Tower Group Reports Net Income Rose 158% in 2Q

August 4, 2006

Tower Group, Inc. reported a 158 percent increase in second quarter of 2006 net income to $12.3 million ($0.61 per diluted share) as compared to net income of $4.8 million ($0.24 per diluted share) in the second quarter of 2005.

For the first six months of 2006, the company said net income increased 122 percent to $18.8 million ($0.93 per diluted share) as compared to $8.5 million ($0.42 per diluted share) for the first six months of 2005.

Tower Group, Inc.’s two insurance company subsidiaries are Tower Insurance Company of New York and Tower National Insurance Company. Both subsidiaries offer commercial insurance products to small to medium-size businesses and personal insurance products to individuals.

“Our second quarter results established new records for both revenue and earnings as reflected by our increasing return on equity. During the quarter, we achieved strong growth in gross and net premiums earned and investment income while continuing to maintain a disciplined underwriting approach,” stated Michael H. Lee, president and chief executive officer. “In addition, we eliminated our exposure to reinsurance recoverables from an unrated reinsurer at favorable terms to further strengthen our balance sheet. This was also our first quarter with CastlePoint Re as our quota share reinsurer, and this relationship further strengthened our business model by supporting our growth and improving our return on average equity to the upper end of our target range for the year.”

Total revenues increased by 53.5% to $77.2 million for the three months ended June 30, 2006 compared to $50.3 million for the same period in 2005. Net premiums earned increased by 57.7% to $59.3 million for the three months ended June 30, 2006 compared to $37.6 million for the same period in 2005. The increase in net premiums earned was due to the overall increase in gross premiums written in the second quarter of 2006 and the novation agreements with PXRE, which added $11.4 million of net premiums earned in the second quarter of 2006.

Total commission and fee income increased by 40.9% to $12.6 million in the second quarter of 2006 compared to $8.9 million in the second quarter of 2005. Net investment income increased by 41.8% to $5.3 million for the three months ended June 30, 2006 compared to $3.7 million for the same period in 2005. On a tax equivalent basis, the investment yield was 5.4% as of June 30, 2006 and 5.1% as of June 30, 2005.

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, 2006 were $58.6 million and 61.3%, respectively, compared to $31.4 million and 57.1%, respectively, for the same period in 2005. The net loss ratio for the combined segments was 69.9% for the three months ended June 30, 2006, which reflected charges resulting from the commutation and novation agreements with PXRE, as compared to 58.6% in the same period of 2005. The effects of these agreements added 12.2% to the net loss ratio for the combined segments for the three months ended June 30, 2006.

Underwriting expenses for the insurance and reinsurance segments combined, which include direct commission expenses and other underwriting expenses, were $25.0 million for the three months ended June 30, 2006 as compared with $16.9 million for the same period in 2005. The gross expense ratio was 25.9% for the three months ended June 30, 2006 as compared with 30.3% for the same period in 2005.

The net underwriting expense ratio, which reflects the benefit of ceding commission revenue that lowers the gross expense ratio, was 24.8% for the three months ended June 30, 2006 as compared to 30.2% for the same period in 2005.

The gross combined ratio was 87.2% for the three months ended June 30, 2006 as compared with 87.4% for the same period in 2005. The net combined ratio was 94.7% for the three months ended June 30, 2006 as compared to 88.8% for the same period in 2005. The effect of the commutation and novation added 13.1% to the net combined ratio.

For the third quarter of 2006, Tower said it projects net income to increase to a range between $8.2 million and $8.7 million.

Source: Tower Group

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