Thursday, November 5, 2009

Tower Group, Inc. Reports Strong Third Quarter 2009 Operating Results

tower insurance

NEW YORK--(Business Wire)--
Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $30 million and
diluted earnings per share of $0.74 for the third quarter 2009. Operating
income(1) and operating earnings per share(1) were $30.2 million and $0.74,
respectively, for the third quarter of 2009.

Key Highlights (all percentage increases compare the third quarter 2009 results
to the results for the same period in 2008 except as noted otherwise):

* Gross premiums written and produced(2) increased by 39.4% to $283 million.
* Net investment income increased by 165.9% to $21.7 million.
* Brokerage Insurance (formerly Tower managed business):

* Gross premiums written and produced increased by 25.8% to $205.6 million.
* Net combined ratio was 87.6% versus 80.5% in the prior year third quarter.

* Specialty Business (formerly CastlePoint managed business):

* Gross premiums written increased by 95.4% to $77.3 million.
* Net combined ratio was 83.6% versus 87.4% in the prior year third quarter.

* Book value per share increased 8.6% during the quarter to $22.72 at September
30, 2009 versus $20.93 at June 30, 2009. Year to date, book value per share
increased by 58.2% from $14.36 at December 31, 2008.
* During the quarter, the investment portfolio had net unrealized gains of $67.1
million before taxes.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc.,
stated, "We are pleased to report another strong quarter of record premium
volume, operating income and book value. Primarily due to the CastlePoint and
Hermitage acquisitions completed this year, we were able to significantly
increase our premium volume over the same period last year while maintaining our
underwriting profitability. We were also able to achieve meaningful organic
growth through continued expansion of our specialty business and brokerage
business outside the Northeast. We were also pleased with the growth in our book
value as a result of the significant recovery in our investment portfolio that
resulted in pre-tax net unrealized gains of $67 million during the quarter.
Finally, we announced a renewal rights transaction involving small workers
compensation business in Florida shortly after the quarter, which we believe
will allow us to continue to profitably expand our business in the Southeast
region."


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

Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Gross premiums written $ 282,800 $ 157,207 $ 743,485 $ 458,282
Premiums produced by managing general agency 318 46,616 11,526 106,006
Net premiums written 258,648 114,615 680,730 265,595
Total commission and fee income 8,074 37,008 34,118 104,189
Net investment income 21,733 8,174 53,683 26,335
Net realized gains (losses) on investments 2,555 (2,684 ) 2,325 (9,280 )

Total revenues 256,340 130,747 711,645 348,037
Gain on CastlePoint shares - - 7,388 -
Net income 29,978 16,716 78,582 41,739
Earnings per share-Basic $ 0.74 $ 0.72 $ 2.05 $ 1.79
Earnings per share-Diluted $ 0.74 $ 0.71 $ 2.04 $ 1.78
Return on average equity 13.6 % 20.9 % 16.3 % 17.7 %

Combined Brokerage and Specialty Segments
Net premiums earned 223,978 88,250 621,519 226,793
Net loss ratio 54.0 % 49.8 % 53.2 % 52.1 %
Net expense ratio 32.7 % 31.2 % 32.7 % 30.3 %

Brokerage Insurance Segment
Net premiums earned 173,852 82,596 474,715 215,598
Net loss ratio 54.0 % 49.3 % 52.6 % 51.8 %
Net expense ratio 33.6 % 31.3 % 33.5 % 30.3 %

Specialty Business Segment
Net premiums earned 50,127 5,653 146,804 11,195
Net loss ratio 53.8 % 56.8 % 55.5 % 57.5 %
Net expense ratio 29.7 % 30.6 % 30.0 % 30.4 %

Reconciliation of non-GAAP financial measures:
Net income 29,978 16,716 78,582 41,739
Net realized gains (losses) on investments, net of tax 1,661 (1,745 ) 1,511 (6,032 )
Acquisition-related transaction costs, net of tax (3) (1,853 ) - (10,909 ) -
Operating income 30,170 18,461 87,980 47,771
Operating EPS and ROE:
Earnings per share-Basic $ 0.75 $ 0.79 $ 2.30 $ 2.05
Earnings per share-Diluted $ 0.74 $ 0.79 $ 2.29 $ 2.03
Return on average equity 13.7 % 23.1 % 18.3 % 20.3 %



Gross premiums written increased to $282.8 million in the third quarter of 2009,
a 79.9% increase compared to the third quarter of 2008.

Total revenues increased 96.1% to $256.3 million in the third quarter of 2009
compared to $130.7 million in the prior year's third quarter. Net premiums
earned represented 87.3% of total revenues for the three months ended September
30, 2009 compared to 67.5% for the same period in 2008.

Total commission and fee income decreased 78.2% to $8.1 million in the third
quarter of 2009 compared to $37 million in the third quarter of 2008. Commission
and fee income decreased primarily due to our decision to not cede quota share
brokerage premiums in 2009. Ceding commission revenue in 2009 represents
commissions on ceded premiums earned from quota share reinsurance contracts
written in 2008 and continuing to earn in 2009. Insurance services revenue
decreased in the quarter because Tower ceased to produce business on behalf of
CastlePoint Insurance Company subsequent to the acquisition of CastlePoint.

Net investment income increased by 165.9% to $21.7 million for the three months
ended September 30, 2009 compared to $8.2 million for the same period in 2008.
On a tax equivalent basis, the investment yield including cash was 5.6% as of
September 30, 2009 compared to 5.5% as of September 30, 2008. New cash invested
over the last six months has experienced lower yields as a result of tightening
spreads combined with a low interest rate environment.

Net realized investment gains were $2.6 million for the three month period
ending September 30, 2009 compared to losses of $2.7 million for the same period
last year. Realized capital gains in 2009 were primarily from opportunistic
sales of commercial mortgage-backed securities (CMBS) and corporate bonds, which
were positively affected by spread tightening. Included in the 2009 net realized
investment gains are approximately $11.7 million of credit related
other-than-temporary impairments (OTTI) losses for the three months ended
September 30, 2009. These OTTI losses related principally to CMBS and non agency
residential mortgage-backed securities as a result of declining estimates for
cash flows for specific investments.

Operating expenses were $81.9 million for the three months ended September 30,
2009 compared to $58.5 million for the same period in 2008.

For the Brokerage Insurance Segment, premiums on renewal business increased 3.2%
in personal lines and decreased 0.6% in commercial lines, resulting in an
overall increase of 0.8% during the third quarter of 2009. The retention rate on
brokerage business was 91% for personal lines and 80% for commercial lines,
resulting in a retention rate of 87% for all lines during the third quarter of
2009. Brokerage insurance premiums earned continued to increase, primarily due
to the acquisitions of CastlePoint and Hermitage, which together added $53.2
million and $15.5 million in net premiums earned, respectively, for the three
months ended September 30, 2009.

The Specialty Business Segment consists of program business written in Tower
insurance subsidiaries and reinsurance business written in CastlePoint Re. The
increase in specialty business premiums earned resulted primarily from the
acquisition of CastlePoint, which added $32.3 million of net premiums earned for
the three months ended September 30, 2009.

Additional Highlights and Disclosures:

2009 and 2010 Guidance

Tower expects fourth quarter 2009 operating earnings per share to be in a range
of $0.86 to $0.96 per diluted share. For the full year 2009, Tower projects
operating earnings per share to be in a range between $3.15 and $3.25 per
diluted share. For 2010, Tower projects its operating earnings per share to be
in a range between $3.50 and $3.70 per diluted share. Both 2009 and 2010 ranges
include the effects of the pending SUA transaction.

Notes on Non-GAAP Financial Measures

(1)Operating income is a common performance measurement for insurance companies
and excludes realized investment gains or losses and expenses related to the
adoption of new accounting guidance related to business combinations. We believe
this presentation enhances the understanding of our results of operations by
highlighting the underlying profitability of our insurance business. The Federal
statutory tax rate of 35% was used to calculate the tax applicable to net
realized gains or losses on investments and tax deductible acquisition-related
transaction costs. Operating earnings per share is operating income divided by
diluted weighted average shares outstanding. Operating return on equity is
annualized operating income divided by average common stockholders` equity.

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

(3) For the three and nine month periods ending September 30, 2009, $1.6 million
and $6.4 million, respectively, of acquisition-related transaction costs were
not deemed deductible for tax purposes. The tax rate used to calculate the
acquisition related transaction costs that were tax deductible was 35%.

Conference Call

Tower will host a conference call and webcast to discuss these results today at
10:00 a.m. ET. This conference call will be broadcast live over the Internet. To
access a listen-only webcast over the Internet, please visit the Investor
Information section of Tower Group, Inc.`s website, www.twrgrp.com, or use this
link: http://investor.twrgrp.com/events.cfm

Please access the website at least 15 minutes prior to the call to register and
to download any necessary audio software. If you are unable to participate
during the live conference call, a webcast will be archived in the Investor
Information section of Tower Group, Inc.'s website at www.twrgrp.com.

About Tower Group, Inc.

Tower Group, Inc. offers diversified 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 through its network of retail and wholesale agents and specialty
business through program underwriting agents. Tower'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 press release and any other written or oral
statements made by or on behalf of Tower may include forward-looking statements
that reflect Tower's current views with respect to future events and financial
performance. All statements other than statements of historical fact included in
this press 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" and "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 the actual results of Tower to differ materially from those indicated in
these statements. Please refer to Tower`s filings with the SEC, including among
others Tower`s Annual Report on Form 10-K for the year ended December 31, 2008
and subsequent filings on Form 10-Q, for a description of the important factors
that could cause the actual results of Tower to differ materially from those
indicated in these statements. Forward-looking statements speak only as of the
date on which they are made, and Tower 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, beginning January 1,
2009, by allocating its previously reported insurance segment into brokerage
insurance and specialty business, based on the way management organizes the
segments for making operating decisions and assessing profitability. This will
result in the reporting of three operating segments. The prior period segment
disclosures have been restated to conform to the current presentation.

The Brokerage Insurance Segment offers a broad range of commercial lines and
personal lines property and casualty insurance products to small to mid-sized
businesses and individuals distributed through a network of retail and wholesale
agents on both an admitted and non-admitted basis;

The Specialty Business Segment provides specialty classes of business through
program underwriting agents. This segment also includes reinsurance solutions
provided primarily to small insurance companies; and

The Insurance Services Segment provides underwriting, claims and reinsurance
brokerage services to insurance companies.


Brokerage Insurance & Specialty Business Combined
($ in thousands)
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(%) 2009 2008 Change(%)
Revenues
Premiums earned
Gross premiums earned $ 263,742 $ 150,510 75.2 % $ 747,440 $ 424,280 76.2 %
Less: ceded premiums earned (39,764 ) (62,260 ) -36.1 % (125,921 ) (197,487 ) -36.2 %
Net premiums earned 223,978 88,250 153.8 % 621,519 226,793 174.0 %
Ceding commission revenue 6,932 18,432 -62.4 % 27,674 60,577 -54.3 %
Policy billing fees 930 485 91.8 % 2,171 1,446 50.1 %
Total 231,840 107,167 116.3 % 651,364 288,816 125.5 %
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 126,470 70,120 80.4 % 390,950 207,201 88.7 %
Less: ceded loss and loss adjustment expenses (5,632 ) (26,213 ) -78.5 % (60,029 ) (89,074 ) -32.6 %
Net loss and loss adjustment expenses 120,838 43,907 175.2 % 330,921 118,127 180.1 %
Underwriting expenses
Direct commission expense 50,241 28,556 75.9 % 148,575 76,658 93.8 %
Other underwriting expenses 30,956 17,920 72.7 % 84,562 54,060 56.4 %
Total underwriting expenses 81,197 46,476 74.7 % 233,138 130,718 78.4 %
Underwriting profit $ 29,806 $ 16,784 77.6 % $ 87,305 $ 39,971 118.4 %

Key Measures
Premiums written
Gross premiums written $ 282,800 $ 157,207 79.9 % $ 743,485 $ 458,282 62.2 %
Less: ceded premiums written (24,151 ) (42,592 ) -43.3 % (62,754 ) (192,687 ) -67.4 %
Net premiums written $ 258,648 $ 114,615 125.7 % $ 680,730 $ 265,595 156.3 %

Loss Ratios
Gross 48.0 % 46.6 % 52.3 % 48.8 %
Net 54.0 % 49.8 % 53.2 % 52.1 %
Accident Year Loss Ratios
Gross 54.1 % 52.4 % 54.3 % 51.6 %
Net 54.1 % 53.3 % 54.3 % 54.1 %
Underwriting Expense Ratios
Gross 30.4 % 30.6 % 30.9 % 30.5 %
Net 32.7 % 31.2 % 32.7 % 30.3 %
Combined Ratios
Gross 78.4 % 77.1 % 83.2 % 79.3 %
Net 86.7 % 81.0 % 86.0 % 82.4 %



Brokerage Insurance Segment Information
($ in thousands)
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(%) 2009 2008 Change(%)
Revenues
Premiums earned
Gross premiums earned $ 205,094 $ 124,191 65.1 % $ 569,200 $ 375,124 51.7 %
Less: ceded premiums earned (31,242 ) (41,595 ) -24.9 % (94,485 ) (159,526 ) -40.8 %
Net premiums earned 173,852 82,596 110.5 % 474,715 215,598 120.2 %
Ceding commission revenue 3,908 11,259 -65.3 % 20,461 48,150 -57.5 %
Policy billing fees 930 485 91.8 % 2,171 1,446 50.1 %
Total 178,690 94,340 89.4 % 497,346 265,194 87.5 %
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 95,221 54,962 73.2 % 290,410 178,768 62.5 %
Less: ceded loss and loss adjustment expenses (1,369 ) (14,268 ) -90.4 % (40,900 ) (67,073 ) -39.0 %
Net loss and loss adjustment expenses 93,852 40,694 130.6 % 249,510 111,695 123.4 %
Underwriting expenses
Direct commission expenses 35,767 20,860 71.5 % 108,236 62,857 72.2 %
Other underwriting expenses 27,504 16,713 64.6 % 73,603 52,033 41.5 %
Total underwriting expenses 63,271 37,573 68.4 % 181,840 114,890 58.3 %
Underwriting profit $ 21,567 $ 16,073 34.2 % $ 65,997 $ 38,609 70.9 %

Key Measures
Premiums written
Gross premiums written $ 205,451 $ 117,625 74.7 % $ 571,111 $ 370,876 54.0 %
Less: ceded premiums written (13,418 ) (11,872 ) 13.0 % (37,654 ) (125,600 ) -70.0 %
Net premiums written $ 192,033 $ 105,753 81.6 % $ 533,457 $ 245,276 117.5 %

Loss Ratios
Gross 46.4 % 44.3 % 51.0 % 47.7 %
Net 54.0 % 49.3 % 52.6 % 51.8 %
Accident Year Loss Ratios
Gross 54.6 % 51.3 % 53.5 % 50.7 %
Net 54.0 % 53.1 % 53.7 % 53.9 %
Underwriting Expense Ratios
Gross 30.4 % 29.9 % 31.6 % 30.2 %
Net 33.6 % 31.3 % 33.5 % 30.3 %
Combined Ratios
Gross 76.8 % 74.1 % 82.6 % 77.9 %
Net 87.6 % 80.5 % 86.1 % 82.1 %



Specialty Business Segment Information
($ in thousands)
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(%) 2009 2008 Change(%)
Revenues
Premiums earned
Gross premiums earned $ 58,648 $ 26,319 122.8 % $ 178,241 $ 49,156 262.6 %
Less: ceded premiums earned (8,521 ) (20,665 ) -58.8 % (31,437 ) (37,961 ) -17.2 %
Net premiums earned 50,127 5,654 786.6 % 146,804 11,195 1211.3 %
Ceding commission revenue 3,024 7,173 -57.8 % 7,213 12,427 -42.0 %
Total 53,150 12,827 314.4 % 154,018 23,622 552.0 %
Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses 31,248 15,158 106.1 % 100,541 28,433 253.6 %
Less: ceded loss and loss adjustment expenses (4,263 ) (11,945 ) -64.3 % (19,129 ) (22,001 ) -13.1 %
Net loss and loss adjustment expenses 26,985 3,213 739.9 % 81,411 6,432 1165.7 %
Underwriting expenses
Direct commission expense 14,474 7,696 88.1 % 40,339 13,801 192.3 %
Other underwriting expenses 3,452 1,207 186.0 % 10,959 2,027 440.6 %
Total underwriting expenses 17,926 8,903 101.3 % 51,298 15,828 224.1 %
Underwriting profit $ 8,239 $ 711 1058.8 % $ 21,309 $ 1,362 1464.5 %

Key Measures
Premiums written
Gross premiums written $ 77,349 $ 39,582 95.4 % $ 172,373 $ 87,406 97.2 %
Less: ceded premiums written (10,733 ) (30,720 ) -65.1 % (25,100 ) (67,087 ) -62.6 %
Net premiums written $ 66,616 $ 8,862 651.7 % $ 147,274 $ 20,319 624.8 %
20,418
Impairment loss on investment securities (374 ) (2,956 ) (1,827 ) (20,037 )
Consolidated income before provision for income taxes $ 87,900 $ 79,594 $ 204,995 $ 231,737


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