Tower Group, Inc. Reports Record Results in Second Quarter of 2007

Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $12.4 million and diluted earnings per share of $0.53 for the second quarter of 2007. For the first six months of 2007, Tower reported net income of $24 million ($1.03 per diluted share). Key Highlights (all percentage increases compare the second quarter of 2007 to the same period in 2006): Strong top line growth resulted in record revenues of $102.8 million; up 33.2%. Commission and fee based revenue increased 53.1%; Net investment income up 78.5%. Preserver acquisition closed and contributing to earnings and regional growth. Retention rate remains solid; 91% for personal lines and 80% for commercial lines. Adjusted Net Income increased 60.4% excluding the effects of significant events which are the gains, warrant and start-up costs related to CastlePoint and the PXRE commutation/novation. Combined ratio of 85.2% achieved. GAAP Financial Summary ($ in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2007   2006   2007   2006 Gross premiums written $148,836 $124,414 $259,716 $211,787 Net premiums written 69,684 45,473 117,716 128,351 Net premiums earned 74,035 59,286 134,418 116,542 Total commission and fee income 19,214 12,553 35,210 21,954 Net investment income 9,446 5,292 17,401 9,952 Net realized gains (losses) on investments 89 29 72 (116)   Total revenues 102,784 77,160 187,101 148,332 Other income 734 12,434 4,128 12,434 Net Income 12,379 12,285 24,007 18,795 Earnings per share – Basic $0.54 $0.62 $1.04 $0.95 Earnings per share – Diluted $0.53 $0.61 $1.03 $0.93 Return on Average Equity 17.2% 31.8% 21.7% 24.7% Non-GAAP Financial Measures (unaudited): During the three and six months ended June 30, 2007 and 2006, significant events affected the consolidated results of Tower, and the exclusion of these is more indicative of Tower’s operating performance. The following table reconciles the effect of these events to GAAP results. Three Months Ended June 30, Six Months Ended June 30, 2007 2006 2007 2006 ($ in thousands, except per share data) Pre-tax GAAP income as reported $19,221 $18,845 $37,214 $28,993 Significant Events: Less: Gain on CastlePoint Shares - (7,883) (2,705) (7,883) Less: Warrant received from unconsolidated affiliate - (4,605) - (4,605) Add: PXRE commutation/novation - 5,459 - 5,459 Add: CastlePoint start-up costs - - - 472 Adjusted pre-tax income 19,221 11,816 34,509 22,436 Income tax expense (excludes the tax effect of adjustments) 6,842 4,100 12,260 7,738 Adjusted net income $12,379 $7,716 $22,249 $14,698   Adjusted EPS – Diluted $0.53 $0.38 $0.95 $0.73   Adjustment to return on average equity - (11.6%) (1.2%) (5.1%) Return on average equity, excluding the effects of the CastlePoint items and PXRE transactions 17.2% 20.2% 20.5% 19.6% Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., stated, "Our strong second quarter results reflect the strength of our business model, successful integration of Preserver Group that we acquired in April of this year as well as the successful implementation of our underwriting and growth strategies. In addition, due to several other growth initiatives that we have recently implemented as well as growth from the Preserver Group acquisition, we anticipate significant growth in premium volume in the second half of the year. Finally, we believe we will also be able to increase our return in equity in the second half of the year as we utilize our hybrid business model to successfully deploy the additional capital raised in January. As a result, we believe we are well positioned to continue to profitably grow our business in the second half of this year and into 2008.” Gross premiums written in the insurance and reinsurance segments increased to $148.8 million in the second quarter, which was 19.6% higher than in the second quarter of 2006. This growth was primarily driven by a 17.5% increase in policies in force over the past year and premium increases on renewed business in the insurance segment which averaged 12.5% for personal lines and 0.9% for commercial lines. Total revenues increased 33.2% to $102.8 million in the second quarter of 2007 as compared to $77.2 million for the same period in 2006. Net premiums earned represented 72.0% of total revenues for the three months ended June 30, 2007 compared to 76.8% for the same period in 2006. During the second quarter of 2007, we ceded 49% of our direct premiums written to CastlePoint. The associated ceding commission revenue was the principal source of the increase in total commission and fee income, which grew by 53.1% to $19.2 million in the second quarter of 2007 compared to $12.6 million in the second quarter of 2006. Net investment income increased by 78.5% to $9.4 million for the three months ended June 30, 2007 compared to $5.3 million for the same period in 2006. On a tax equivalent basis, the yield was 5.8% as of June 30, 2007 compared to 5.4% as of June 30, 2006. Gross loss and loss adjustment expenses and the gross loss ratio for the insurance and reinsurance segments combined for the three months ended June 30, 2007 were $66.8 million and 51.2%, respectively, compared to $58.6 million and 61.3%, respectively, in the same period in 2006. The net loss ratio for the combined segments was 54.9% in the three months ended June 30, 2007 and 69.9% in the same period in 2006. Operating expenses increased by 50.1% to $41.2 million for the three months ended June 30, 2007 from $27.5 million for the same period in 2006. Our gross expense ratio was 30.2% for the three months ended June 30, 2007 as compared with 25.9% for the same period in 2006. The acquisition of Preserver added 1.0 percentage point to the gross expense ratio. Cost reductions were realized as part of the Preserver integration and Preserver’s gross expense ratio was significantly reduced from pre-acquisition levels. The gross expense ratio for the three months ended June 30, 2006 was lower due to additional earned premium from the PXRE novation. Underwriting expenses for the insurance and reinsurance segments combined were $40.0 million for the three months ended June 30, 2007 as compared to $25.0 million for the same period in 2006. The net underwriting expense ratio, which reflects the benefits of ceding commission revenue that is deducted from gross underwriting expenses, was 30.3% for the three months ended June 30, 2007 as compared to 24.8% for the same period in 2006. The acquisition of Preserver added 2.2 percentage points to the net expense ratio. The effect of the PXRE commutation/novation reduced the net underwriting expense ratio by 4.5 percentage points in the second quarter of 2006. Additional Highlights and Disclosures: Closing of Preserver Group, Inc. Acquisition On April 10, 2007, the Company completed the acquisition of 100% of the issued and outstanding common stock of Preserver Group, Inc., a New Jersey corporation. Under the terms of the acquisition agreement, the Company acquired Preserver for approximately $64.9 million comprised of $34.1 million in cash considerations to the Sellers and a contribution of $30.8 million to the capital of Preserver to enable Preserver to repay the principal and accrued interest on indebtedness held by certain of the sellers. First Quarter of 2007 Earnings per Share Calculation As of June 30, 2007 the Company reviewed its calculation of basic and diluted earnings per share for the first quarter of 2007. During the first quarter the Company redeemed all of its perpetual preferred Series A-1 stock for $40 million which had a carrying value, net of issuance costs, of $39.6 million. In accordance with EITF (Emerging Issues Task Force) D-42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”, the excess of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock should be subtracted from net earnings available to common shareholders in the calculation of earnings per share. In our first quarter calculation of earnings per share, we deducted $400,000 from paid in capital rather than earnings available to common shareholders. Correcting this calculation results in a reduction in the basic and diluted earnings per share for the first quarter of 2007 by $0.02 and $0.02, respectively. The correction has been reflected in the six months ended June 30, 2007 calculation of basic and diluted earnings per share. Dividend Declaration Tower Group, Inc. announced today that the Company's Board of Directors approved a quarterly dividend of $0.025 per share payable September 27, 2007 to stockholders of record as of September 14, 2007. 2007 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. We continue to anticipate increasing earnings for the second half of the year. For the third quarter, we project net income to be in a range between $13.7 million and $14.6 million. We project Tower's diluted earnings per share in the third quarter to be in the range between $0.59 and $0.63 per diluted share. For the full year, we anticipate net income to be in a range between $55 million and $58 million and diluted earnings per share to be between $2.40 and $2.50 for the year. 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 Overall Results of Operations Insurance and Reinsurance Segments Second Quarter ($ in thousands)   Three Months Ended June 30, Revenues 2007 2006 (%) Change Earned premiums Gross premiums earned $130,621 $95,568 36.7% Less: Ceded premiums earned (56,586) (36,281) 56.0% Net premiums earned 74,035 59,287 24.9% Ceded commission revenue 17,032 10,077 69.0% Policy Billing Fees 543 272 99.6% Total Revenues 91,610 69,636 31.6%   Expenses Loss and Loss Adjustment Expenses Gross loss and loss adjustment expenses 66,826 58,562 14.1% Less: Ceded loss and loss adjustment expenses (26,215) (17,137) 53.0% Net loss and loss adjustment expense 40,611 41,425 -2.0% Underwriting Expenses Commissions paid to producers 21,663 14,533 49.1% Other underwriting expenses 18,309 10,509 74.2% Total Underwriting Expenses 39,972 25,042 59.6%   Underwriting Profit $11,027 $3,169 248.0%     Key Measures Written Premiums Gross $148,836 $124,414 19.6% Ceded (79,152) (78,941) 0.3% Net $69,684 $45,473 53.2% Loss Ratios Gross 51.2% 61.3% Net 54.9% 69.9% Accident Year Loss Ratios Gross 51.9% 61.2% Net 54.9% 67.5% Expense Ratios Gross 30.2% 25.9% Net 30.3% 24.8% Combined Ratios (GAAP) Gross 81.4% 87.2% Net 85.2% 94.7% Insurance Overall Results of Operations Insurance and Reinsurance Segments First Six Months ($ in thousands)   Six Months Ended June 30, Revenues 2007 2006 (%) Change Earned premiums Gross premiums earned $239,248 $172,184 38.9% Less: Ceded premiums earned (104,830) (55,641) 88.4% Net premiums earned 134,418 116,543 15.3% Ceded commission revenue 31,266 17,379 79.9% Policy Billing Fees 845 539 56.8% Total Revenues 166,529 134,461 23.8%   Expenses Loss and Loss Adjustment Expenses Gross loss and loss adjustment expenses 124,168 101,874 21.9% Less: Ceded loss and loss adjustment expenses (49,647) (27,239) 82.3% Net loss and loss adjustment expense 74,521 74,635 -0.2% Underwriting Expenses Commissions paid to producers 40,292 27,010 49.2% Other underwriting expenses 32,217 21,684 48.6% Total Underwriting Expenses 72,509 48,694 48.9%   Underwriting Profit $19,499 $11,132 75.2%     Key Measures Written Premiums Gross $259,716 $211,787 22.6% Ceded (142,000) (83,436) 70.2% Net $117,716 $128,351 -8.3% Loss Ratios Gross 51.9% 59.2% Net 55.4% 64.0% Accident Year Loss Ratios Gross 52.4% 59.6% Net 55.5% 63.3% Expense Ratios Gross 30.0% 28.0% Net 30.1% 26.4% Combined Ratios (GAAP) Gross 81.9% 87.2% Net 85.5% 90.4% Insurance Services Segment Results of Operations ($ in thousands)   Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006   Revenues Direct commission revenue from managing general agency $572 $1,105 $1,060 $1,911 Claims administration revenue 535 922 1,100 1,884 Other administrative revenue (1) 347 - 598 - Reinsurance intermediary fees(2) 185 174 341 235 Policy billing fees - 2 - 5 Total Revenues 1,639 2,203 3,099 4,035 Expenses Direct commissions expense paid to producers 144 731 151 1,334 Other insurance services expenses(3) 358 305 615 542 Claims expense reimbursement to TICNY 533 911 1,098 1,869 Total Expenses 1,035 1,947 1,864 3,745 Insurance Services Pre-tax Income $604 $256 $1,235 $290 Premium produced by TRM on behalf of issuing companies $716 $4,834 $661 $8,862   (1)The other administrative revenue includes amounts reimbursed by CastlePoint Reinsurance for services rendered pursuant to a service and expense sharing agreement. (2)The reinsurance intermediary fees include commissions earned for placement of reinsurance on behalf of TICNY and TNIC. (3)Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing agreement and to CastlePoint Reinsurance pursuant to a service and expense sharing agreement. Tower Group, Inc. Consolidated Balance Sheets   (Unaudited) June 30, 2007 December 31, 2006 ($ in thousands, except par value and share amounts) Assets Fixed-maturity securities, available-for-sale, at fair value (amortized cost $578,003 at June 30, 2007 and $416,642 at December 31, 2006) $566,837 $414,567 Equity securities, available-for-sale, at fair value (cost $59,312 at June 30, 2007 and $47,971 at December 31, 2006) 58,756 49,453 Total investments 625,593 464,020 Cash and cash equivalents 64,969 100,598 Investment income receivable 6,453 4,767 Agents' balances receivable 97,701 65,578 Assumed premiums receivable 1,763 77 Ceding commission receivable 4,355 3,237 Reinsurance recoverable 186,859 118,003 Receivable - claims paid by agency 7,779 5,186 Prepaid reinsurance premiums 136,105 94,063 Deferred acquisition costs net of deferred ceding commission revenue 40,118 35,811 Federal and state taxes recoverable 1,910 - Deferred Income taxes 19,015 - Intangible assets 22,314 5,423 Goodwill 9,608 - Fixed assets, net of accumulated depreciation 29,015 20,563 Investment in unconsolidated affiliate 31,459 27,944 Investment in statutory business trusts, equity method 3,036 2,045 Other assets 8,505 6,767 Total Assets $1,296,557 $954,082 Liabilities Loss and loss adjustment expenses $468,910 $302,541 Unearned premium 290,012 227,017 Reinsurance balances payable 61,051 38,560 Payable to issuing carriers 5,919 662 Funds held as agent 6,073 8,181 Funds held under reinsurance agreements 44,641 51,527 Accounts payable and accrued expenses 15,638 18,267 Deferred rent liability 7,371 6,295 Payable for securities 1,836 2,922 Other liabilities 3,645 3,515 Federal and state income taxes payable - 1,163 Deferred income taxes - 1,255 Dividends payable - 212 Subordinated debentures 101,036 68,045 Total Liabilities 1,006,132 730,162 Stockholders' Equity Series A perpetual preferred stock ($0.01 par value per share; 2,000,000 shares authorized; no shares issued and outstanding at June 30, 2007; 40,000 shares issued and outstanding at December 31, 2006; liquidation preference of $1,000 per share, net of $0.4 million of issuance costs) - 39,600 Common stock ($0.01 par value per share; 40,000,000 shares authorized, 23,212,686 and 20,005,758 shares issued at June 30, 2007 and December 31, 2006, respectively, and 23,191,070 and 19,980,306 shares outstanding at June 30, 2007 and December 31, 2006, respectively) 232 200 Paid-in-capital 204,661 113,168 Accumulated other comprehensive net loss (7,927) (437) Retained earnings 93,759 71,596 Treasury stock (21,616 shares at June 30, 2007 and 25,452 at December 31, 2006) (300) (207) Total Stockholders' Equity 290,425 223,920 Total Liabilities and Stockholders' Equity $1,296,557 $954,082 Tower Group, Inc. Consolidated Statements of Income and Comprehensive Net Income (Unaudited)   Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 ($ in thousands, except share and per share amounts) Revenues Net premiums earned $74,035 $59,286 $134,418 $116,542 Ceding commission revenue 17,032 10,077 31,266 17,379 Insurance services revenue 1,639 2,202 3,099 4,031 Net investment income 9,446 5,292 17,401 9,952 Net realized gains (losses) on investments 89 29 72 (116) Policy billing fees 543 274 845 544 Total revenues 102,784 77,160 187,101 148,332 Expenses Loss and loss adjustment expenses 40,611 41,424 74,521 74,634 Direct commission expense 21,808 15,265 40,443 28,345 Other operating expenses 19,432 12,207 34,521 25,591 Interest expense 2,446 1,853 4,530 3,203 Total expenses 84,297 70,749 154,015 131,773   Other Income Equity income in unconsolidated affiliate 734 (54) 1,423 (54) Gain from issuance of common stock of unconsolidated affiliate - 7,883 2,705 7,883 Warrant received from unconsolidated affiliate - 4,605 - 4,605 Income before income taxes 19,221 18,845 37,214 28,993 Income tax expense 6,842 6,560 13,207 10,198 Net income $12,379 $12,285 $24,007 $18,795   Comprehensive Net Income Net income $12,379 $12,285 $24,007 $18,795 Other comprehensive income: Gross unrealized investment holding losses arising during period (11,575) (2,478) (11,029) (5,877) Equity in net unrealized gains in investment in unconsolidated affiliate’s investment portfolio (477) (112) (422) (112) Less: reclassification adjustment for net realized losses included in net income (89) (29) (72) 116 (12,141) (2,619) (11,523) (5,873) Income tax (expense) benefit related to items of other comprehensive income 4,249 917 4,033 1,998 Total other comprehensive net (loss) income (7,892) (1,702) (7,490) (3,875) Comprehensive Net Income $4,487 $10,583 $16,517 $14,920   Earnings Per Share Basic earnings per common share $0.54 $0.62 $1.04 $0.95 Diluted earnings per common share $0.53 $0.61 $1.03 $0.93   Weighted Average Common Shares Outstanding: Basic 22,895,783 19,742,004 22,442,345 19,713,453 Diluted 23,169,573 20,265,054 22,729,005 20,241,611   Dividends declared and paid per common share: Common stock $0.025 $0.025 $0.050 $0.050