May 6, 2008

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

NEW YORK, May 06, 2008 (BUSINESS WIRE) -- 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):

                                                   Three Months Ended
                                                        March 31,
                                                   -------------------
                                                     2008      2007
                                                   --------- ---------
Gross premiums written                             $135,113  $110,880
Premiums produced by managing general agency         23,291       (55)
Net premiums written                                 68,356    48,032
Net premiums earned                                  68,430    60,383
Total commission and fee income                      30,892    15,996
Net investment income                                 9,796     7,955
Net realized (losses) gains on investments            1,374       (17)

Total revenues                                      110,492    84,317
Other income                                            760     3,394
Net Income                                           14,853    11,628
Earnings per share - Basic                            $0.65     $0.50
Earnings per share - Diluted                          $0.64     $0.49
Return on Average Equity                               19.1%     23.8%

Reconciliation of non-GAAP financial measures:
--------------------------------------------------
  Net income                                        $14,853   $11,628
  Net realized (losses) gains on investments, net
   of tax                                               893       (11)
  Net income excluding realized investment gains
   or losses                                         13,960    11,639
Excluding realized investment gains or losses:
--------------------------------------------------
  Earnings per share - Basic                          $0.61     $0.50
  Earnings per share - Diluted                        $0.60     $0.49
  Return on Average Equity                             18.1%     23.8%

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.

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/.

Tower has changed the presentation of its business results by combining its previously reported Insurance Segment with its Reinsurance Segment since reporting this segment separately was no longer meaningful. This will result in reporting two operating segments: the Insurance Segment which offers a broad range of property and casualty insurance products and services to small to mid-sized businesses and to individuals primarily in the Northeast states and which assumes reinsurance and the Insurance Services Segment which provides insurance brokering, claim administration, reinsurance intermediary services and other administrative services.

               Insurance Segment Results of Operations
                           ($ in thousands)

                                       Three Months Ended
                                            March 31
                                       -------------------
Revenues                                 2008      2007    Change (%)
                                       --------- ---------
Premiums Earned
    Gross premiums earned              $135,137  $108,627        24.4%
    Less: Ceded premiums earned         (66,707)  (48,244)       38.3%
                                       --------- ---------
    Net premiums earned                  68,430    60,383        13.3%
Ceding commission revenue                20,654    14,234        45.1%
Policy billings fees                        502       302        66.2%
                                       --------- ---------
Total                                    89,586    74,919        19.6%

Expenses
Loss and loss adjustment expenses
   Gross loss and loss adjustment
    expenses                             67,131    57,342        17.1%
   Less: ceded loss and loss
    adjustment expenses                 (29,834)  (23,432)       27.3%
                                       --------- ---------
   Net loss and loss adjustment
    expenses                             37,297    33,910        10.0%
Underwriting expenses
   Direct commission expense             23,238    18,629        24.7%
   Other underwriting expenses           18,748    13,908        34.8%
                                       --------- ---------
Total underwriting expenses              41,986    32,537        29.0%

Underwriting Profit                     $10,303    $8,472        21.6%
                                       ========= =========

Key Measures
Premiums written
  Gross premiums written               $135,113  $110,880        21.9%
  Less: ceded premiums written          (66,757)  (62,848)        6.2%
                                       --------- ---------
  Net premiums written                  $68,356   $48,032        42.3%
                                       ========= =========
Loss Ratios
  Gross                                    49.7%     52.8%
  Net                                      54.5%     56.2%
Accident Year Loss Ratios
  Gross                                    50.5%     53.1%
  Net                                      54.5%     56.2%
Underwriting Expense Ratios
  Gross                                    30.7%     29.7%
  Net                                      30.4%     29.8%
Combined Ratios
  Gross                                    80.4%     82.5%
  Net                                      84.9%     86.0%

           Insurance Services Segment Results of Operations
                           ($ in thousands)

                                         Three Months Ended
                                             March 31,
                                         ------------------
                                           2008     2007    Change (%)
                                         -------- ---------

Revenues
Direct commission revenue from managing
 general agency                            $8,164     $488     1573.0%
Claims administration revenue                 957      565       69.4%
Other administrative revenue(1)               371      251       47.7%
Reinsurance intermediary fees(2)              168      156        7.7%
Policy billing fees                            76        -         NM
                                         -------- ---------
Total                                       9,736    1,460      566.8%
                                         -------- ---------
Expenses
Direct commission expense paid to
 producers                                  3,371        7         NM
Other insurance services expenses(3)        1,574      257      512.3%
Claims expense reimbursement to TICNY         957      565       69.4%
                                         -------- ---------
Total                                       5,902      829      611.9%
                                         -------- ---------
Insurance services pre-tax income (loss)   $3,834     $631      507.6%
                                         ======== =========
Premiums produced by TRM on behalf of
 issuing companies                        $23,291     ($55)        NM
                                         ======== =========

(1) 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 our insurance subsidiaries.

(3) Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing agreement.

                          Tower Group, Inc.
                     Consolidated Balance Sheets

                                      (Unaudited)
                                    March 31, 2008   December 31, 2007
                                   ----------------- -----------------
                                    ($ in thousands, except par value
                                           and share amounts)
Assets
Fixed-maturity securities,
 available-for-sale, at fair value
 (amortized cost of $554,803 and
 $616,757)                                 $529,557          $606,488
Equity securities, available-for-
 sale, at fair value (cost of
 $11,993 and $14,429)                        10,810            12,580
                                   ----------------- -----------------
    Total investments                       540,367           619,068
Cash and cash equivalents                    93,439            77,679
Receivable for securities                    68,312             8,755
Investment income receivable                  6,148             6,546
Agents' balances receivable                 114,869           122,763
Reinsurance recoverable                     215,959           207,828
Prepaid reinsurance premiums                130,041           124,834
Deferred acquisition costs, net of
 deferred ceding commission
 revenue                                     44,883            39,271
Deferred income taxes                        19,938            22,802
Intangible assets                            21,369            21,670
Goodwill                                     18,962            13,281
Fixed assets, net of accumulated
 depreciation                                34,298            32,337
Investment in unconsolidated
 affiliate                                   32,591            32,615
Other assets                                 25,202            25,162
                                   ----------------- -----------------
    Total Assets                         $1,366,378        $1,354,611
                                   ================= =================
Liabilities
Loss and loss adjustment expenses          $505,705          $501,183
Unearned premium                            275,389           272,774
Reinsurance balances payable                 74,519            58,740
Payable to issuing carriers                  36,992            42,855
Funds held under reinsurance
 agreements                                  32,841            36,841
Accounts payable and accrued
 expenses                                    14,099            14,205
Other liabilities                            11,712            17,590
Subordinated debentures                     101,036           101,036
                                   ----------------- -----------------
   Total Liabilities                      1,052,293         1,045,224
                                   ----------------- -----------------
Stockholders' Equity
Common stock ($0.01 par value per
 share; 40,000,000 shares
 authorized; 23,374,013 and
 23,225,039 shares issued, and
 23,326,346 and 23,185,173 shares
 outstanding)                                   234               232
Treasury stock (47,667 and 39,866
 shares)                                       (674)             (493)
Paid-in-capital                             206,157           205,435
Accumulated other comprehensive
 net loss                                   (17,865)           (8,322)
Retained earnings                           126,233           112,535
                                   ----------------- -----------------
   Total Stockholders' Equity               314,085           309,387
                                   ----------------- -----------------
   Total Liabilities and
    Stockholders' Equity                 $1,366,378        $1,354,611
                                   ================= =================

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

                                              Three Months Ended
                                                   March 31,
                                         -----------------------------
                                              2008           2007
                                         -------------- --------------
                                         ($ in thousands, except share
                                            and per share amounts)
Revenues
   Net premiums earned                         $68,430        $60,383
   Ceding commission revenue                    20,654         14,234
   Insurance services revenue                    9,660          1,460
   Net investment income                         9,796          7,955
   Net realized gains (losses) on
    investments                                  1,374            (17)
   Policy billing fees                             578            302
                                         -------------- --------------
     Total revenues                            110,492         84,317
                                         -------------- --------------
Expenses
  Loss and loss adjustment expenses             37,297         33,910
  Direct and ceding commission expense          26,608         18,635
  Other operating expenses                      21,666         15,089
  Interest expense                               2,322          2,084
                                         -------------- --------------
      Total expenses                            87,893         69,718
                                         -------------- --------------
Other Income
  Equity income in unconsolidated
   affiliate                                       760            689
  Gain from issuance of common stock by
   unconsolidated affiliate                          -          2,705
                                         -------------- --------------
  Income before income taxes                    23,359         17,993
  Income tax expense                             8,506          6,365
                                         -------------- --------------
     Net income                                $14,853        $11,628
                                         ============== ==============

     Gross unrealized investment holding
      gains (losses) arising during
      period                                   (12,524)           546
     Equity in net unrealized gains in
      investment in unconsolidated
      affiliate's investment portfolio            (784)            55
     Less: reclassification adjustment
      for (gains) losses included in net
      income                                    (1,374)            17
     Income tax (expense) benefit
      related to items of other
      comprehensive income                       5,139           (216)
                                         -------------- --------------
        Comprehensive net income                $5,310        $12,030
                                         ============== ==============

Basic and diluted earnings per share
  Basic                                          $0.65          $0.50
                                         ============== ==============
  Diluted                                        $0.64          $0.49
                                         ============== ==============

Weighted Average Common Shares
 Outstanding:
  Basic                                     22,995,511     21,988,907
  Diluted                                   23,187,773     22,621,230
Dividends declared and paid per common
 share:
  Common stock                                  $0.050         $0.025

SOURCE: Tower Group, Inc.

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

Copyright Business Wire 2008

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