calculated by dividing annualized net income of $19.1 million by average stockholders' equity of $133.6 million. For the second quarter of 2004, the return was calculated by dividing annualized net income of $8.0 million by average stockholders' equity of $14.7 million.

Gross premiums written in the insurance and reinsurance segments increased to $84.0 million in the second quarter of 2005, which were 92% higher than in the second quarter of 2004. This growth was driven by a 24% increase in policies in force as of June 30, 2005 as compared to June 30, 2004. In addition, premium increases on renewed business averaged 10% for personal lines and 5% for commercial lines. The retention rate was 89% for personal lines and 85% for commercial lines. Contributing to the increase in policies in force was $9.6 million in premiums written on business subject to our renewal rights agreement with OneBeacon Insurance Company. In addition, $3.7 million of new premiums were written in the second quarter of 2005 through former OneBeacon producers appointed in conjunction with the renewal rights transaction. Some of the policies in the more rating sensitive large lines and middle market programs formerly written through Tower Risk Management (TRM), were written by Tower Insurance Company of New York (TICNY) due to the rating upgrade to "A-" (Excellent) by A.M. Best. As a result, premiums produced by TRM on behalf of issuing companies declined to $8.4 million in the second quarter of 2005, 54% lower than in the second quarter of 2004.

Net premiums written increased 259% to $59.2 million in the second quarter of 2005 as compared to $16.5 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% in the second quarter of 2005 compared with 60% during the second quarter of 2004.

Net premiums earned rose 295% to $37.6 million for the second quarter of 2005 as compared to $9.5 million in the same quarter of 2004 due to overall growth in gross premiums written and the reduction in the ceding percentage as mentioned above. In addition, the second quarter's net premiums earned included $3.7 million from the $13.1 million of retained unearned premiums as of December 31, 2004 that would have been ceded to Converium Reinsurance (North America) Inc. absent the 2004 novation of our quota share reinsurance agreement with that company at the end of 2004.

Ceding commission revenue declined 50% to $5.3 million in the second quarter of 2005 as compared to $10.8 million in the second quarter of 2004 reflecting the significant reduction in the quota share ceding percentage.

The net loss ratio improved to 58.6% for the second quarter of 2005 as compared to 61.9% in the second quarter of 2004. The improvement resulted from the increase in net premiums earned which reduced the proportional effect of catastrophe reinsurance premiums on the net loss ratio.

The gross expense ratio decreased by 2.3 percentage points to 30.3% in the second quarter of 2005 as compared to 32.6% in the second quarter of 2004. This decline was primarily due to an increase in earned premiums at a higher rate than the increase in underwriting expenses and, to a lesser extent, the renewal of larger premium policies in TICNY that were previously produced through TRM on behalf of issuing companies. This was partially offset by a slight increase in the gross commission ratio.

The net expense ratio increased 20.0 percentage points to 30.2% in the second quarter of 2005 as compared to 10.2% in the same period in 2004 primarily due to the lower ceding commission revenue discussed above.

The net combined ratio increased to 88.8% in the second quarter of 2005 from 72.1% in the same period in the prior year primarily due to the increase in the net expense ratio driven by the lower ceding commission revenue. Nevertheless, despite the increase in the combined ratio, underwriting profits increased due to the significantly higher base of net premiums earned in the second quarter of 2005 as compared to the second quarter of 2004.

Pre-tax income in the insurance services segment increased to $0.6 million in the second quarter of 2005 from $0.3 million in the same quarter of 2004 primarily as a result of an increase in the direct commission revenue rate.

Net investment income was a strong contributor to revenue growth in the second quarter of 2005, increasing 240% to $3.7 million versus $1.1 million in the second quarter of 2004. This increase was primarily due to the growth in invested assets from operating cash flow, net proceeds from subordinated debentures underlying trust preferred securities in December 2004 for $26.8 million and net proceeds of $107.8 million from our initial public offering (IPO) and concurrent private placement in October 2004. On a tax equivalent basis, the yield was 5.1% for invested assets held at June 30, 2005 and 4.8% as of June 30, 2004.

Interest expense increased to $1.1 million in the second quarter of 2005 from $0.7 million in the second quarter of 2004 primarily a result of $0.5 million interest on the subordinated debentures issued in December, 2004 partially offset by a $0.1 million reduction of interest expense on other borrowings and preferred stock that were repaid in the fourth quarter of 2004.

The effective income tax rate was 33.7% and 39.0% for the second quarter of 2005 and second quarter of 2004, respectively. The effective tax rate in the second quarter of 2005 was lower due to the benefit of tax-exempt interest income of $0.9 million as compared to $0.1 million in the same period of 2004.

First Six Months 2005 Financial Highlights:

Total revenues increased 94% to $92.9 million in the first six months of 2005 as compared to $47.9 million in the same period of the prior year. This increase was driven primarily by increases in net premiums earned and investment income partially offset by lower total commission and fee income. Net premiums earned represented 73% of total revenues for the first six months of 2005 as compared to 36% for the same period of 2004. Ceding commission and fee income represented 20% of total revenue for the first half of 2005 as compared to 60% in the same period of 2004. This decline reflects the reduced ceding percentage under the quota share reinsurance agreement to 25% in the first half of 2005 versus 60% in the first half of 2004. Net investment income, excluding realized gains, comprised 7% of total revenues in the first sixth months of 2005 and 4% in the same period of 2004.

Return on average equity was 12.7% in the first six months of 2005 as compared with 48.1% in the same period of 2004. Although net income was significantly higher in the first half 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 stockholders' equity resulting primarily from capital raised from the initial public offering in October 2004. The return on average equity for the first six months of 2005 was calculated by dividing annualized net income of $16.9 million by average stockholders' equity of $133.4 million. For the first six months of 2004, the return was calculated by dividing annualized net income of $6.6 million by average stockholders' equity of $13.8 million.

Gross premiums written in the insurance and reinsurance segments increased to $148.7 million in the first six months of 2005, which was 77% higher than in the similar period of 2004. This growth was driven by a 24% increase in policies in force as of June 30, 2005 compared to June 30, 2004. Premium increases on renewed business averaged 10% for personal lines and 5% for commercial lines. Premiums written on business subject to our renewal rights agreement with OneBeacon Insurance Company amounted to $18.4 million during the first six months of 2005. In addition, $8.6 million of new premiums were written in the first six months of 2005 through former OneBeacon producers appointed in conjunction with the renewal rights transaction. In addition, policies in the more rating sensitive large lines and middle market programs formerly written through TRM, were written by TICNY due to the rating upgrade to "A-" (Excellent) by A.M. Best Company. As a result, premiums produced by TRM on behalf of issuing companies declined to $16.9 million in the first six months of 2005, 33% lower than in the first six months of 2004.

Net premiums written increased 234% to $104.5 million in the first half of 2005 as compared to $31.3 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% in 2005 compared with 60% in the first six months of 2004.

Net premiums earned increased 288% to $67.6 million for the first half of 2005 as compared to $17.4 million in the same period of 2004 due to overall growth in gross premiums written and the reduced ceding percentage. In addition, net premiums earned in the first half of 2005 included $9.2 million from the $13.1 million of retained unearned premiums as of December 31, 2004 that would have been ceded to Converium Reinsurance (North America) Inc. absent the 2004 novation.

Ceding commission revenue declined 47% to $11.2 million in the first half of 2005 as compared to $21.1 million in the same period of 2004 reflecting the significant reduction in the quota share ceding percentage.

The net loss ratio improved to 59.3% for the first six months of 2005 as compared to 62.5% for the first six months of 2004. The improvement resulted primarily from the increase in net premiums earned which reduced the proportional effect of catastrophe reinsurance premiums on the net loss ratio.

The gross expense ratio increased decreased by 1.1 percentage points to 30.7% for the first half of 2005 as compared to 31.8% in the same period of 2004. This decline was primarily due to an increase in earned premiums at a higher rate than the increase of other underwriting expenses and, to a lesser extent, the writing of larger premium policies in TICNY that were previously produced through TRM on behalf of issuing companies. This was partially offset by a slight increase in the gross commission ratio.

The net expense ratio increased 16.4 percentage points to 29.4% for the first six months of 2005 as compared to 13.0% in the same period in 2004 primarily due to the lower ceding commission revenue discussed above.

The net combined ratio increased to 88.7% in the first half of 2005 from 75.5% in the same period in the prior year primarily due to the increase in the net expense ratio driven by the lower ceding commission revenue. As in the second quarter, although the combined ratio increased, underwriting profits increased due to the significantly higher base of net premiums earned in 2005 as compared to the first six months of 2004.

Despite the reduction in premiums produced by TRM in the insurance services segment, pre tax income increased to $1.7 million in the first half of 2005 from $0.8 million in the same period of 2004 primarily as a result of additional direct commission income due to lower loss ratios on premiums produced in prior years and an increase in the direct commission revenue rate on premiums produced in the current year as the mix of premiums produced by TRM, primarily in the small market segment, carried a higher commission rate.

Net investment income contributed significantly to revenue growth in the first half of 2005, increasing 241% to $6.3 million versus $1.9 million in the first six months of 2004. The increase in net investment income was primarily due to the growth in invested assets provided by operating cash flow, net proceeds from subordinated debentures and net proceeds of $107.8 million from our IPO and concurrent private placement in October 2004. On a tax equivalent basis, the investment yield was 5.1% as of June 30, 2005 and 4.8% as of June 30, 2004.

Net realized capital gains were $0.2 million for the first half of 2005 as compared to a modest capital loss in the same period of the prior year. The increase resulted from the sale of common stock the proceeds of which the proceeds were reinvested into higher yielding securities.

Interest expense increased to $2.3 million for the first six months of 2005 from $1.4 million in the first six months of 2004. This increase was primarily a result of interest of $0.9 million on subordinated debentures and a $0.2 million increase in interest expense as a result of crediting reinsurers on funds withheld in segregated trusts as collateral for reinsurance recoverables. These increases were offset by reductions of $0.2 million of interest expense on other borrowings and preferred stock that were repaid in the fourth quarter of 2004.

The effective income tax rate was 34.3% and 39.1% for the first six months of 2005 and 2004, respectively. The effective tax rate in the second quarter of 2005 was lower due to the benefit of tax-exempt interest income in the first six months of 2005 of $1.6 million as compared to $0.2 million in the same period of 2004.

            Second Quarter and First Six Months Highlights


Second Second First Six First Six Quarter Quarter Months Months 2005 2004 2005 2004 --------- -------- --------- ---------

Total Underwriting Profit (Loss) $ 4,233 $ 2,655 $ 7,690 $ 4,260 Insurance Services Segment Pre- Tax Income 628 293 1,668 765 Net Investment Income 3,733 1,099 6,348 1,863 Net Realized Investment Gains 20 (13) 229 (2) Corporate Expenses (324) (31) (746) (59) Interest Expense (1,106) (724) (2,271) (1,375) Income Before Income Taxes 7,184 3,279 12,918 5,452 Income Tax Expense 2,419 1,280 4,436 2,131 Net Income $ 4,765 $ 1,999 $ 8,482 $ 3,321

EPS - Basic $ 0.24 $ 0.45 $ 0.43 $ 0.75 EPS - Diluted $ 0.24 $ 0.35 $ 0.42 $ 0.58

Book Value Per Share $ 6.96 $ 3.31 $ 6.96 $ 3.31
    Additional Items:


Agreement to Acquire MIIX Insurance Company of New York:

Following our shell acquisition strategy, we announced on August 8, 2005 the execution of an agreement to acquire MIIX Insurance Company of New York (MIIX), an insurance company with licenses in New York and New Jersey. Upon closing, we plan to expand MIIX's licensing to other states and we expect the acquisition to enable us to improve our capability to deliver products in different market segments with varying pricing and coverage terms. The closing of the transaction is expected before year end 2005.

Reinsurance Transactions:

Like many other insurance companies, Tower Group, Inc. received an inquiry from the New York Insurance Department in the first quarter of 2005 relating to risk transfer under its 2004 quota share reinsurance agreement effective January 1, 2004. The Company has continued to provide information in response to these inquiries and continues to believe that its reinsurance agreements demonstrate an appropriate transfer of risk and proper accounting.

Dividend Declaration:

Tower Group, Inc. announced today that the Company's Board of Directors approved a quarterly dividend on August 5, 2005 of $0.025 per share payable September 27, 2005 to stockholders of record as of September 15, 2005.

2005 Guidance:

We continue to believe that strong growth opportunities remain in our targeted markets despite price softening in the broad P&C market. Although we have experienced some price softening in select market segments, we expect overall market conditions to remain favorable for most of our products for the remainder of 2005 and remain on target with our guidance for the full year of 2005 that was previously provided. For the third quarter of 2005, we project net income, excluding realized capital gains, to increase to a range between $5.2 million and $5.6 million. We project the diluted earnings per share, excluding realized capital gains in the third quarter to be in the range between $0.26 and $0.28 per diluted share. For the full year, we anticipate net income, excluding realized capital gains to increase to a range between $19.7 million and $20.5 million and diluted earnings per share, excluding realized capital gains to be between $0.98 and $1.02 per diluted share.

About Tower Group, Inc.

Tower Group, Inc., headquartered in New York City, offers property and casualty insurance products and services through its insurance company and insurance service subsidiaries. Its insurance company subsidiary, Tower Insurance Company of New York, is rated A- (Excellent) by A.M. Best Company and offers commercial insurance products to small to medium-size businesses and personal insurance products to individuals. Its insurance services subsidiary, Tower Risk Management, acts as a managing general agency, adjusts claims and negotiates reinsurance terms on behalf of other insurance companies. In March 2005, Tower Group, Inc. acquired its other insurance company subsidiary, Tower National Insurance Company (f/k/a North American Lumber Insurance Company).

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" 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 terminology 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 or obsolescence 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; greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data; the effects of acts of terrorism or war; developments in the world's financial and capital markets that adversely affect the performance of our investments; changes in regulations or laws applicable to us, our subsidiaries, brokers or customers; changes in the level of demand for our insurance and reinsurance products and services, including new products and services; changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all; 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.

    For more information visit Tower's website at
http://www.twrgrp.com/.


Insurance Overall Results of Operations Insurance and Reinsurance Segments Second Quarter

Second Second Quarter Quarter % 2005 2004 Change

Revenues: Earned Premiums: Gross Premiums Earned $ 55,060 $ 35,922 53.3% Less: Ceded Premiums Earned (17,469) (26,407) -33.8% -------- -------- Net Premiums Earned 37,591 9,515 295.1% Ceded Commission Revenue 5,330 10,750 -50.4% Policy Billing Fees 230 158 45.6% -------- -------- Total 43,151 20,423 111.3%

Expenses: Loss & Loss Adjustment Expenses Gross Loss & Loss Adjustment Expenses 31,418 20,904 50.3% Less: Ceded Loss & Loss Adjustment Expenses (9,405) (15,012) -37.4% -------- -------- Net Loss & Loss Adjustment Expenses 22,013 5,892 273.6%

Underwriting Expenses Commissions Paid to Producers 9,495 6,081 56.1% Other Underwriting Expenses 7,410 5,795 27.9% -------- --------

Total Underwriting Expenses 16,905 11,876 42.3% -------- --------

Total Expenses 38,918 17,768 119.0% -------- --------

Underwriting Profit $ 4,233 $ 2,655 59.4% ======== ========

Key Measures: Written Premiums Gross $ 84,006 $ 43,847 91.6% Ceded (24,821) (27,355) -9.3% -------- -------- Net $ 59,185 $ 16,492 258.9% ======== ======== Loss Ratios Gross 57.1% 58.2% Net 58.6% 61.9% Accident Year Loss Ratios Gross 57.3% 58.6% Net 58.9% 62.3% Expense Ratios Gross 30.3% 32.6% Net 30.2% 10.2% Combined Ratios (GAAP) Gross 87.4% 90.8% Net 88.8% 72.1%

Insurance Overall Results of Operations Insurance and Reinsurance Segments First Six Months

First Six First Six Months Months % 2005 2004 Change

Revenues: Earned Premiums: Gross Premiums Earned $ 100,928 $ 73,264 37.8% Less: Ceded Premiums Earned (33,319) (55,819) -40.3% --------- -------- Net Premiums Earned 67,609 17,445 287.6% Ceded Commission Revenue 11,176 21,051 -46.9% Policy Billing Fees 426 332 28.3% --------- -------- Total 79,211 38,828 104.0%

Expenses: Loss & Loss Adjustment Expenses Gross Loss & Loss Adjustment Expenses 57,495 42,409 35.6% Less: Ceded Loss & Loss Adjustment Expenses (17,420) (31,500) -44.7% --------- -------- Net Loss & Loss Adjustment Expenses 40,075 10,909 267.4%

Underwriting Expenses Commissions Paid to Producers 17,076 12,217 39.8% Other Underwriting Expenses 14,370 11,442 25.6% --------- --------

Total Underwriting Expenses 31,446 23,659 32.9% --------- --------

Total Expenses 71,521 34,568 106.9% --------- --------

Underwriting Profit $ 7,690 $ 4,260 80.5% ========= ========

Key Measures: Written Premiums Gross $ 148,674 $ 83,860 77.3% Ceded (44,128) (52,578) -16.1% --------- -------- Net $ 104,546 $ 31,282 234.2% ========= ======== Loss Ratios Gross 57.0% 57.9% Net 59.3% 62.5% Accident Year Loss Ratios Gross 57.6% 57.4% Net 59.4% 62.5% Expense Ratios Gross 30.7% 31.8% Net 29.4% 13.0% Combined Ratios (GAAP) Gross 87.7% 89.7% Net 88.7% 75.5%

Insurance Services Segment Results of Operations Second Quarter

Second Second Quarter Quarter % 2005 2004 Change

Revenues: Direct Commission Revenue from MGA $ 2,166 $ 3,595 -39.7% Claims Administration Revenue 1,097 846 29.7% Reinsurance Intermediary Fees 79 240 -67.1% Policy Billing Fees 6 - - -------- -------- Total 3,348 4,681 -28.5%

Expenses: Direct Commission Expense Paid to Producers 1,174 2,487 -52.8% Other Insurance Services Expenses 455 1,061 -57.1% Claims Expense Reimbursement to TICNY 1,091 840 29.9% -------- -------- Total Expenses 2,720 4,388 -38.0% -------- --------

Insurance Services Pre-tax Income (Loss) $ 628 $ 293 114.3% ======== ========

Insurance Services Segment Results of Operations First Six Months

First Six First Six Months Months % 2005 2004 Change

Revenues: Direct Commission Revenue from MGA $ 4,691 $ 5,052 -7.1% Claims Administration Revenue 2,150 1,715 25.4% Reinsurance Intermediary Fees 282 438 -35.6% Policy Billing Fees 11 - - --------- -------- Total 7,134 7,205 -1.0%

Expenses: Direct Commission Expense Paid to Producers 2,385 3,437 -30.6% Other Insurance Services Expenses 940 1,361 -30.9% Claims Expense Reimbursement to TICNY 2,141 1,642 30.4% --------- -------- Total Expenses 5,466 6,440 -15.1% --------- --------

Insurance Services Pre-tax Income (Loss) $ 1,668 $ 765 118.0% ========= ========

Tower Group, Inc. Consolidated Statements of Income and Comprehensive Net Income (Unaudited)

Three Months Ended Six Months Ended June 30 June 30 ---------------------- ---------------------- 2005 2004 2005 2004 ----------- ---------- ----------- ---------- ($ in thousands, except share and per share amounts) Revenues Net premiums earned $ 37,591 $ 9,515 $ 67,609 $ 17,445 Ceding commission revenue 5,330 10,750 11,176 21,051 Insurance services revenue 3,342 4,681 7,123 7,205 Net investment income 3,733 1,099 6,348 1,863 Net realized gains on investments 20 (13) 229 (2) Policy billing fees 236 158 437 332 ----------- ---------- ----------- ---------- Total revenues 50,252 26,190 92,922 47,894 ----------- ---------- ----------- ---------- Expenses Loss and loss adjustment expenses 22,013 5,892 40,075 10,909 Direct commission expense 10,669 8,568 19,461 15,654 Other operating expenses 9,280 7,727 18,197 14,504 Interest expense 1,106 724 2,271 1,375 ----------- ---------- ----------- ---------- Total expenses 43,068 22,911 80,004 42,442 ----------- ---------- ----------- ---------- Income before income taxes 7,184 3,279 12,918 5,452 Income tax expense 2,419 1,280 4,436 2,131 ----------- ---------- ----------- ---------- Net income $ 4,765 $ 1,999 $ 8,482 $ 3,321 =========== ========== =========== ==========

Comprehensive Net Income Net income $ 4,765 $ 1,999 $ 8,482 $ 3,321 Other comprehensive income: Gross unrealized investment holding gains (losses) arising during period 4,827 (3,191) 341 (2,244) Less: reclassification adjustment for gains included in net income (20) 13 (229) 2 ----------- ---------- ----------- ---------- 4,807 (3,178) 112 (2,242) Income tax benefit (expense) related to items of other comprehensive income (1,683) 1,080 (39) 762 ----------- ---------- ----------- ---------- Total other comprehensive net income (loss) 3,124 (2,098) 73 (1,480) ----------- ---------- ----------- ---------- Comprehensive Net Income $ 7,889 $ (99)$ 8,555 $ 1,841 =========== ========== =========== ==========

Earnings Per Share Basic earnings per common share $ 0.24 $ 0.45 $ 0.43 $ 0.75 =========== ========== =========== ========== Diluted earnings per common share $ 0.24 $ 0.35 $ 0.42 $ 0.58 =========== ========== =========== ==========

Weighted Average Common Shares Outstanding: Basic 19,555,327 4,407,434 19,538,219 4,407,434 Diluted 20,108,917 5,819,870 20,093,198 5,772,977

Tower Group, Inc. Consolidated Balance Sheets

(Unaudited) June 30, 2005 December 31, 2004 --------------- ----------------- ($ in thousands, except par value and share amounts) Assets Fixed-maturity securities, available- for-sale, at fair value (amortized cost $266,543 in 2005 and $223,562 in 2004) $ 267,961 $ 224,523 Equity securities, at fair value (cost $30,083 in 2005 and $1,827 in 2004) 30,396 2,485 Common trust securities - statutory business trusts, equity method 1,426 1,426 -------------- --------------- Total investments 299,783 228,434 Cash and cash equivalents 44,692 55,201 Investment income receivable 2,743 1,975 Agents' balances receivable 41,022 33,473 Assumed premiums receivable 1,054 1,197 Ceding commission receivable 8,727 8,329 Reinsurance recoverable 100,391 101,173 Receivable - claims paid by agency 2,976 1,622 Prepaid reinsurance premiums 39,200 28,391 Deferred acquisition costs net of deferred ceding commission revenue 25,414 18,740 Federal income taxes and state taxes recoverable - 1,975 Intangible assets 5,902 4,978 Fixed assets, net of accumulated depreciation 6,667 5,420 Other assets 3,449 3,239 -------------- --------------- Total Assets $ 582,020 $ 494,147 ============== =============== Liabilities Loss and loss adjustment expenses $ 155,858 $ 128,722 Unearned premium 143,251 95,505 Reinsurance balances payable 17,769 2,735 Payable to issuing carriers 12,265 18,652 Funds held as agent 776 785 Funds held under reinsurance agreements 52,019 54,152 Accounts payable and accrued expenses 8,283 12,410 Checks outstanding 2,901 2,726 Payable for securities 2,784 - Federal income taxes and state taxes payable 1,180 Deferred income taxes 81 1,587 Subordinated debentures 47,426 47,426 -------------- --------------- Total Liabilities 444,593 364,700 -------------- --------------- Stockholders' Equity Common stock ($0.01 par value per share; 40,000,000 shares authorized; 19,847,303 and 19,826,135 shares issued in 2005 and 2004) 198 198 Paid-in-capital 112,604 112,375 Accumulated other comprehensive net income 1,125 1,052 Retained earnings 25,729 18,224 Unearned compensation - restricted stock (1,731) (1,908) Treasury stock (89,439 shares in 2005 and 88,967 in 2004) (498) (494) -------------- --------------- Total Stockholders' Equity 137,427 129,447 -------------- --------------- Total Liabilities and Stockholders' Equity $ 582,020 $ 494,147 ============== ===============



CONTACT: Tower Group, Inc.
Investor Relations:
Andrew Colannino, 212-655-2107
acolannino@twrgrp.com


SOURCE: Tower Group, Inc.


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