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Tower Group, Inc. Reports First Quarter 2010 Results

NEW YORK, May 10, 2010 (BUSINESS WIRE) -- Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $17.5 million and diluted earnings per share of $0.38 for the first quarter 2010. Operating income (1) and operating earnings per share(1) were $17.8 million and $0.39 respectively for the first quarter of 2010. After-tax catastrophe storm losses amounted to $12.0 million or $0.27 per share. The storm losses added 6.5 points to the first quarter 2010 loss ratio for the combined segments.

Key Highlights (all percentage increases compare the first quarter 2010 results to the results for the same period in 2009 except as noted otherwise): -- Gross premiums written and produced (2) increased by 34.4% to $283.9 million due to significant contributions from acquired companies.

-- For the combined segments, the net combined ratio was 96.8% (including catastrophe losses) compared with 86.7% for the same period last year.

- For the combined segments, the net loss ratio was 63.2% which reflects the storm losses compared with 53.7% for the same period last year. Tower had no catastrophe losses in the first quarter of 2009. - For the combined segments, the net expense ratio was 33.6% compared with 33.0% for the same period last year. Financial Summary ($ in thousands, except per share data): Three Months Ended March 31, ----------------------- 2010 2009 ---------- ---------- Gross premiums written $ 283,084 $ 199,944 Premiums produced by managing general agency 821 10,729 Net premiums written 247,134 186,264 Total commission and fee income 11,515 18,371 Net investment income 23,175 14,533 Net realized investment gains (losses) 740 (672 ) Total revenues 303,476 200,322 Gain on investment in acquired unconsolidated affiliate - 7,388 Other expense (466 ) - Net income 17,472 17,976 Earnings per share--Basic $ 0.39 $ 0.53 Earnings per share--Diluted $ 0.38 $ 0.53 Return on average equity 7.5 % 17.3 % Combined Brokerage and Specialty Segments Net premiums earned 268,046 168,090 Net loss ratio 63.2 % 53.7 % Net expense ratio 33.6 % 33.0 % Brokerage Insurance Segment Net premiums earned 189,427 145,696 Net loss ratio 62.8 % 52.2 % Net expense ratio 35.3 % 32.9 % Specialty Business Segment Net premiums earned 78,619 22,394 Net loss ratio 64.1 % 63.1 % Net expense ratio 29.6 % 33.8 % Reconciliation of non-GAAP financial measures: Net income $ 17,472 $ 17,976 Net realized gains (losses) on investments, net of tax 481 (437 ) Acquisition-related transaction costs, net of tax (3) (794 ) (9,924 ) ------- - ------- - Operating income $ 17,785 $ 28,337 ======= ======= Operating EPS and ROE: Earnings per share--Basic $ 0.39 $ 0.84 Earnings per share--Diluted $ 0.39 $ 0.84 Return on average equity 7.6 % 27.3 % First Quarter 2010 Highlights Gross premiums written increased to $283.1 million in the first quarter of 2010, which was 41.6% higher than in the first quarter of 2009. Excluding Specialty Underwriters' Alliance business, policies in-force for our brokerage business increased by 14.5% as of March 31, 2010 compared to March 31, 2009. During the same period, premiums on renewed Brokerage Insurance segment business increased 3.1% and 0.3%, respectively, in personal and commercial lines, resulting in an overall premium increase on renewal business of 1.3%. For the Brokerage Insurance segment, the retention rate was 90% in personal lines and 80% in commercial lines, resulting in an overall retention rate of 86%.

Total revenues increased 51.5% to $303.5 million in the first quarter of 2010 as compared to $200.3 million in the prior year's first quarter. Net premiums earned represented 88.3% of total revenues for the three months ended March 31, 2010 compared to 83.9% for the same period in 2009.

Total commission and fee income decreased 37.3% to $11.5 million in the first quarter of 2010 compared to $18.4 million in the first quarter of 2009.

Net investment income increased 59.5% to $23.2 million for the three months ended March 31, 2010 compared to $14.5 million for the same period in 2009. On a tax equivalent basis, the book yield was 5.7% as of March 31, 2010 compared to 5.5% as of March 31, 2009. Net realized investment gains were $0.7 million for the three months ended March 31, 2010 compared to a loss of $0.7 million in the same period last year. The first quarter gains include other-than-temporarily impaired losses of $2.9 million as compared to $3.2 million of such losses in the first quarter of 2009.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended March 31, 2010 were $197.0 million and 61.2%, respectively, compared to $129.4 million and 59.9%, respectively, in the same period in 2009.

The net loss ratio was 63.2% in the three months ended March 31, 2010 and 53.7% in the same period in 2009. The first quarter 2010 loss and loss adjustment expenses include $17.5 million of pre-tax losses ($12.0 million after-tax) caused by the March Northeast U.S. storm.

Operating expenses were $102.3 million for the three months ended March 31, 2010 as compared to $74.2 million for the same period in 2009. Our gross expense ratio was 31.2% for the three months ended March 31, 2010 as compared to 32.0% in the same period in 2009. Our net expense ratio was 33.6% for the three months ended March 31, 2010 as compared to 33.0% in the same period in 2009.

Additional Highlights and Disclosures: Stock Repurchase As part of Tower's capital management strategy, the Board of Directors approved a $100 million share repurchase program on February 26, 2010. During the first quarter of 2010, 337,782 shares of common stock were purchased for an aggregate consideration of $7.4 million.

Dividend Declaration Tower's Board of Directors approved a quarterly dividend on April 27, 2010 of $0.07 per share payable on June 25, 2010 to stockholders of record as of June 14, 2010.

2010 Guidance Tower expects second quarter 2010 operating earnings per share to be in a range of $0.55 to $0.60. For the full year 2010, Tower projects its operating earnings per share to be in a range between $2.60 and $2.70. We have revised our earnings guidance for 2010 to reflect the effect of reported catastrophe losses in the first quarter and the closing of the OneBeacon Personal Lines Division transaction, which is now expected to close at the end of the second quarter of 2010.

Notes on Non-GAAP Financial Measures (1) Operating income excludes realized gains and losses and acquisition-related transaction costs, net of tax. This is a common measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, these measures are a key internal management performance standard. 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 month periods ended March 31, 2010 and March 31, 2009, $0.7 million and $7.3 million, respectively, of acquisition-related transaction costs were not deemed deductible for tax purposes. A tax rate of 35% was used for those acquisition-related transaction costs that were tax deductible.

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, 2009, 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/ Brokerage Insurance & Specialty Business Combined ($ in thousands) (Unaudited) Three Months Ended March 31, ----------------------------------------- 2010 2009 Change(%) ------------ ------------ ----------- Revenues Premiums earned Gross premiums earned $ 321,819 $ 216,058 49.0 % Less: ceded premiums earned (53,773 ) (47,968 ) 12.1 % ------- --- ------- --- ----- ---- Net premiums earned 268,046 168,090 59.5 % Ceding commission revenue 10,188 13,574 -25.0 % Policy billing fees 771 532 44.9 % ------- ------- ----- ---- Total 279,005 182,196 53.1 % Expenses Loss and loss adjustment expenses Gross loss and loss adjustment expenses 196,949 129,439 52.2 % Less: ceded loss and loss adjustment expenses (27,613 ) (39,182 ) -29.5 % ------- --- ------- --- ----- ---- Net loss and loss adjustment expenses 169,337 90,256 87.6 % Underwriting expenses Direct commission expense 57,940 44,982 28.8 % Other underwriting expenses 43,185 24,632 75.3 % ------- ------- ----- ---- Total underwriting expenses 101,125 69,614 45.3 % ------- ------- ----- ---- Underwriting profit $ 8,543 $ 22,326 -61.7 % ======= ======= ===== ==== Key Measures Premiums written Gross premiums written $ 283,084 $ 199,944 41.6 % Less: ceded premiums written (35,950 ) (13,680 ) 162.8 % ------- --- ------- --- ----- ---- Net premiums written $ 247,134 $ 186,264 32.7 % ======= ======= ===== ==== Loss Ratios Gross 61.2 % 59.9 % Net 63.2 % 53.7 % Accident Year Loss Ratios Gross 60.7 % 55.5 % Net 63.2 % 57.8 % Underwriting Expense Ratios Gross 31.2 % 32.0 % Net 33.6 % 33.0 % Combined Ratios Gross 92.4 % 91.9 % Net 96.8 % 86.7 % Brokerage Insurance Segment Information ($ in thousands) (Unaudited) Three Months Ended March 31, ----------------------------- 2010 2009 ------------ ------------ Revenues Premiums earned Gross premiums earned $ 237,223 $ 189,914 Less: ceded premiums earned (47,796 ) (44,218 ) ------- --- ------- --- Net premiums earned 189,427 145,696 Ceding commission revenue 8,410 13,112 Policy billing fees 771 532 ------- ------- Total 198,608 159,340 Expenses Loss and loss adjustment expenses Gross loss and loss adjustment expenses 141,185 113,547 Less: ceded loss and loss adjustment expenses (22,229 ) (37,430 ) ------- --- ------- --- Net loss and loss adjustment expenses 118,956 76,117 ------- ------- Underwriting expenses Direct commission expenses 40,671 38,184 Other underwriting expenses 35,441 23,392 ------- ------- Total underwriting expenses 76,112 61,576 ------- ------- Underwriting profit $ 3,540 $ 21,647 ------- ------- Key Measures Premiums written Gross premiums written $ 212,737 $ 170,866 Less: ceded premiums written (30,636 ) (12,656 ) ------- --- ------- --- Net premiums written $ 182,101 $ 158,210 ======= ======= Loss Ratios Gross 59.5 % 59.8 % Net 62.8 % 52.2 % Accident Year Loss Ratios Gross 58.9 % 54.8 % Net 62.8 % 57.0 % Underwriting Expense Ratios Gross 31.8 % 32.1 % Net 35.3 % 32.9 % Combined Ratios Gross 91.3 % 91.9 % Net 98.1 % 85.1 % Specialty Business Segment Information ($ in thousands) (Unaudited) Three Months Ended Ended March 31, ------------------------------ 2010 2009 ------------ ------------ Revenues Premiums earned Gross premiums earned $ 84,596 $ 26,144 Less: ceded premiums earned (5,977 ) (3,750 ) ------ ---- ------ ---- Net premiums earned 78,619 22,394 Ceding commission revenue 1,778 466 ------ ------ Total 80,397 22,860 Expenses Loss and loss adjustment expenses Gross loss and loss adjustment expenses 55,765 15,892 Less: ceded loss and loss adjustment expenses (5,384 ) (1,752 ) ------ ---- ------ ---- Net loss and loss adjustment expenses 50,381 14,140 Underwriting expenses Direct commission expense 17,270 6,798 Other underwriting expenses 7,744 1,240 ------ ------ Total underwriting expenses 25,014 8,038 ------ ------ Underwriting profit $ 5,002 $ 682 ====== ====== Key Measures Premiums written Gross premiums written $ 70,348 $ 29,078 Less: ceded premiums written (5,315 ) (1,024 ) ------ ---- ------ ---- Net premiums written $ 65,033 $ 28,054 ====== ====== Loss Ratios Gross 65.9 % 60.8 % Net 64.1 % 63.1 % Accident Year Loss Ratios Gross 65.9 % 60.8 % Net 64.2 % 63.1 % Underwriting Expense Ratios Gross 29.6 % 30.7 % Net 29.6 % 33.8 % Combined Ratios Gross 95.5 % 91.5 % Net 93.7 % 96.9 % Insurance Services Segment Results of Operations ($ in thousands) (Unaudited) Three Months Ended March 31, ------------------- 2010 2009 --------- ------ Revenue Direct commission revenue from managing general agent $ (52 ) $ 3,107 Claims administration revenue 174 846 Other administration revenue 102 195 Reinsurance intermediary fees 332 94 Policy billing fees - 19 ------ ------ Total revenue 556 4,261 ------ ------ Expenses Direct commission expenses paid to producers 122 1,491 Other insurance services expenses 247 859 Claims expense reimbursement to TICNY 3 846 ------ ------ Total 372 3,196 ------ ------ Insurance services pre-tax income $ 184 $ 1,065 ====== ====== Premiums produced by TRM on behalf of issuing companies $ 821 $ 10,729 ====== ====== Tower Group, Inc. Consolidated Balance Sheets (Unaudited) March 31, December 31, ($ in thousands, except par value and share amounts) 2010 2009 -------------------------------------------------------------------------------------------------- ------------------ -------------------- Assets Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $1,756,831 and $1,729,117) $ 1,833,499 $ 1,783,596 Equity securities, available-for-sale, at fair value (cost of 78,579 76,733 $78,275 and $78,051) Short-term investments, available-for-sale, at fair value (cost of 6,699 36,500 $6,699 and $36,500) ------------------------------------------------------------------------------------------------ --------- --------- Total investments 1,918,777 1,896,829 Cash and cash equivalents 156,855 164,882 Investment income receivable 22,264 20,240 Premiums receivable 300,785 308,075 Reinsurance recoverable on unpaid losses 18,929 14,819 Reinsurance recoverable on paid losses 214,807 199,687 Prepaid reinsurance premiums 76,670 94,818 Deferred acquisition costs, net of deferred ceding commission revenue 174,859 170,652 Deferred income taxes 33,964 41,757 Intangible assets 52,018 53,350 Goodwill 243,748 244,690 Fixed assets, net of accumulated depreciation 71,405 66,429 Other assets 59,013 36,724 -------------------------------------------------------------------------------------------------- --------- --------- Total assets $ 3,344,094 $ 3,312,952 -------------------------------------------------------------------------------------------------- --- --------- ---- --------- Liabilities Loss and loss adjustment expenses $ 1,195,840 $ 1,131,989 Unearned premium 620,401 $ 658,940 Reinsurance balances payable 46,273 89,080 Funds held under reinsurance agreements 60,242 13,737 Accounts payable, accrued liabilities and other liabilities 112,194 133,647 Subordinated debentures 235,058 235,058 -------------------------------------------------------------------------------------------------- --------- --------- Total liabilities 2,270,008 2,262,451 Stockholders' equity Common stock ($0.01 par value; 100,000,000 shares authorized, 45,480,876 and 45,092,321 shares issued, and 44,973,701 and 44,984,953 shares 455 451 outstanding) Treasury stock (507,175 and 107,368 shares) (10,636 ) (1,995 ) Paid-in-capital 754,265 751,878 Accumulated other comprehensive income 50,031 34,554 Retained earnings 279,971 265,613 -------------------------------------------------------------------------------------------------- --------- --------- Total stockholders' equity 1,074,086 1,050,501 -------------------------------------------------------------------------------------------------- --------- --------- Total liabilities and stockholders' equity $ 3,344,094 $ 3,312,952 -------------------------------------------------------------------------------------------------- --- --------- ---- --------- Tower Group, Inc. Consolidated Statements of Income and Comprehensive Income (Unaudited) Three Months Ended March 31, ------------------------------------------ ($ in thousands, except per share and share amounts) 2010 2009 -------------------------------------------------------------------------------------------------- ---------------- ---------------- Revenues Net premiums earned $ 268,046 $ 168,090 Ceding commission revenue 10,188 13,574 Insurance services revenue 556 4,276 Policy billing fees 771 521 Net investment income 23,175 14,533 Net realized investment gains (losses) Other-than-temporary impairments (6,146 ) (8,732 ) Portion of loss recognized in other comprehensive income 3,215 5,506 Other net realized investment gains 3,671 2,554 -------------------------------------------------------------------------- ---------- ---------- Total net realized investment gains (losses) 740 (672 ) -------------------------------------------- ---------- ---------- ---- Total revenues 303,476 200,322 Expenses Loss and loss adjustment expenses 169,337 90,256 Direct and ceding commission expense 58,045 47,408 Other operating expenses 44,208 26,744 Acquisition-related transaction costs 857 11,348 Interest expense 4,881 3,783 -------------------------------------------------------------------------------------------------- ---------- ---------- Total expenses 277,328 179,539 Other Income (expense) Equity in loss of unconsolidated affiliate - (777 ) Gain on investment in acquired unconsolidated affiliate - 7,388 Other expense (466 ) - -------------------------------------------------------------------------------------------------- ---------- ---- ---------- Income before income taxes 25,682 27,394 Income tax expense 8,210 9,418 -------------------------------------------------------------------------------------------------- ---------- ---------- Net income $ 17,472 $ 17,976 -------------------------------------------------------------------------------------------------- ---- ---------- ---- ---------- Gross unrealized investment holding gains arising during periods 23,811 5,067 Cumulative effect of adjustment resulting from adoption of new accounting guidance - (2,497 ) Equity in net unrealized gains on investment in unconsolidated affiliate's investment portfolio - 3,124 Less: reclassification adjustment for (gains) losses included in net income (740 ) 672 Income tax (expense) related to items of other comprehensive income (7,594 ) (2,228 ) -------------------------------------------------------------------------- ---------- ---- ---------- ---- Comprehensive net income $ 32,949 $ 22,114 -------------------------------------------------------------------------------------------------- ---- ---------- ---- ---------- Basic and diluted earnings per share Basic $ 0.39 $ 0.53 Diluted $ 0.38 $ 0.53 -------------------------------------------------------------------------- ---- ---------- ---- ---------- Weighted average common shares outstanding Basic 45,204,427 33,766,141 Diluted 45,406,284 33,918,069 -------------------------------------------------------------------------- ---------- ---------- Dividends declared and paid per common share $ 0.07 $ 0.05 -------------------------------------------------------------------------------------------------- ---- ---------- ---- ---------- SOURCE: Tower Group, Inc.

CONTACT: Tower Group, Inc. Thomas Song, 212-655-4789 Managing Vice President tsong@twrgrp.com Copyright Business Wire 2010 -0- KEYWORD: United States

North America

New York INDUSTRY KEYWORD: Professional Services

Banking

Finance

Insurance SUBJECT CODE: Advisory

Dividend

Earnings

Stock Sale/Buyback

Conference Call

Webcast