Tower Group, Inc. Reports Record Operating Results for the Fourth Quarter and Full Year 2008

Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $15.7 million and diluted earnings per share of $0.68 for the fourth quarter of 2008 and net income of $57.5 million and diluted earnings per share of $2.47 for the full year of 2008.

Net income and diluted earnings per share excluding realized investment gains or losses ⁽¹⁾ were $19.0 million and $0.82, respectively, for the fourth quarter and $66.8 million and $2.87, respectively, for the full year of 2008.

Book value per share increased 7.6% to $14.36 from $13.34 at year end 2007. On February 5, 2009, we closed on our acquisition of CastlePoint in a transaction valued at $533 million which increased book value per share by approximately $4.18 to $18.54 on a pro forma basis as of year end 2008.

Fourth Quarter and Full Year 2008 Key Operating Highlights (all percentage increases compare the fourth quarter and full year results to the corresponding period in 2007):

• Gross premiums written and produced⁽²⁾ increased by 23.8% to $244.1 million in the fourth quarter and by 32.3% to $805.0 million for the full year.
• Our return on equity, excluding realized investment gains or losses⁽¹⁾, was 23.3% in the fourth quarter and 20.7% for the full year.
• Commission and fee based revenue increased by 8.8% to $45.5 million in the fourth quarter and by 40.7% to $149.7 million for the full year.
• Net investment income decreased by 15.0% to $8.2 million in the fourth quarter and by 5.8% to $34.6 million for the full year.
• Net combined ratio was 82.6% for the fourth quarter and 82.4% for the full year.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., stated, "During 2008, many companies in our industry sustained significant losses to their investment portfolios and faced declining underwriting results due to intense competition and losses from Hurricanes Gustav and Ike. Despite these unfavorable economic and market conditions, we achieved another quarter and full year of strong premium growth, steady underwriting profitability and superior return on equity. Furthermore, as a result of the CastlePoint acquisition, we were able to increase our year end pro forma stockholders’ equity by 141% to approximately $744 million from our reported stockholders’ equity of $309 million at year end 2007. The acquisition of Hermitage Insurance Group, which closed last week, also further expands our wholesale distribution system nationally and establishes our retail distribution in the Southeast. Our continued success under these difficult conditions is a testament to the strength of our business model and uniquely positions us to take advantage of market opportunities.”

Note: These results include the effects of our equity income in CastlePoint’s realized investment losses and merger related costs. The losses attributable to these effects were $387,000 for the quarter and $1.8 million for the year.

Fourth Quarter 2008 Highlights

Gross premiums written increased to $176.5 million in the fourth quarter, which was 29.2% higher than in the fourth quarter of 2007.

Total revenues increased 21.2% to $136.4 million in the fourth quarter of 2008 as compared to $112.5 million in the prior year's fourth quarter. Net premiums earned represented 64.3% of total revenues for the three months ended December 31, 2008 compared to 69.8% for the same period in 2007. For the fourth quarter of 2008, we produced $68.2 million of premiums on behalf of CastlePoint Insurance Company through our insurance services segment, resulting in $22.2 million in fee income.

Total commission and fee income increased 8.8% to $45.5 million in the fourth quarter of 2008 compared to $41.8 million in the fourth quarter of 2007.

Net investment income decreased by 15.0% to $8.2 million for the three months ended December 31, 2008 compared to $9.7 million for the same period in 2007. On a tax equivalent basis, the yield was 4.6% as of December 31, 2008 compared to 5.6% as of December 31, 2007. In addition, Tower determined that 21 securities, consisting primarily of residential mortgage backed securities in the amount of $6.6 million, were other-than-temporarily impaired. Including these impairments, Tower had a net realized loss on investments of $5.1 million on a pre-tax basis.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended December 31, 2008 were $81.1 million and 52.7%, respectively, compared to $70.7 million and 49.1%, respectively, in the same period in 2007. The net loss ratio was 50.8% in the three months ended December 31, 2008 and 55.2% in the same period in 2007.

Operating expenses were $65.0 million for the three months ended December 31, 2008 as compared to $55.7 million for the same period in 2007. Our gross expense ratio was 30.2% for the three months ended December 31, 2008 as compared to 28.0% in the same period in 2007. Our net expense ratio was 31.8% for the three months ended December 31, 2008 as compared to 25.7% in the same period in 2007.

Tower’s net income in the fourth quarter was affected by a loss from our 6.7% share of CastlePoint’s net loss resulting from realized investment losses and merger related costs expensed by CastlePoint during the fourth quarter. The equity loss in CastlePoint was $432,000 for the three months ended December 31, 2008 as compared to income of $269,000 for the same period in 2007.

Full Year 2008 Highlights

Gross premiums written increased to $634.8 million in 2008, which was 21.2% higher than in 2007. Policies in-force, including brokerage business managed by Tower on behalf of CastlePoint Insurance Company, increased by 23.7% as of December 31, 2008 compared to December 31, 2007. During the same period, premium increases on renewal business averaged 3.4% in personal lines and premium decreases on renewal business averaged 2.0% in commercial lines. For all brokerage business managed by Tower, the retention rate was 86% in personal lines and 78% in commercial lines.

Total revenues increased 17.7% to $484.4 million for 2008 compared to $411.6 million in 2007. Net premiums earned represented 64.9% of total revenues for 2008 compared to 69.5% in 2007. In 2008, Tower produced $171.7 million in premiums on behalf of CastlePoint Insurance Company through its insurance services segment, resulting in $55.4 million of fee income.

Total commission and fee income increased 40.7% to $149.7 million for 2008 compared to $106.3 million in 2007.

Net investment income decreased 5.8% to $34.6 million for 2008 compared to $36.7 million in 2007. Including impairments of $22.7 million, Tower had a net realized loss on investments of $14.4 million on a pre-tax basis.

Gross loss and loss adjustment expenses and the gross loss ratio for 2008 were $288.3 million and 49.9%, respectively, compared to $264.7 million and 50.7%, respectively, in 2007. The net loss ratio was 51.7% for 2008 and 55.2% in 2007.

Operating expenses increased by 25.6% to $223.9 million for 2008 from $178.3 million in 2007. Our gross expense ratio was 30.4% for 2008 as compared with 29.2% in 2007. Our net expense ratio was 30.7% for 2008 as compared to 28.5% in the same period in 2007.

Additional Highlights and Disclosures:

Closing of CastlePoint Acquisition

On February 5, 2009, Tower Group, Inc. completed the acquisition of CastlePoint Holdings, Ltd. in a transaction valued at $533 million. This transaction was previously announced on August 5, 2008.

Closing of Hermitage Acquisition

On February 27, 2009, Tower Group, Inc. completed the acquisition of HIG, Inc., a specialty property and casualty insurance holding company, from a subsidiary of Brookfield Asset Management Inc. for $130 million. This transaction was previously announced on August 27, 2008.

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 March 27, 2009 to stockholders of record as of March 16, 2009.

2009 Guidance

Tower expects first quarter 2009 diluted earnings per share, excluding realized investment gains and losses and non-recurring transaction expenses⁽³⁾, to be in a range of $0.80 to $0.85 per diluted share. For the full year 2009, Tower projects diluted earnings per share, excluding realized investment gains and losses and non-recurring expenses, to be in a range between $3.10 and $3.30 per diluted share. These projections include a gain on Tower’s investment in CastlePoint resulting from the fair value of the acquired outstanding shares, which is expected to add approximately $0.20 per diluted share in the first quarter of 2009 and approximately $0.17 per diluted share for the full year 2009. These projections also reflect lower expected investment income in 2009 due to higher levels of cash held and the actual timing of the CastlePoint and Hermitage transaction closings, which occurred in February 2009.

⁽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 $1.8 million for the quarter and $5.2 million for the year, which was included in premiums produced by TRM.

⁽³⁾ Expenses related to the adoption of FAS No. 141R, Business Combinations.

About Tower Group, Inc.

Tower Group, Inc. offers property and casualty insurance products and services through its operating subsidiaries. Its insurance company subsidiaries in the U.S. 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 also offers reinsurance solutions to small insurance companies through its Bermuda based reinsurer and U.S. insurance companies. 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" or "continue" or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. 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, 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/

⁽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.