Tower Group, Inc. Reports Record Premium Volume and Earnings for Third Quarter 2008

NEW YORK--(BUSINESS WIRE)--November 6, 2008--Tower Group, Inc. (NASDAQ: TWGP) today reported its financial results for the third quarter of 2008. For the three months ended September 30, 2008, net income totaled $16.7 million as compared to $14.4 million in the third quarter of 2007. Tower reported diluted earnings per share of $0.72 for the third quarter of 2008 as compared to $0.62 per share for the same period in 2007. Net income and diluted earnings per share excluding realized investment gains or losses⁽¹⁾ increased by 28.0% to $18.5 million and 27.4% to $0.79, respectively, as compared to the third quarter of 2007.

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

⁽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, excluding assumed premiums written of $0.7 million, which was included in premiums produced by TRM. Gross premiums written increased to $157.2 million and premiums produced by TRM increased to $46.6 million.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Gross premiums written	$	157,207	$	127,671	$	458,282	$	387,387
Premiums produced by managing general agency		46,616		23,433		106,006		24,094
Net premiums written		114,615		66,759		265,595		184,475
Net premiums earned		88,249		73,124		226,793		207,542
Total commission and fee income		37,009		29,337		104,189		64,547
Net investment income		8,174		9,615		26,335		27,016
Net realized (losses) gains on investments		(2,684)		(62)		(9,280)		10

Total revenues		130,747		112,014		348,037		299,115
Other income		(820)		746		700		4,874
Net income		16,716		14,384		41,739		38,391
Earnings per share – Basic	$	0.73	$	0.63	$	1.81	$	1.67
Earnings per share – Diluted	$	0.72	$	0.62	$	1.80	$	1.65
Return on average equity		20.9%		19.6%		17.7%		20.4%

Reconciliation of non-GAAP financial measures:
Net income	$	16,716	$	14,384	$	41,739	$	38,391
Net realized (losses) gains on investments, net of tax		(1,745)		(40)		(6,032)		7
Net income excluding realized investment gains or losses		18,461		14,424		47,771		38,385
Excluding realized investment gains or losses:
Earnings per share – Basic	$	0.80	$	0.63	$	2.07	$	1.67
Earnings per share – Diluted	$	0.79	$	0.62	$	2.06	$	1.65
Return on average equity		23.1%		19.6%		20.3%		20.4%

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc. stated, “Given the unprecedented financial turmoil, losses from Hurricanes Gustav and Ike and continuing soft market conditions that our industry experienced during the third quarter, we are extremely pleased that we were able to achieve another strong quarter of operating results. Our strong operating results were driven by our ability to continue to successfully execute on our growth strategy that focuses on territorial expansion as well as a prudent and disciplined underwriting strategy that emphasizes allocation of capital and resources to profitable market segments using our broad product platform and diversified distribution system. In addition, due to the actions that we have taken during the past year to further strengthen our investment portfolio, our balance sheet remains strong and well positioned to support our business plan going forward. Finally, the acquisitions of CastlePoint Holdings, Ltd. and Hermitage Insurance Group that we announced during the quarter are proceeding on track. Our continued strong operating performance combined with these strategic acquisitions will substantially increase our capital and revenues. We believe our enhanced financial strength positions us well to respond to the market challenges and opportunities.”

Gross premiums written increased to $157.2 million in the third quarter, which was 23.1% higher than in the third quarter of 2007.

Total revenues increased 16.7% to $130.7 million in the third quarter of 2008 as compared to $112.0 million in the prior year's third quarter. Net premiums earned represented 67.5% of total revenues for the three months ended September 30, 2008 compared to 65.3% for the same period in 2007. For the third quarter of 2008, we produced $46.7 million of premiums on behalf of CastlePoint Insurance Company through our insurance services segment resulting in $14.9 million in fee income.

Total commission and fee income increased 26.2% to $37.0 million in the third quarter of 2008 compared to $29.3 million in the third quarter of 2007.

Net investment income decreased by 15.0% to $8.2 million for the three months ended September 30, 2008 compared to $9.6 million for the same period in 2007. On a tax equivalent basis, the yield was 5.5% as of September 30, 2008 compared to 5.9% as of September 30, 2007. In addition, Tower determined that 12 securities consisting of corporate bonds and residential mortgage backed securities were other-than-temporarily impaired and realized a loss of $5.6 million. Including these impairments, Tower had a net realized loss on investments of $2.7 million.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended September 30, 2008 were $70.1 million and 46.5%, respectively, compared to $69.9 million and 50.4%, respectively, in the same period in 2007. The net loss ratio was 49.8% in the three months ended September 30, 2008 and 54.7% in the same period in 2007. The decrease in the net loss ratio in the third quarter of 2008 compared to the same period in 2007 was due to lower accident year loss ratios as a result of favorable claims frequency in the homeowners’ line, the effect of earned pricing increases in the commercial multi peril liability and other liability lines, and a release of $3.2 million of net reserves due to lower than expected loss development from prior accident years in the commercial multi-peril and property lines, partially offset by unfavorable loss development in the workers’ compensation and auto liability lines. The Company’s net estimated losses for Hurricane Ike of $700,000, net of tax, which was previously announced, are included in the third quarter net losses.

Operating expenses were $58.5 million for the three months ended September 30, 2008 as compared to $47.7 million for the same period in 2007. Our gross expense ratio was 30.6% for the three months ended September 30, 2008 as compared to 29.2% in the same period in 2007.

Tower’s net income in the third quarter was affected by a loss from our 6.7% share of CastlePoint’s net loss resulting from realized investment losses and merger related expenses. The equity loss in CastlePoint was $820,000 for the three months ended September 30, 2008 as compared to income of $746,000 for the same period in 2007.

Tower Group, Inc. announced today that the Company's Board of Directors has approved a quarterly dividend of $0.05 per share payable December 27, 2008 to stockholders of record as of December 15, 2008.

Tower expects fourth quarter 2008 diluted earnings per share and net income, excluding realized investment gains and losses, to be in a range of $0.80 to $0.85 per diluted share and $18.5 million to $19.7 million, respectively. For the full year 2008, Tower projects diluted earnings per share to be in the range between $2.85 and $2.90 per diluted share including an adjustment for equity income in CastlePoint and excluding realized investment gains and losses. The adjustment for equity income in CastlePoint is based on realized investment losses and merger related costs which are estimated to affect Tower’s proportion of equity income in CastlePoint. The exclusion of the adjustment would increase Tower’s projected diluted earnings per share by approximately $0.07 for the full year 2008 period.

For 2009, including the effects of the CastlePoint transaction, Tower projects diluted earnings per share, excluding realized investment gains and losses, to be in a range between $3.20 and $3.40 per diluted share. Combined gross premiums written is projected to be in a range between $1.1 to $1.2 billion for 2009.

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.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This press release or any other written or oral statements made by or on behalf of Tower and CastlePoint Holdings, Ltd. (“CastlePoint”), with which Tower has entered into an Agreement and Plan of Merger dated as of August 4, 2008, may include forward-looking statements that reflect Tower’s and CastlePoint’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” 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 the actual results of CastlePoint, Tower, HIG, Inc. (“Hermitage”), which CastlePoint has agreed to acquire pursuant to a Stock Purchase Agreement dated as of August 27, 2008 and with respect to which Tower and CastlePoint have entered into a separate asset purchase agreement dated as of August 26, 2008 pursuant to which Tower has agreed to acquire certain operating assets of Hermitage from CastlePoint, and the combined companies to differ materially from those indicated in these statements. The following factors, among others, could cause or contribute to such material differences: the ability to obtain governmental approvals or rulings on or regarding the Hermitage transactions or the Tower-CastlePoint merger on the proposed terms and schedule; the failure of the shareholders of CastlePoint or the stockholders of Tower to approve the Tower-CastlePoint merger; the failure to satisfy the closing conditions to the Hermitage acquisition or the Tower-CastlePoint merger; the risk that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the risk that the revenue opportunities, cost savings and other anticipated synergies from the Hermitage acquisition or the Tower-CastlePoint merger may not be fully realized or may take longer to realize than expected; disruption from the Hermitage acquisition or the Tower-CastlePoint merger making it difficult to maintain relationships with customers, employees, brokers and managing general agents; the risk that the U.S. or Bermuda tax authorities may view the tax treatment of the Hermitage acquisition or Tower-CastlePoint merger and/or the other transactions contemplated by the Hermitage stock purchase agreement or the Tower-CastlePoint merger agreement differently from CastlePoint and Tower’s tax advisors; costs relating to the transactions; ineffectiveness or obsolescence of the 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 the underwriting, reserving or investment practices of Hermitage, CastlePoint or Tower anticipate based on historical experience or industry data; the ability to obtain necessary governmental licenses; the ability to hire and retain executive officers and other key personnel; the effects of acts of terrorism or war; developments in the world's financial and capital markets that adversely affect the performance of Hermitage’s, CastlePoint’s and Tower’s investments; changes in regulations or laws applicable to Hermitage, CastlePoint, Tower and their respective subsidiaries, brokers or customers, including tax laws in Bermuda and the United States; acceptance of products and services, including new products and services; changes in the availability, cost or quality of reinsurance and failure of Hermitage’s, CastlePoint’s or Tower’s reinsurers to pay claims timely or at all; decreased demand for Hermitage’s, CastlePoint’s or Tower’s insurance or reinsurance products; the effects of mergers, acquisitions and divestitures in the insurance and reinsurance sectors; changes in rating agency policies or practices; changes in legal theories of liability under Hermitage’s, CastlePoint’s and Tower’s insurance policies or the policies that it reinsures; 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 assumptions underlying our pro forma projections and/or earnings guidance could prove incorrect due to, among other things, the foregoing factors, and neither CastlePoint nor Tower undertake any obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Although the acquisition of Hermitage by CastlePoint and sale of Hermitage operating assets by CastlePoint to Tower is not subject to approval by either Tower or CastlePoint shareholders, information regarding the transaction will be included in the joint proxy statement/prospectus regarding the proposed Tower-CastlePoint merger.

Shareholders of Tower and CastlePoint are urged to read the joint proxy statement/prospectus regarding the proposed Tower-CastlePoint merger because it will contain important information. Tower and CastlePoint filed a preliminary joint proxy statement/prospectus with the Securities and Exchange Commission on September 30, 2008. A definitive joint proxy statement/prospectus is not yet available. Shareholders will be able to obtain a free copy of the joint proxy statement/prospectus, as well as other filings containing information about Tower and CastlePoint, without charge, at the Securities Exchange Commission’s Internet site (www.sec.gov). Copies of the joint proxy statement/prospectus and the filings with the Securities and Exchange Commission that will be incorporated by reference in the joint proxy statement/prospectus can also be obtained, without charge, by accessing the companies’ websites:

Tower and CastlePoint, their respective directors and executive officers and other persons may be deemed to be participants in the solicitations of proxies from the shareholders of Tower and/or CastlePoint in respect of the proposed Tower-CastlePoint merger. Information regarding Tower’s directors and executive officers is available in its proxy statement filed with the Securities and Exchange Commission by Tower on April 11, 2008, and information regarding CastlePoint’s directors and executive officers is available in it proxy statement filed with the Securities and Exchange Commission by CastlePoint on April 29, 2008. Additional information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, are contained in the preliminary joint proxy statement/prospectus and will be contained in the definitive joint proxy statement/prospectus when it becomes available.

This press release shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. No offering of securities shall be made except by means of a joint proxy statement/prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

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 from other insurers, and the Insurance Services Segment which provides insurance brokering, claim administration, reinsurance intermediary services and other administrative services.

Insurance Segment Results of Operations
Third Quarter
($ in thousands)

	Three Months Ended
	September 30,
Revenues		2008			2007		Change (%)
Premiums earned
Gross premiums earned	$	150,510		$	138,752		8.5	%
Less: Ceded premiums earned		(62,261	)		(65,628	)	-5.1	%
Net premiums earned		88,249			73,124		20.7	%
Ceding commission revenue		18,432			19,601		-6.0	%
Policy billing fees		485			599		-19.0	%
Total		107,166			93,324		14.8	%

Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses		70,119			69,888		0.3	%
Less: ceded loss and loss adjustment expenses		(26,212	)		(29,881	)	-12.3	%
Net loss and loss adjustment expenses		43,907			40,007		9.7	%
Underwriting expenses
Direct commission expense		28,548			22,614		26.2	%
Other underwriting expenses		17,920			18,551		-3.4	%
Total underwriting expenses		46,468			41,165		12.9	%
Underwriting Profit	$	16,791		$	12,152		38.2	%

Key Measures
Premiums written
Gross premiums written	$	157,207		$	127,671		23.1	%
Less: ceded premiums written		(42,592	)		(60,912	)	-30.1	%
Net premiums written	$	114,615		$	66,759		71.7	%
Loss Ratios
Gross		46.5	%		50.4	%
Net		49.8	%		54.7	%
Accident Year Loss Ratios
Gross		52.4	%		50.5	%
Net		53.3	%		55.4	%
Underwriting Expense Ratios
Gross		30.6	%		29.2	%
Net		31.2	%		28.7	%
Combined Ratios
Gross		77.1	%		79.6	%
Net		81.0	%		83.4	%

Insurance Segment Results of Operations
First Nine Months
($ in thousands)

	Nine Months Ended
	September 30,
Revenues		2008			2007		Change (%)
Premiums earned
Gross premiums earned	$	424,280		$	378,000		12.2	%
Less: Ceded premiums earned		(197,486	)		(170,458	)	15.9	%
Net premiums earned		226,794			207,542		9.3	%
Ceding commission revenue		60,577			50,867		19.1	%
Policy billing fees		1,445			1,444		0.1	%
Total		288,816			259,853		11.1	%

Expenses
Loss and loss adjustment expenses
Gross loss and loss adjustment expenses		207,201			194,056		6.8	%
Less: ceded loss and loss adjustment expenses		(89,074	)		(79,528	)	12.0	%
Net loss and loss adjustment expenses		118,127			114,528		3.1	%
Underwriting expenses
Direct commission expense		76,658			62,906		21.9	%
Other underwriting expenses		54,059			50,768		6.5	%
Total underwriting expenses		130,717			113,674		15.0	%

Underwriting Profit	$	39,972		$	31,651		26.3	%

Key Measures
Premiums written
Gross premiums written	$	458,282		$	387,387		18.3	%
Less: ceded premiums written		(192,687	)		(202,912	)	-5.0	%
Net premiums written	$	265,595		$	184,475		44.0	%
Loss Ratios
Gross		48.8	%		51.3	%
Net		52.1	%		55.2	%
Accident Year Loss Ratios
Gross		51.6	%		51.7	%
Net		54.1	%		55.4	%
Underwriting Expense Ratios
Gross		30.5	%		29.7	%
Net		30.3	%		29.6	%
Combined Ratios
Gross		79.3	%		81.0	%
Net		82.4	%		84.8	%

Insurance Services Segment Results of Operations ($ in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Revenues
Direct commission revenue from managing general agency	$	15,287	$	8,028	$	35,353	$	9,088
Claims administration revenue		1,606		524		3,576		1,624
Other administrative revenue ⁽¹⁾		846		326		2,426		924
Reinsurance intermediary fees⁽²⁾		254		254		540		595
Policy billing fees		99		5		271		5
Total		18,092		9,137		42,166		12,236
Expenses
Direct commissions expense paid to producers		6,857		3,808		15,382		3,959
Other insurance services expenses		3,225		1,687		7,970		2,302
Claims expense reimbursement to TICNY⁽³⁾		1,606		520		3,576		1,618
Total		11,688		6,015		26,928		7,879
Insurance Services Pre-tax Income	$	6,404	$	3,122	$	15,238	$	4,357

Premium produced by TRM on behalf of issuing companies	$	46,616	$	23,433	$	106,006	$	24,094

⁽¹⁾ Other administration revenue includes amounts reimbursed by CastlePoint Reinsurance for services rendered pursuant to a service and expense sharing agreement.

⁽²⁾ 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)
($ in thousands, except par value and share amounts)	September 30, 2008		December 31, 2007
Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $608,677 and $616,757)	$	554,138	$	606,488
Equity securities, available-for-sale, at fair value (cost of $7,051 and $14,429)		4,531		12,580
Total investments		558,669		619,068
Cash and cash equivalents		101,396		77,679
Investment income receivable		6,860		6,546
Agents' balances receivable		130,143		122,763
Reinsurance recoverable		245,507		207,828
Prepaid reinsurance premiums		122,021		124,834
Deferred acquisition costs, net of deferred ceding commission revenue		57,082		39,271
Deferred income taxes		34,824		22,802
Intangible assets		20,765		21,670
Goodwill		18,962		13,281
Fixed assets, net of accumulated depreciation		37,510		32,337
Investment in unconsolidated affiliate		30,274		32,615
Other assets		46,753		34,955
Total assets	$	1,410,766	$	1,355,649

Liabilities
Loss and loss adjustment expenses	$	525,123	$	501,183
Unearned premium		306,370		272,774
Reinsurance balances payable		75,878		58,740
Payable to issuing carriers		28,106		42,855
Funds held under reinsurance agreements		26,119		36,841
Accounts payable, accrued liabilities and other liabilities		29,947		32,833
Subordinated debentures		101,036		101,036
Total liabilities		1,092,579		1,046,262

Stockholders' Equity
Common stock ($0.01 par value per share; 40,000,000 shares authorized; 23,386,731 and 23,225,039 shares issued, and 23,307,939 and 23,185,173 shares outstanding)		234		232
Treasury stock (78,792 and 39,866 shares)		(1,074)		(493)
Paid-in-capital		207,498		205,435
Accumulated other comprehensive net loss		(39,288)		(8,322)
Retained earnings		150,817		112,535
Total stockholders' equity		318,187		309,387
Total liabilities and stockholders' equity	$	1,410,766	$	1,355,649

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands, except share and per share amounts)		2008			2007			2008			2007
Revenues
Net premiums earned	$	88,249		$	73,124		$	226,793		$	207,542
Ceding commission revenue		18,432			19,601			60,577			50,867
Insurance services revenue		17,993			9,137			41,896			12,236
Net investment income		8,174			9,615			26,335			27,016
Net realized gains (losses) on investments		(2,684	)		(62	)		(9,280	)		10
Policy billing fees		583			599			1,716			1,444
Total revenues		130,747			112,014			348,037			299,115
Expenses
Loss and loss adjustment expenses		43,907			40,007			118,127			114,528
Direct and ceding commission expense		35,406			26,422			92,040			66,865
Other operating expenses		23,060			21,311			66,917			55,832
Interest expense		2,110			2,313			6,593			6,843
Total expenses		104,483			90,053			283,677			244,068

Other Income
Equity income (loss) in unconsolidated affiliate		(820	)		746			700			2,169
Gain from issuance of common stock of unconsolidated affiliate		-			-			-			2,705
Income before income taxes		25,444			22,707			65,060			59,921
Income tax expense		8,728			8,323			23,321			21,530
Net income	$	16,716		$	14,384		$	41,739		$	38,391

Gross unrealized investment holding losses arising during period		(31,732	)		(9,140	)		(54,201	)		(20,169	)
Equity in net unrealized losses in investment in unconsolidated affiliate’s investment portfolio		(1,615	)		(236	)		(2,722	)		(658	)
Less: reclassification adjustment for (gains) losses included in net income		2,684			62			9,280			(10	)
Income tax benefit (expense) related to items of other comprehensive income		10,732			3,260			16,675			7,293
Comprehensive net income (loss)		($3,215	)	$	8,330		$	10,771		$	24,847

Basic and diluted earnings per share
Basic	$	0.73		$	0.63		$	1.81		$	1.67
Diluted	$	0.72		$	0.62		$	1.80		$	1.65

Weighted average common shares outstanding:
Basic		23,054,860			22,983,325			23,029,541			22,622,672
Diluted		23,251,173			23,189,031			23,244,577			22,885,001

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

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

Number	Description
99.1	Copy of press release issued by Tower Group, Inc. dated November 6, 2008

		Tower Group, Inc.
		Registrant

Date:	November 6, 2008	/s/ Francis M. Colalucci
		FRANCIS M. COLALUCCI
		Senior Vice President, Chief Financial Officer and Treasurer