Tower Group, Inc. Reports Fourth Quarter and Full Year 2009 Results

Tower Group, Inc. (NASDAQ: TWGP) today reported net income of $30.7 million and diluted earnings per share of $0.72 for the fourth quarter of 2009 and net income of $109.3 million and diluted earnings per share of $2.76 for the full year of 2009.

Tower reported a 67% increase in operating income⁽¹⁾ for the fourth quarter of 2009 to $31.9 million ($0.74 per share) from $19 million in the same period in 2008. For the year, operating income increased 79% to $119.8 million ($3.03 per share) from $66.8 million in 2008. Operating income for the fourth quarter of 2009 includes a $13.2 million bargain purchase gain from the Specialty Underwriter’s Alliance, Inc. ("SUA”) transaction which represents $0.31 per diluted share. Operating income also includes a charge of $11.7 million, net of tax, or $0.27 per diluted share, primarily related to changes in the loss ratio estimates for commercial liability lines of business during the first nine months of 2009.

Key Highlights (all percentage increases compare the fourth quarter and full year 2009 results to the corresponding periods in 2008 except as noted otherwise):

• The total number of outstanding shares in 2009 increased significantly as a result of the acquisitions of CastlePoint Holdings, Ltd. ("CastlePoint”) and SUA. The diluted weighted average common shares outstanding for the fourth quarter of 2009 was 42.9 million compared to 23.5 million during the same period of 2008. For the full year, the diluted weighted average common shares outstanding was 39.6 million compared to 23.5 million in 2008.
• Stockholders’ equity increased by 213% to $1.1 billion at year end 2009 from $335 million at year end 2008; book value per share increased by 62.6% to $23.35 at year end 2009 from $14.36 at year end 2008.
• Gross premiums written and produced⁽²⁾ increased by 34.1% to $327.3 million in the fourth quarter and by 34.5% to $1.1 billion for the full year.
• Tower ceded $87 million of liability lines business written premium during the fourth quarter of 2009 as a result of a 50% quota share reinsurance cession of our in-force, new and renewal premiums in the Brokerage Insurance segment to third party reinsurers.
• For the combined segments, the net combined ratio was 94.7% for the fourth quarter of 2009 compared with 82.6% for the same period last year. For the full year, the net combined ratio was 88.3% in 2009 compared with 82.4% in 2008.
• For the combined segments, the net loss ratio was 62% for the fourth quarter of 2009 compared with 50.8% for the same period last year. The fourth quarter 2009 loss ratio included 7.7% of higher loss ratio estimates primarily from earlier quarters in 2009. For the full year 2009, the net loss ratio was 55.6%, while the net accident year loss ratio was 55.9%.
• For the combined segments, the net expense ratio was 32.7% for the fourth quarter of 2009 compared with 31.8% for the same period last year. For the full year 2009, the net expense ratio was 32.7% compared with 30.7% in 2008.
• Net investment income increased by 157.3% to $21.2 million in the fourth quarter and by 116.6% to $74.9 million for the full year.

Michael H. Lee, President and Chief Executive Officer of Tower Group, Inc., stated, "In 2009, we successfully executed on our strategy to improve our business franchise by significantly increasing our capitalization, further diversifying our product offerings and expanding geographically. In addition, we were able to create value for our shareholders by significantly increasing our book value per share and increasing our earnings per share despite the increased number of shares outstanding as a result of the CastlePoint and SUA acquisitions. In the fourth quarter of 2009, we revised our loss ratio estimates for 2009 which resulted in slightly lower earnings than we had previously projected. This revision required us to revise our earnings guidance for the first two quarters of 2010. We believe we will be on track to meet our previously announced annual earnings guidance for 2010 beginning in the third quarter as we complete SUA’s integration and realize the benefits from the acquisition of OneBeacon’s personal lines division that we announced in February 2010.”

Fourth Quarter 2009 Highlights

Gross premiums written increased to $327.2 million in the fourth quarter of 2009, which was 85.4% higher than in the fourth quarter of 2008. Excluding Hermitage, policies in force for our brokerage business increased by 19.3% in 2009 compared to 2008. During the same period, premium increases on renewal business averaged 2.9% in personal lines and premium decreases on renewal business averaged 1.4% in commercial lines. For all brokerage business managed by Tower, the retention rate was 88% in personal lines and 75% in commercial lines.

Total revenues increased 99.0% to $271.5 million in the fourth quarter of 2009 as compared to $136.4 million in the prior year's fourth quarter. Net premiums earned represented 85.9% of total revenues for the three months ended December 31, 2009 compared to 64.3% for the same period in 2008.

Tower entered into a quota share reinsurance contract ceding our Brokerage Insurance Segment’s liability business in the fourth quarter of 2009. Under this quota share agreement, we ceded 50% of our in-force, new and renewal written and earned premiums on Commercial Multi-Peril and Other Liability policies to third party reinsurers amounting to $86.9 million and $27.2 million, respectively.

Total commission and fee income decreased 60.6% to $17.9 million in the fourth quarter of 2009 compared to $45.5 million in the fourth quarter of 2008.

Net investment income increased 157.3% to $21.2 million for the three months ended December 31, 2009 compared to $8.2 million for the same period in 2008. On a tax equivalent basis, the book yield was 5.5% as of December 31, 2009 compared to 4.6% as of December 31, 2008. Net realized investment losses were $0.8 million for the three months ended December 31, 2009 compared to losses of $5.1 million for the same time period in 2008. Included in the fourth quarter of 2009 realized investment losses are $4.4 million of OTTI losses.

Gross loss and loss adjustment expenses and the gross loss ratio for the three months ended December 31, 2009 were $175.8 million and 58.8%, respectively, compared to $81.1 million and 52.7%, respectively, in the same period in 2008. The net loss ratio was 62.0% in the three months ended December 31, 2009 and 50.8% in the same period in 2008.

Operating expenses were $94.4 million for the three months ended December 31, 2009 as compared to $65.0 million for the same period in 2008. Our gross expense ratio was 30.9% for the three months ended December 31, 2009 as compared to 30.2% in the same period in 2008. Our net expense ratio was 32.7% for the three months ended December 31, 2009 as compared to 31.8% in the same period in 2008.

Other income for the fourth quarter of 2009 includes a gain on bargain purchase of $13.2 million related to the acquisition of SUA.

Additional Highlights and Disclosures:

Stock Repurchase Announced

As part of Tower’s capital management strategy, the Board of Directors approved a $100 million share repurchase program on February 26, 2010. Purchases will be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The program has no expiration date. Based on the closing stock price of Tower common stock on February 26, 2010, the authorized repurchase would represent approximately 9.5% of outstanding shares.

Acquisitions

In October 2009, Tower completed the acquisition of the renewal rights to the workers’ compensation business of AequiCap Program Administrators Inc., an underwriting agency based in Fort Lauderdale, Florida.

In November 2009, Tower completed the acquisition of all issued and outstanding common stock of SUA, for approximately $107 million of Tower’s common stock. After the acquisition, SUA Insurance Company was renamed CastlePoint National Insurance Company, which name change is still pending in some jurisdictions. The acquisition of SUA strengthens Tower’s Specialty Business segment and its regional presence in the Midwest.

On February 2, 2010, Tower announced that it entered into a definitive agreement to purchase the Personal Lines Division of OneBeacon Insurance Group. The transaction involves the acquisition of two insurance companies, two management companies, certain renewal rights and other associated assets.

Dividend Declaration

Tower’s Board of Directors approved a quarterly dividend on February 4, 2010 of $0.07 per share payable March 26, 2010 to stockholders of record as of March 15, 2010.

2010 Guidance

Tower expects first quarter 2010 operating earnings per share to be in a range of $0.65 to $0.70. For the full year 2010, Tower projects its operating earnings per share to be in a range between $3.00 and $3.20. We have revised our earnings guidance for 2010 primarily to reflect the changes in the loss ratio estimates for 2010 made in the fourth quarter of 2009 and the effects of the SUA integration. We believe our operating earnings per share will be in the range of $3.50 to $3.70 for the twelve month period beginning in the third quarter of 2010 after we fully integrate SUA and recognize the benefits from the OneBeacon Personal Line Division transaction, which is expected to close in the second quarter of 2010.

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 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 twelve month periods ended December 31, 2009, $0.3 million and $9.2 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, 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.