March 6, 2008

Tower Group, Inc. Reports Strong Operating Results for the Fourth Quarter and Full Year 2007

NEW YORK, Mar 06, 2008 (BUSINESS WIRE) -- Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $6.7 million and $0.29 per diluted share for the fourth quarter and $45.1 million and $1.93 per diluted share for the full year of 2007. Net income excluding realized investment gains or losses(1) was $18.1 million and $0.78 per diluted share for the fourth quarter and $56.5 million and $2.43 per diluted share for the full year of 2007.

Fourth Quarter and Full Year 2007 Key Operating Highlights (all percentage increases compare the fourth quarter and full year results to the same period in 2006):

-- Net income and diluted earnings per share excluding realized investment gains or losses (1), increased by 91.3% and 69.6%, respectively during the fourth quarter and 53.6% and 33.5%, respectively for the full year.

-- Our return on equity, excluding realized investment gains or losses(1), increased to 23.8% from 20.7% in the fourth quarter and to 22.6% from 22.2% for the full year.

-- Our book value per share increased 44.5% to $13.34 from $9.23 in 2006.

-- Gross premiums written and produced(2) increased by 62.6% to $197.1 million in the fourth quarter and 44.4% to $608.4 million for the full year.

-- Commission and fee based revenue increased by 168.2% to $41.8 million in the fourth quarter and 103.6% to $106.3 million for the full year.

-- Net investment income increased by 35.4% to $9.7 million in the fourth quarter and 59.4% to $36.7 million for the full year.

-- Net combined ratio of 80.9% for the fourth quarter and 83.7% for the full 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) 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):

                                     Three Months      Twelve Months
                                         Ended             Ended
                                     December 31,      December 31,
                                     2007     2006     2007     2006
                                   -----------------------------------
Gross premiums written             $136,628 $121,066 $524,015 $432,663
Premiums produced by managing
 general agency                      61,004    2,656   85,098   12,926
Net premiums written                 74,708   65,059  259,183  245,070
Net premiums earned                  78,564   55,080  286,106  223,988
Total commission and fee income      41,801   15,583  106,348   52,237
Net investment income                 9,683    7,151   36,699   23,026
Net realized (losses) gains on
 investments                       (17,521)       96 (17,511)       12
Net income                            6,691    9,513   45,082   36,764

Earnings per share - Basic            $0.29    $0.47    $1.95    $1.85
Earnings per share - Diluted          $0.29    $0.46    $1.93    $1.82
Return on Average Equity               8.8%    20.7%    18.0%    22.2%

Reconciliation of non-GAAP
 financial measures:
----------------------------------
  Net income                         $6,691   $9,513  $45,082  $36,764
  Net realized (losses) gains on
   investments, net of tax         (11,389)       62 (11,382)        8
  Net income excluding realized
   investment gains or losses        18,080    9,451   56,464   36,756
Excluding realized investment
 gains or losses:
----------------------------------
  Earnings per share - Basic          $0.79    $0.47    $2.46    $1.85
  Earnings per share - Diluted        $0.78    $0.46    $2.43    $1.82
  Return on Average Equity            23.8%    20.7%    22.6%    22.2%

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. stated, "We were extremely pleased with our fourth quarter operating results. Despite challenging market conditions, we achieved very strong operating results as exhibited by our top line growth, a favorable combined ratio and significant contributions from commission and fee income. We are encouraged by our continued success in the Northeast and expansion into other parts of the country. Based upon the growth initiatives that we have developed in 2007, we anticipate that we will continue to achieve meaningful profitable growth in 2008. In response to the challenging investment environment in the second half of 2007, we took affirmative steps to maintain the quality of our investment portfolio by selling investments to reduce our exposures to sub-prime mortgages. We also wrote down certain investments that had unrealized losses. In doing so, a significant portion of our unrealized investment losses that were already reflected on our balance sheet at the end of the third quarter were realized in our income statement in the fourth quarter. As a result of these investment transactions, we believe our balance sheet has been further strengthened to support our growth in 2008."

Fourth Quarter 2007 Highlights

Gross premiums written in the insurance and reinsurance segments increased to $136.6 million in the fourth quarter, which was 12.9% higher than in the fourth quarter of 2006.

Total revenues increased 44.4% to $112.5 million in the fourth quarter of 2007 compared to $77.9 million for the same period in 2006. Net premiums earned represented 69.8% of total revenues for the three months ended December 31, 2007 compared to 70.7% for the same period in 2006. For the fourth quarter of 2007, we produced $60.3 million in premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $19.3 million of fee income.

Total commission and fee income increased 168.2% to $41.8 million for the fourth quarter of 2007 compared to $15.6 million in the fourth quarter of 2006.

Net investment income increased by 35.4% to $9.7 million for the three months ended December 31, 2007 compared to $7.2 million for the same period in 2006. On a tax equivalent basis, the yield was 5.6% as of December 31, 2007 compared to 5.7% as of December 31, 2006.

At the end of the third quarter, we had net unrealized investment losses of $20.6 million. In order to reduce our exposure to sub-prime and other real estate related investments, we realized $17.5 million of losses through sales or write downs, including additional unrealized losses on these investments and gains on other investments in the fourth quarter. Our net unrealized investment losses were reduced to $12.1 million at the end of the fourth quarter. These actions taken with respect to our investments reduced our sub-prime exposure to $11.5 million, which have an average rating of A. Overall, the fair value of our fixed income investments exceeded $600 million as of year end 2007 and substantially consists of high rated securities averaging AA with nearly half rated AAA.

Gross loss and loss adjustment expenses and the gross loss ratio for the insurance and reinsurance segments combined were $70.7 million and 49.1%, compared to $48.9 million and 49.5%, for the three months ended December 31, 2007 and 2006, respectively. The net loss ratio for the combined segments was 55.2% and 54.6% in the three months ended December 31, 2007 and 2006 respectively.

Operating expenses were $55.7 million for the three months ended December 31, 2007 as compared to $31.9 million for the same period in 2006. Our gross expense ratio was 28.0% for the three months ended December 31, 2007 as compared with 29.8% for the same period in 2006.

Full Year 2007 Highlights

Gross premiums written in the insurance and reinsurance segments increased to $524.0 million in 2007, which was 21.1% higher than in 2006. Policies in-force, before the effect of the Preserver acquisition, increased by 16.8% as of December 31, 2007 compared to December 31, 2006. During 2007, premium increases on renewed business averaged 9.3% in personal lines and 0.3% in commercial lines. For all brokerage business managed by Tower, the retention rate was 85% in personal lines and 79% in commercial lines.

Total revenues increased 37.6% to $411.6 million for 2007 compared to $299.3 million in 2006. Net premiums earned represented 69.5% of total revenues for 2007 compared to 74.8% in 2006. In 2007, we produced $84.2 million in premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $27.0 million of fee income.

Total commission and fee income increased 103.6% to $106.3 million for 2007 compared to $52.2 million in 2006.

Net investment income increased by 59.4% to $36.7 million for 2007 compared to $23.0 million in 2006.

Gross loss and loss adjustment expenses and the gross loss ratio for the insurance and reinsurance segments combined for 2007 were $264.7 million and 50.7%, respectively, compared to $199.9 million and 55.0%, respectively, in 2006. The net loss ratio for the combined segments was 55.2% for 2007 and 60.3% in 2006.

Operating expenses increased by 56.1% to $178.4 million for 2007 from $114.2 million in 2006. Our gross expense ratio was 29.2% for 2007 as compared with 28.7% in 2006.

Additional Highlights and Disclosures:

Dividend Declaration

Tower Group, Inc. announced today that the Company's Board of Directors approved a quarterly dividend of $0.05 per share payable March 27, 2008 to stockholders of record as of March 14, 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 first quarter, we project net income to be in a range between $13.5 million and $14.5 million. We project Tower's diluted earnings per share in the first quarter to be in the range between $0.58 and $0.62 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.

About Tower Group, Inc.

Tower Group, Inc. offers property and casualty insurance products and services through its operating subsidiaries. Its insurance company subsidiaries offer insurance products to individuals and small to medium-sized businesses. Tower Group's insurance services subsidiaries provide underwriting, claims and reinsurance brokerage services to other insurance companies.

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," "project", "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 Results of Operations
                  Insurance and Reinsurance Segments
                            Fourth Quarter
                           ($ in thousands)

                                             Three Months Ended
                                                December 31,
                                             ------------------
                                                                 (%)
Revenues                                       2007      2006   Change
----------------------------------------------------------------------
Premiums earned
   Gross premiums earned                      $143,934  $98,714  45.8%
   Less: Ceded premiums earned                (65,370) (43,634)  49.8%
                                             --------- --------
    Net premiums earned                         78,564   55,080  42.6%
Ceded commission revenue                        20,143   12,580  60.1%
Policy billing fees                                561      304  84.5%
                                             --------- --------
Total Revenues                                  99,268   67,964  46.1%

Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses         70,692   48,889  44.6%
Less: Ceded loss and loss adjustment
 expenses                                     (27,314) (18,790)  45.4%
                                             --------- --------
Net loss and loss adjustment expense            43,378   30,099  44.1%
Underwriting Expenses
   Commissions paid to producers                24,070   16,524  45.7%
   Other underwriting expenses                  16,862   13,230  27.5%
                                             --------- --------
Total Underwriting Expenses                     40,932   29,754  37.6%

Underwriting Profit                            $14,958   $8,111  84.4%
                                             ========= ========

Key Measures
Premiums written
 Gross                                        $136,628 $121,066  12.9%
 Ceded                                        (61,920) (56,007)  10.6%
                                             --------- --------
 Net                                           $74,708  $65,059  14.8%
                                             ========= ========
Loss Ratios
 Gross                                           49.1%    49.5%
 Net                                             55.2%    54.6%
Accident Year Loss Ratios
 Gross                                           51.0%    51.3%
 Net                                             56.6%    56.6%
Expense Ratios
 Gross                                           28.0%    29.8%
 Net                                             25.7%    30.6%
Combined Ratios
 Gross                                           77.1%    79.3%
 Net                                             80.9%    85.2%

                   Insurance Results of Operations
                  Insurance and Reinsurance Segments
                              Full Year
                           ($ in thousands)

                                            Twelve Months Ended
                                               December 31,
                                            -------------------
                                                                 (%)
Revenues                                      2007      2006    Change
----------------------------------------------------------------------
Premiums earned
   Gross premiums earned                     $521,934  $363,425  43.6%
   Less: Ceded premiums earned              (235,828) (139,437)  69.1%
                                            --------- ---------
    Net premiums earned                       286,106   223,988  27.7%
Ceded commission revenue                       71,010    43,130  64.6%
Policy billing fees                             2,005     1,129  77.6%
                                            --------- ---------
Total Revenues                                359,121   268,247  33.9%

Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses       264,748   199,863  32.5%
Less: Ceded loss and loss adjustment
 expenses                                   (106,842)  (64,738)  65.0%
                                            --------- ---------
Net loss and loss adjustment expense          157,906   135,125  16.9%
Underwriting Expenses
    Commissions paid to producers              86,976    58,633  48.3%
    Other underwriting expenses                67,630    46,738  44.7%
                                            --------- ---------
Total Underwriting Expenses                   154,606   105,371  46.7%

Underwriting Profit                           $46,609    27,751  68.0%
                                            ========= =========

Key Measures
Premiums written
 Gross                                       $524,015  $432,663  21.1%
 Ceded                                      (264,832) (187,593)  41.2%
                                            --------- ---------
 Net                                         $259,183  $245,070   5.8%
                                            ========= =========
Loss Ratios
 Gross                                          50.7%     55.0%
 Net                                            55.2%     60.3%
Accident Year Loss Ratios
 Gross                                          51.5%     55.8%
 Net                                            55.8%     60.7%
Expense Ratios
 Gross                                          29.2%     28.7%
 Net                                            28.5%     27.3%
Combined Ratios
 Gross                                          79.9%     83.7%
 Net                                            83.7%     87.6%

                        Results of Operations
                      Insurance Services Segment
                            Fourth Quarter

($ in thousands)                                2007    2006  % Change
----------------------------------------------------------------------
Revenue
Direct commission revenue from managing
 general agency                                $19,707 $1,175 1,577.2%
Claims administration revenue                      690    621    11.1%
Other administration revenue (1)                   497    737   -32.6%
Reinsurance intermediary fees (2)                  175    166     5.4%
Policy billing fees                                 28      -     0.0%
----------------------------------------------------------------------
Total                                           21,097  2,699   681.7%
----------------------------------------------------------------------

Expenses
Direct commissions expense paid to producers    10,096    380 2,556.8%
Other insurance services expenses                3,491    843   314.1%
Claims expense reimbursement to TICNY (3)          684    620    10.3%
----------------------------------------------------------------------
Total                                           14,271  1,843   674.3%
----------------------------------------------------------------------
Insurance services pre-tax income (loss)         6,826    856   697.4%
----------------------------------------------------------------------
Premiums produced by TRM on behalf of issuing
 companies                                     $61,004 $2,656 2,196.8%
----------------------------------------------------------------------

(1) The other administration revenue includes amounts reimbursed by
     CastlePoint Reinsurance for services rendered pursuant to a
     service and expense sharing agreement.
(2) The reinsurance intermediary fees include commissions earned for
     placement of reinsurance on behalf of TICNY and TNIC.
(3) Consists of underwriting expenses reimbursed to TICNY pursuant to
     an expense sharing agreement and to CastlePoint Reinsurance
     pursuant to a service and expense sharing agreement.

                        Results of Operations
                      Insurance Services Segment
                              Full Year

($ in thousands)                               2007    2006   % Change
----------------------------------------------------------------------
Revenue
Direct commission revenue from managing
 general agency                               $28,795  $3,466   730.8%
Claims administration revenue                   2,314   3,193   -27.5%
Other administration revenue (1)                1,421     737    92.8%
Reinsurance intermediary fees (2)                 770     577    33.4%
Policy billing fees                                33       5   560.0%
----------------------------------------------------------------------
Total                                          33,333   7,978   317.8%
----------------------------------------------------------------------

Expenses
Direct commissions expense paid to producers   14,055   1,925   630.1%
Other insurance services expenses               5,793   1,578   267.1%
Claims expense reimbursement to TICNY (3)       2,302   3,176   -27.5%
----------------------------------------------------------------------
Total                                          22,150   6,679   231.6%
----------------------------------------------------------------------
Insurance services pre-tax income (loss)      $11,183  $1,299   760.9%
----------------------------------------------------------------------
Premiums produced by TRM on behalf of issuing
 companies                                    $85,098 $12,926   558.3%
----------------------------------------------------------------------

(1) The other administration revenue includes amounts reimbursed by
     CastlePoint Reinsurance for services rendered pursuant to a
     service and expense sharing agreement.
(2) The reinsurance intermediary fees include commissions earned for
     placement of reinsurance on behalf of TICNY and TNIC.
(3) Consists of underwriting expenses reimbursed to TICNY pursuant to
     an expense sharing agreement and to CastlePoint Reinsurance
     pursuant to a service and expense sharing agreement.

                          Tower Group, Inc.
                     Consolidated Balance Sheets
                             (Unaudited)
                                                      December 31,
                                                   -------------------
($ in thousands, except par value and share
 amounts)                                             2007      2006
----------------------------------------------------------------------
Assets
Fixed-maturity securities, available-for-sale, at
 fair value (amortized cost of
  $616,757 and $416,642)                             $606,488 $414,567
Equity securities, available-for-sale, at fair
 value (cost of $14,429 and $47,971)                   12,580   49,453
----------------------------------------------------------------------
    Total investments                                 619,068  464,020
Cash and cash equivalents                              77,679  100,598
Investment income receivable                            6,546    4,767
Agents' balances receivable                           122,763   65,578
Reinsurance recoverable                               207,828  118,003
Prepaid reinsurance premiums                          125,174   94,063
Deferred acquisition costs, net of deferred ceding
 commission revenue                                    39,271   35,811
Deferred income taxes                                  24,835        -
Intangible assets                                      21,670    5,423
Goodwill                                               13,281        -
Fixed assets, net of accumulated depreciation          32,337   20,563
Investment in unconsolidated affiliate                 32,615   27,944
Other assets                                           33,452   17,312
----------------------------------------------------------------------
    Total assets                                   $1,356,519 $954,082
----------------------------------------------------------------------
Liabilities
Loss and loss adjustment expenses                     501,183  302,541
Unearned premium                                      272,774  227,017
Reinsurance balances payable                           58,740   38,560
Payable to issuing carriers                            42,855      662
Funds held under reinsurance agreements                36,841   51,527
Accounts payable and accrued expenses                  14,205   18,267
Other liabilities                                      17,590   21,125
Federal and state income taxes payable                  1,908    1,163
Deferred income taxes                                       -    1,255
Subordinated debentures                               101,036   68,045
----------------------------------------------------------------------
    Total liabilities                               1,047,132  730,162
Stockholders' Equity
Series A perpetual preferred stock ($0.01 par
 value; 2,000,000 shares authorized;
  0 and 40,000 shares issued and outstanding,
   liquidation preference of
  $1,000 per share, net of $0.4 million of
   issuance costs)                                          -   39,600
Common stock ($0.01 par value; 40,000,000 shares
 authorized, 23,225,039 and
  20,005,758 shares issued, and 23,185,173 and
   19,980,306 shares outstanding)                         232      200
Treasury stock (39,866 and 25,452 shares)               (493)    (207)
Paid-in-capital                                       205,435  113,168
Accumulated other comprehensive net loss              (8,322)    (437)
Retained earnings                                     112,535   71,596
----------------------------------------------------------------------
    Total stockholders' equity                        309,387  223,920
----------------------------------------------------------------------
    Total liabilities and stockholders' equity     $1,356,519 $954,082
----------------------------------------------------------------------

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

                            Three Months Ended    Twelve Months Ended
                               December 31,          December 31,
                           --------------------- ---------------------
($ in thousands, except
 per share and share
 amounts)                     2007       2006       2007       2006
----------------------------------------------------------------------

Revenues
Net premiums earned           $78,564    $55,080   $286,106   $223,988
Ceding commission revenue      20,143     12,580     71,010     43,130
Insurance services revenue     21,064      2,699     33,300      7,973
Policy billing fees               594        304      2,038      1,134
Net investment income           9,683      7,151     36,699     23,026
Net realized gains
 (losses) on investments     (17,521)         96   (17,511)         12
----------------------------------------------------------------------
   Total revenues             112,527     77,910    411,642    299,263
Expenses
Loss and loss adjustment
 expenses                      43,378     30,099    157,906    135,125
Direct and ceding
 commission expense            34,165     16,904    101,030     60,558
Other operating expenses       21,487     14,957     77,319     53,675
Interest expense                2,447      1,804      9,290      6,870
----------------------------------------------------------------------
   Total expenses             101,477     63,764    345,545    256,228

Other Income
Equity income in
 unconsolidated affiliate         269        550      2,438        914
Gain from issuance of
 common stock by
 unconsolidated affiliate           -          -      2,705      7,883
Warrant received from
 unconsolidated affiliate           -          -          -      4,605
----------------------------------------------------------------------
Income before income taxes     11,319     14,696     71,240     56,437
Income tax expense              4,628      5,183     26,158     19,673
----------------------------------------------------------------------
   Net income                   6,691      9,513     45,082     36,764
----------------------------------------------------------------------

Gross unrealized
 investment holding gains
 (losses) arising during
 period                       (9,255)      1,170   (29,424)      4,443
Equity in net unrealized
 gains in investment in
 unconsolidated
affiliate's investment
 portfolio                        440       (41)      (218)        143
 Less: reclassification
  adjustment for (gains)
  losses included in net
  income                       17,521       (96)     17,511       (12)
 Income tax (expense)
  benefit related to items
  of other
   comprehensive income       (3,047)      (362)      4,246    (1,659)
----------------------------------------------------------------------
   Comprehensive net
    income                    $12,350    $10,184    $37,197    $39,679
----------------------------------------------------------------------

Basic and diluted earnings
 per share
Basic                           $0.29      $0.47      $1.95      $1.85
----------------------------------------------------------------------
Diluted                         $0.29      $0.46      $1.93      $1.82
----------------------------------------------------------------------

Weighted average common
 shares outstanding:
Basic                      22,991,463 19,798,141 22,714,663 19,750,309
Diluted                    23,215,462 20,483,388 22,968,097 20,147,318

Dividends declared and
 paid per common share:
Common stock                    $0.05      $0.03      $0.15      $0.10

Note: Full year 2007 earnings per share calculated from net income available to common shareholders of $44,383,711 and 22,714,663 weighted average common shares for basic EPS and 22,968,097 weighted average common shares for diluted EPS.

Fourth quarter 2007 earnings per share calculated from net income available to common shareholders of $6,691,000 and 22,991,463 weighted average common shares for basic EPS and 23,215,462 weighted average common shares for diluted EPS.

SOURCE: Tower Group, Inc.

Tower Group, Inc.
Thomas Song, 212-655-4789
Managing Vice President
tsong@twrgrp.com

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