##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act Of 1934
 For the quarterly period ended March 31, 2009
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
 Commission file no. 000-50990
 Tower Group, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3894120(State or other jurisdiction of incorporation
 or organization)
    
    (I.R.S. Employer Identification No.)120 Broadway, 31stFloor 
New York, NY
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000
 
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial statementsConsolidated Balance Sheets  March 31, 2009 (unaudited) and December 31, 2008
    
    
    2Consolidated Statements of Income and Comprehensive Net Income Three months ended March 31, 2009 and 2008 (unaudited)
    
    
    3Consolidated Statements of Changes in Stockholders Equity Three months ended March 31, 2009 and 2008 (unaudited)
    
    
    4Consolidated Statements of Cash Flows Three months ended March 31, 2009 and 2008 (unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4.
    
    Controls and Procedures
    
    
    50PART II
    
    OTHER INFORMATION
    
    
    52Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 6.
    
    Exhibits
    
    
    52SIGNATURES
    
    
    53EX-10.1: EMPLOYMENT AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  1




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
  
 Tower Group, Inc.
Consolidated Balance Sheets
 (Unaudited)March 31,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2009
    
    2008AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,213,629 and $581,470)
    
    $
    1,163,048
    
    
    $
    530,159Equity securities, available-for-sale, at fair value (cost of $14,897 and $12,726)
    
    
    11,658
    
    
    
    10,814Total investments
    
    
    1,174,706
    
    
    
    540,973Cash and cash equivalents
    
    
    304,650
    
    
    
    136,253Receivable for securities
    
    
    51,708
    
    
    
    3,542Investment income receivable
    
    
    12,599
    
    
    
    6,972Premiums receivable
    
    
    181,466
    
    
    
    186,806Reinsurance recoverable
    
    
    128,301
    
    
    
    272,606Prepaid reinsurance premiums
    
    
    59,274
    
    
    
    153,650Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    139,944
    
    
    
    53,080Deferred income taxes
    
    
    71,118
    
    
    
    36,207Intangible assets
    
    
    39,824
    
    
    
    20,464Goodwill
    
    
    234,728
    
    
    
    18,962Fixed assets, net of accumulated depreciation
    
    
    43,651
    
    
    
    39,038Investment in unconsolidated affiliate
    
    
    
    
    
    
    29,293Other assets
    
    
    39,399
    
    
    
    35,167Total assets
    
    $
    2,481,368
    
    
    $
    1,533,013LiabilitiesLoss and loss adjustment expenses
    
    $
    823,232
    
    
    $
    534,991Unearned premium
    
    
    511,936
    
    
    
    328,847Reinsurance balances payable
    
    
    27,510
    
    
    
    134,598Payable to issuing carriers
    
    
    335
    
    
    
    47,301Funds held under reinsurance agreements
    
    
    19,028
    
    
    
    20,474Accounts payable, accrued liabilities and other liabilities
    
    
    77,339
    
    
    
    30,562Subordinated debentures
    
    
    235,058
    
    
    
    101,036Total liabilities
    
    
    1,694,438
    
    
    
    1,197,809Stockholders EquityCommon stock ($0.01 par value; 100,000,000 shares authorized, 40,512,786 and
23,408,145 shares issued, and 40,439,935 and 23,339,470 shares outstanding)
    
    
    405
    
    
    
    234Treasury stock (72,851 and 68,675 shares)
    
    
    (1,320
    )
    
    
    (1,026
    )Paid-in-capital
    
    
    639,848
    
    
    
    208,094Accumulated other comprehensive net loss
    
    
    (34,983
    )
    
    
    (37,498
    )Retained earnings
    
    
    182,980
    
    
    
    165,400Total stockholders equity
    
    
    786,930
    
    
    
    335,204Total liabilities and stockholders equity
    
    $
    2,481,368
    
    
    $
    1,533,013
 See accompanying notes to the consolidated financial statements.
 2




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##### Table of Contents



Tower Group, Inc.  Consolidated Statements of Income and Comprehensive Income
 Three Months Ended($ in thousands, except
    
    March 31,per share and share amounts)
    
    2009
    
    2008RevenuesNet premiums earned
    
    $
    168,090
    
    
    $
    68,430Ceding commission revenue
    
    
    13,574
    
    
    
    20,654Insurance services revenue
    
    
    4,276
    
    
    
    9,660Policy billing fees
    
    
    521
    
    
    
    578Net investment income
    
    
    14,533
    
    
    
    9,796Net realized gains on investments
    
    
    2,554
    
    
    
    3,810Other-than-temporary impairment losses
    
    
    (8,732
    )
    
    
    (2,436
    )Portion of loss recognized in other accumulated
comprehensive net loss
    
    
    5,506
    
    
    
    Net impairment losses recognized in earnings
    
    
    (3,226
    )
    
    
    (2,436
    )Total revenues
    
    
    200,322
    
    
    
    110,492ExpensesLoss and loss adjustment expenses
    
    
    90,256
    
    
    
    37,297Direct and ceding commission expense
    
    
    56,409
    
    
    
    26,608Other operating expenses
    
    
    17,743
    
    
    
    21,666Interest expense
    
    
    3,783
    
    
    
    2,322Total expenses
    
    
    168,191
    
    
    
    87,893Other income (expense)Equity income (loss) in unconsolidated affiliate
    
    
    (777
    )
    
    
    760Acquisition-related transaction costs
    
    
    (11,348
    )
    
    
    Gain on investment in acquired unconsolidated
affiliate
    
    
    7,388
    
    
    
    Income before income taxes
    
    
    27,394
    
    
    
    23,359Income tax expense
    
    
    9,418
    
    
    
    8,506Net income
    
    $
    17,976
    
    
    $
    14,853Gross unrealized investment holding gains (losses)
arising during period
    
    
    2,570
    
    
    
    (12,524
    )Equity in net unrealized (losses) gains in investment in
unconsolidated affiliates investment portfolio
    
    
    3,124
    
    
    
    (784
    )Less: reclassification adjustment for (gains)
included in net income
    
    
    672
    
    
    
    (1,374
    )Income tax (expense) benefit related to items of other
comprehensive income
    
    
    (2,228
    )
    
    
    5,139Comprehensive net income
    
    $
    22,114
    
    
    $
    5,310Basic and diluted earnings per shareBasicCommon stock:Distributed
    
    $
    0.05
    
    
    $
    0.05Undistributed
    
    
    0.48
    
    
    
    0.59Total
    
    
    0.53
    
    
    
    0.64Diluted
    
    $
    0.53
    
    
    $
    0.64Weighted average common shares outstandingBasic
    
    
    33,766,141
    
    
    
    23,214,655Diluted
    
    
    33,918,069
    
    
    
    23,406,916Dividends declared and paid per common shareCommon stock
    
    $
    0.05
    
    
    $
    0.05
 See accompanying notes to the consolidated financial statements.
 3




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##### Table of Contents



Tower Group, Inc.  Consolidated Statements of Changes in Stockholders Equity
 AccumulatedOther
    
    
    
    
    
    TotalCommon Stock
    
    Treasury
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Stockholders($ in thousands)
    
    Shares
    
    Amount
    
    Stock
    
    Capital
    
    Income
    
    Earnings
    
    EquityBalance at December 31, 2007
    
    
    23,225
    
    
    $
    232
    
    
    $
    (493
    )
    
    $
    205,435
    
    
    $
    (8,322
    )
    
    $
    112,535
    
    
    $
    309,387Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,608
    )
    
    
    (4,608
    )Stock based compensation
    
    
    183
    
    
    
    2
    
    
    
    (592
    )
    
    
    2,634
    
    
    
    
    
    
    
    
    
    
    
    2,044Warrant exercise
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    84Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,473
    
    
    
    57,473Net unrealized depreciation on
securities available for sale,
net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,176
    )
    
    
    
    
    
    
    (29,176
    )Balance at December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (37,498
    )
    
    
    165,400
    
    
    
    335,204Cumulative effect of adjustment
resulting from adoption of
FSP FAS 115-2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,623
    )
    
    
    1,623
    
    
    
    Adjusted balance at December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (39,121
    )
    
    
    167,023
    
    
    
    335,204Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,019
    )
    
    
    (2,019
    )Stock based compensation
    
    
    226
    
    
    
    2
    
    
    
    (355
    )
    
    
    1,223
    
    
    
    
    
    
    
    
    
    
    
    870Issuance of common stock
    
    
    16,878
    
    
    
    169
    
    
    
    
    
    
    
    421,454
    
    
    
    
    
    
    
    
    
    
    
    421,623Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,138
    
    
    
    
    
    
    
    
    
    
    
    9,138Warrant exercise
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,976
    
    
    
    17,976Net unrealized depreciation on
securities available for sale,
net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,138
    
    
    
    
    
    
    
    4,138Balance at March 31, 2009
    
    
    40,513
    
    
    $
    405
    
    
    $
    (1,320
    )
    
    $
    639,848
    
    
    $
    (34,983
    )
    
    $
    182,980
    
    
    $
    786,930
 4




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##### Table of Contents



Tower Group, Inc.
Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,($ in thousands)
    
    2009
    
    
    2008Cash flows provided by (used in) operating activities:Net income
    
    $
    17,976
    
    
    $
    14,853Adjustments to reconcile net income to net cash provided by
(used in) operations:(Gain) loss on sale of investments
    
    
    (2,557
    )
    
    
    (1,374
    )(Gain) on
sale of Castle Point
    
    
    (7,388
    )
    
    
    Other-than-temporary-impairment loss on investments
    
    
    3,229
    
    
    
    Depreciation and amortization
    
    
    5,239
    
    
    
    2,605Amortization of bond premium or discount
    
    
    (2,998
    )
    
    
    Amortization of restricted stock
    
    
    1,193
    
    
    
    491Deferred income taxes
    
    
    7,693
    
    
    
    2,482Excess tax benefits from share-based payment arrangements
    
    
    14
    
    
    
    (51
    )(Increase) decrease in assets:Investment income receivable
    
    
    (764
    )
    
    
    Premiums receivable
    
    
    224,693
    
    
    
    7,895Reinsurance recoverable
    
    
    159,864
    
    
    
    (11,823
    )Prepaid reinsurance premiums
    
    
    123,185
    
    
    
    (5,207
    )Deferred acquisition costs, net
    
    
    (8,476
    )
    
    
    (5,612
    )Federal and state income taxes recoverable/payable
    
    
    (276
    )
    
    
    140Intangible assets and goodwill
    
    
    (3,768
    )
    
    
    Other assets
    
    
    4,082
    
    
    
    (939
    )Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    (150,110
    )
    
    
    4,522Unearned premium
    
    
    (102,817
    )
    
    
    2,615Reinsurance balances payable
    
    
    (165,144
    )
    
    
    15,779Payable to issuing carriers
    
    
    (46,966
    )
    
    
    4,446Accounts
payable and accrued expenses
    
    
    159
    
    
    
    (10,970
    )Funds held under reinsurance agreement
    
    
    (1,796
    )
    
    
    (4,652
    )Other
    
    
    
    
    
    
    (756
    )Net cash flows provided by operations
    
    
    54,268
    
    
    
    14,445Cash flows provided by (used in) investing activities:Acquisition of CastlePoint
    
    
    (65,294
    )
    
    
    Acquisition of Hermitage
    
    
    (130,115
    )
    
    
    Purchase of fixed assets
    
    
    (4,421
    )
    
    
    (4,426
    )Purchase  fixed-maturity securities
    
    
    (148,153
    )
    
    
    (115,565
    )Sale or maturity  fixed-maturity securities
    
    
    40,051
    
    
    
    122,363Sale  equity securities
    
    
    28,631
    
    
    
    Net cash flows provided by (used in) investing activities
    
    
    (279,301
    )
    
    
    2,372Cash flows provided by (used in) financing activities:Exercise of stock options & warrants
    
    
    19
    
    
    
    231Excess tax benefits from share-based payment arrangements
    
    
    (14
    )
    
    
    51Treasury stock acquired-net employee share-based compensation
    
    
    (354
    )
    
    
    (180
    )Dividends paid
    
    
    (2,019
    )
    
    
    (1,159
    )Net cash flows (used in) provided by financing activities
    
    
    (2,369
    )
    
    
    (1,057
    )Increase (decrease) in cash and cash equivalents
    
    
    (227,402
    )
    
    
    15,760Cash and cash equivalents, beginning of period (1)
    
    
    532,052
    
    
    
    77,679Cash and cash equivalents, end of period
    
    $
    304,650
    
    
    $
    93,439
 (1)
    
    2009 amount includes $395,664 of cash acquired with the acquisitions of CastlePoint and Hermitage Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    12,080
    
    
    $
    5,139Cash paid for interest
    
    
    3,783
    
    
    
    2,116Schedule of non-cash investing and financing activities:Issuance of common stock in acquisition of CastlePoint
    
    $
    421,623
    
    
    $
    Value of CastlePoint stock options at date of acquisition
    
    
    9,138
    
    
    
    
 See accompanying notes to the consolidated financial statements.
 5




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##### Table of Contents



Tower Group, Inc.  Notes to Unaudited Interim Consolidated Financial Statements
 Note 1Nature of Business
        Note 2Accounting Policies and Basis of Presentation
 Basis of Presentation
  6




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##### Table of Contents



Consolidation
  Loss and Loss Adjustment Expenses (LAE)
    Deferred Acquisition Costs / Commission Revenue
  7




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##### Table of Contents



Use of Estimates
  Accounting Pronouncements
 Effective Date of FASB Statement No. 157
  Business Combinations
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
 Determination of the Useful Life of Intangible
Assets
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That
Are Not Orderly
 
    
    Determine whether there are factors present that indicate that the market for the asset is
not active at the measurement date; and
 8




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##### Table of Contents




    
    Evaluate the quoted price (i.e., a recent transaction or broker price quotation) to
determine whether the quoted price is not associated with a distressed transaction.
  Recognition and
Presentation of Other-Than-Temporary Impairments
 Interim Disclosures about Fair Value
of Financial Instruments
 Note 3Acquisitions
 Acquisition of CastlePoint Holdings, Ltd.
  9




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##### Table of Contents



($ in thousands)Purchase consideration
    
    $
    491,366Fair value of outstanding CastlePoint stock options
    
    
    9,138Total purchase consideration
    
    
    500,504Fair value of investment in CastlePoint
    
    
    34,673Fair value of CastlePoint at acquisition
    
    $
    535,177
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    $
    868
    
    
    $
    484,937
    
    
    $
    1,358
    
    
    $
    487,163Cash and cash equivalents
    
    
    307,632
    
    
    
    
    
    
    
    
    
    
    
    307,632Receivables
    
    
    
    
    
    
    
    
    
    
    211,464
    
    
    
    211,464Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    23,424
    
    
    
    23,424Reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    8,249
    
    
    
    8,249Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    69,253
    
    
    
    69,253Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    27,128
    
    
    
    27,128Goodwill and intangibles
    
    
    
    
    
    
    
    
    
    
    190,923
    
    
    
    190,923Other assets
    
    
    
    
    
    
    
    
    
    
    72,742
    
    
    
    72,742Total assets
    
    
    308,500
    
    
    
    484,937
    
    
    
    604,541
    
    
    
    1,397,978Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    `
    
    
    
    
    
    
    
    290,497
    
    
    
    290,497Unearned premium
    
    
    
    
    
    
    
    
    
    
    242,365
    
    
    
    242,365Other liabilities
    
    
    
    
    
    
    
    
    
    
    130,623
    
    
    
    130,623Subordinated debt
    
    
    
    
    
    
    
    
    
    
    134,022
    
    
    
    134,022Total liabilities
    
    
    
    
    
    
    
    
    
    
    797,507
    
    
    
    797,507Stockholders equity
    
    
    308,500
    
    
    
    484,937
    
    
    
    (192,966
    )
    
    
    600,471Total liabilities and stockholders
equity
    
    $
    308,500
    
    
    $
    484,937
    
    
    $
    604,541
    
    
    $
    1,397,978
  10




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##### Table of Contents



Acquisition of Hermitage
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    $
    151
    
    
    $
    101,940
    
    
    $
    263
    
    
    $
    102,354Cash and cash equivalents
    
    
    88,032
    
    
    
    
    
    
    
    
    
    
    
    88,032Receivables
    
    
    
    
    
    
    
    
    
    
    11,896
    
    
    
    11,896Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    5,385
    
    
    
    5,385Reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    7,310
    
    
    
    7,310Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    10,735
    
    
    
    10,735Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    6,366
    
    
    
    6,366Goodwill and intangibles
    
    
    
    
    
    
    
    
    
    
    44,772
    
    
    
    44,772Other assets
    
    
    
    
    
    
    
    
    
    
    2,075
    
    
    
    2,075Total assets
    
    
    88,183
    
    
    
    101,940
    
    
    
    88,802
    
    
    
    278,925Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    92,105
    
    
    
    92,105Unearned premium
    
    
    
    
    
    
    
    
    
    
    43,541
    
    
    
    43,541Other liabilities
    
    
    
    
    
    
    
    
    
    
    13,166
    
    
    
    13,166Total liabilities
    
    
    
    
    
    
    
    
    
    
    148,812
    
    
    
    148,812Stockholders equity
    
    
    88,183
    
    
    
    101,940
    
    
    
    (60,010
    )
    
    
    130,115Total liabilities and stockholders
equity
    
    $
    88,183
    
    
    $
    101,940
    
    
    $
    88,802
    
    
    $
    278,926
  11




---



##### Table of Contents



($ in thousands)
    
    CastlePoint
    
    HermitageTotal revenue
    
    $
    80,761
    
    
    $
    8,561Net income
    
    
    10,709
    
    
    
    1,706
  Significant Factors Affecting Acquisition Date Fair Values
 Value of Business Acquired (VOBA)
    Intangibles
  Loss
and Loss Adjustment Expense Reserves (LAE) Acquired
  12




---



##### Table of Contents



Non-financial Assets and Liabilities
  Pro forma Results of Operations
  Three Months EndedMarch 31,($ in thousands)
    
    2009
    
    2008Total revenue
    
    $
    245,902
    
    
    $
    195,047Net income
    
    
    17,352
    
    
    
    18,962Net income per share  basic
    
    $
    0.44
    
    
    $
    0.48Net income per share  diluted
    
    $
    0.43
    
    
    $
    0.47Weighted average common shares outstandingBasic
    
    
    39,799,550
    
    
    
    39,798,243Diluted
    
    
    40,305,264
    
    
    
    40,017,386
 Note:
  Note 4Investments
  March 31, 2009
    
    December 31, 2008Cost or
    
    
    
    
    
    Unrealized
    
    Cost or
    
    
    
    
    
    UnrealizedAmortized
    
    Aggregate
    
    Gains/
    
    Amortized
    
    Aggregate
    
    Gains/($ in thousands)
    
    Cost
    
    Fair Value
    
    (Losses)
    
    Cost
    
    Fair Value
    
    (Losses)U.S. Treasury securities
    
    $
    28,320
    
    
    $
    28,770
    
    
    $
    450
    
    
    $
    26,482
    
    
    $
    27,006
    
    
    $
    524U.S. Agency securities
    
    
    23,619
    
    
    
    23,878
    
    
    
    259
    
    
    
    361
    
    
    
    399
    
    
    
    38Municipal bonds
    
    
    306,281
    
    
    
    310,515
    
    
    
    4,234
    
    
    
    179,734
    
    
    
    179,948
    
    
    
    214Corporate and other bondsFinance
    
    
    141,955
    
    
    
    124,295
    
    
    
    (17,660
    )
    
    
    84,579
    
    
    
    74,860
    
    
    
    (9,719
    )Industrial
    
    
    178,754
    
    
    
    168,780
    
    
    
    (9,974
    )
    
    
    122,599
    
    
    
    109,695
    
    
    
    (12,904
    )Utilities
    
    
    25,733
    
    
    
    25,306
    
    
    
    (427
    )
    
    
    2,829
    
    
    
    2,420
    
    
    
    (409
    )Commercial mortgage-backed
securities
    
    
    181,547
    
    
    
    162,440
    
    
    
    (19,107
    )
    
    
    52,558
    
    
    
    31,535
    
    
    
    (21,023
    )Residential mortgage-backed
securitiesAgency backed
    
    
    267,196
    
    
    
    273,045
    
    
    
    5,848
    
    
    
    70,416
    
    
    
    72,179
    
    
    
    1,763Non-agency backed
    
    
    30,907
    
    
    
    20,688
    
    
    
    (10,218
    )
    
    
    31,441
    
    
    
    24,315
    
    
    
    (7,126
    )Asset-backed securities
    
    
    29,317
    
    
    
    25,332
    
    
    
    (3,986
    )
    
    
    10,471
    
    
    
    7,802
    
    
    
    (2,669
    )Total
fixed-maturity
securities
    
    
    1,213,629
    
    
    
    1,163,048
    
    
    
    (50,581
    )
    
    
    581,470
    
    
    
    530,159
    
    
    
    (51,311
    )Preferred stocks
    
    
    14,529
    
    
    
    11,371
    
    
    
    (3,158
    )
    
    
    5,551
    
    
    
    3,694
    
    
    
    (1,857
    )Common stocks
    
    
    368
    
    
    
    287
    
    
    
    (81
    )
    
    
    7,175
    
    
    
    7,120
    
    
    
    (55
    )Total
    
    $
    1,228,526
    
    
    $
    1,174,706
    
    
    $
    (53,820
    )
    
    $
    594,196
    
    
    $
    540,973
    
    
    $
    (53,223
    )
  13




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##### Table of Contents



Three months endedMarch 31,($ in thousands)
    
    2009
    
    2008IncomeFixed-maturity securities
    
    $
    13,969
    
    
    $
    8,992Equity securities
    
    
    315
    
    
    
    385Cash and cash equivalents
    
    
    665
    
    
    
    633Dividends on common trust securities
    
    
    53
    
    
    
    53Total
    
    
    15,002
    
    
    
    10,063ExpensesInvestment expenses
    
    
    469
    
    
    
    267Net investment income
    
    $
    14,533
    
    
    $
    9,796
  Three months endedMarch 31,($ in thousands)
    
    2009
    
    2008Fixed-maturity securitiesGross realized gains
    
    $
    2,489
    
    
    $
    3,906Gross realized losses
    
    
    (136
    )
    
    
    (96
    )2,353
    
    
    
    3,810Equity securitiesGross realized gains
    
    
    262
    
    
    
    Gross realized losses
    
    
    (62
    )
    
    
    200
    
    
    
    Net realized gains (losses) on investments
    
    
    2,554
    
    
    
    3,810Other-than-temporary impairment lossesFixed-maturity securities
    
    
    (3,226
    )
    
    
    Equity securities
    
    
    
    
    
    
    (2,436
    )Total other-than-temporary impairment losses
    
    
    (3,226
    )
    
    
    (2,436
    )Total net realized gains (losses), including other-than
temporary impairment losses
    
    $
    (672
    )
    
    $
    1,374
 Impairment Review
  14




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##### Table of Contents



Recognition and
Presentation of Other-Than-Temporary Impairments,
  Three Months Ended March 31,2009
    
    2008($ in thousands)
    
    No.
    
    Amount
    
    No.
    
    AmountCommercial mortgage-backed securities
    
    
    10
    
    
    $
    (5,521
    )
    
    
    
    
    
    $
    Residential mortgage-backed securities
    
    
    5
    
    
    
    (2,455
    )
    
    
    
    
    
    
    Asset-backed securities
    
    
    8
    
    
    
    (760
    )
    
    
    
    
    
    
    Equities
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (2,436
    )23
    
    
    $
    (8,735
    )
    
    
    7
    
    
    $
    (2,436
    )Portion of loss recognized in accumulated other
comprehensive net loss, principally residential mortgage-backed securities
    
    
    
    
    
    
    5,509
    
    
    
    
    
    
    
    Net impairment losses recognized in earnings
    
    
    
    
    
    $
    (3,226
    )
    
    
    
    
    
    $
    (2,436
    )
  Recognized InOtherComprehensive($ in thousands)
    
    Earnings
    
    Net Loss
    
    TotalBeginning balance, January 1, 2009
    
    $
    25,094
    
    
    $
    
    
    
    $
    25,094Cumulative effect of adjustment resulting from adoption
of FSP 115-2, before income taxes
    
    
    (2,497
    )
    
    
    2,497
    
    
    
    22,597
    
    
    
    2,497
    
    
    
    25,094Other-than-temporary impairment loss
    
    
    3,226
    
    
    
    5,506
    
    
    
    8,732Ending balance, March 31, 2009
    
    $
    25,823
    
    
    $
    8,003
    
    
    $
    33,826
 Unrealized Losses
  15




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##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    Aggregate Fair
    
    Unrealized($ in thousands)
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Value
    
    LossesMarch 31, 2009U.S. Treasury securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    U.S. Agency securities
    
    
    4
    
    
    $
    220
    
    
    $
    (3
    )
    
    
    1
    
    
    $
    976
    
    
    $
    (35
    )
    
    
    5
    
    
    $
    1,196
    
    
    $
    (37
    )Municipal bonds
    
    
    61
    
    
    
    78,436
    
    
    
    (880
    )
    
    
    16
    
    
    
    13,506
    
    
    
    (907
    )
    
    
    77
    
    
    
    91,942
    
    
    
    (1,787
    )Corporate and other bondsFinance
    
    
    109
    
    
    
    60,201
    
    
    
    (9,039
    )
    
    
    47
    
    
    
    27,969
    
    
    
    (9,689
    )
    
    
    156
    
    
    
    88,170
    
    
    
    (18,728
    )Industrial
    
    
    101
    
    
    
    74,798
    
    
    
    (4,398
    )
    
    
    56
    
    
    
    34,139
    
    
    
    (6,516
    )
    
    
    157
    
    
    
    108,937
    
    
    
    (10,914
    )Utilities
    
    
    15
    
    
    
    10,787
    
    
    
    (242
    )
    
    
    8
    
    
    
    3,550
    
    
    
    (321
    )
    
    
    23
    
    
    
    14,336
    
    
    
    (563
    )Commercial mortgage-
backed securites
    
    
    34
    
    
    
    39,689
    
    
    
    (4,939
    )
    
    
    26
    
    
    
    16,014
    
    
    
    (19,929
    )
    
    
    60
    
    
    
    55,703
    
    
    
    (24,867
    )Residential mortgage-
backed securitesAgency backed
    
    
    9
    
    
    
    4,274
    
    
    
    (11
    )
    
    
    5
    
    
    
    4,741
    
    
    
    (15
    )
    
    
    14
    
    
    
    9,016
    
    
    
    (26
    )Non-agency backed
    
    
    24
    
    
    
    5,673
    
    
    
    (3,295
    )
    
    
    25
    
    
    
    14,154
    
    
    
    (7,199
    )
    
    
    49
    
    
    
    19,828
    
    
    
    (10,494
    )Asset-backed securities
    
    
    12
    
    
    
    3,749
    
    
    
    (869
    )
    
    
    13
    
    
    
    4,915
    
    
    
    (3,204
    )
    
    
    25
    
    
    
    8,664
    
    
    
    (4,073
    )Total fixed maturity
securities
    
    
    369
    
    
    
    277,828
    
    
    
    (23,674
    )
    
    
    197
    
    
    
    119,965
    
    
    
    (47,815
    )
    
    
    566
    
    
    
    397,792
    
    
    
    (71,489
    )Preferred stocks
    
    
    8
    
    
    
    6,813
    
    
    
    (467
    )
    
    
    6
    
    
    
    2,853
    
    
    
    (2,698
    )
    
    
    14
    
    
    
    9,666
    
    
    
    (3,165
    )Common stocks
    
    
    4
    
    
    
    43
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    43
    
    
    
    (120
    )Total
    
    
    381
    
    
    $
    284,684
    
    
    $
    (24,262
    )
    
    
    203
    
    
    
    122,818
    
    
    
    (50,513
    )
    
    
    584
    
    
    $
    407,501
    
    
    $
    (74,775
    )December 31, 2008U.S. Treasury securitiesU.S. Agency securitiesMunicipal bonds
    
    
    53
    
    
    $
    49,879
    
    
    $
    (2,485
    )
    
    
    1
    
    
    $
    371
    
    
    $
    (166
    )
    
    
    54
    
    
    $
    50,250
    
    
    $
    (2,651
    )Corporate and other bondsFinance
    
    
    55
    
    
    
    42,007
    
    
    
    (6,003
    )
    
    
    38
    
    
    
    20,575
    
    
    
    (4,173
    )
    
    
    93
    
    
    
    62,582
    
    
    
    (10,176
    )Industrial
    
    
    110
    
    
    
    72,787
    
    
    
    (7,740
    )
    
    
    32
    
    
    
    17,701
    
    
    
    (5,639
    )
    
    
    142
    
    
    
    90,488
    
    
    
    (13,379
    )Utilities
    
    
    5
    
    
    
    1,974
    
    
    
    (205
    )
    
    
    2
    
    
    
    446
    
    
    
    (204
    )
    
    
    7
    
    
    
    2,420
    
    
    
    (409
    )Commercial mortgage-
backed securites
    
    
    15
    
    
    
    13,997
    
    
    
    (4,399
    )
    
    
    22
    
    
    
    16,431
    
    
    
    (16,626
    )
    
    
    37
    
    
    
    30,427
    
    
    
    (21,026
    )Residential mortgage-
backed securitesAgency backed
    
    
    6
    
    
    
    3,408
    
    
    
    (16
    )
    
    
    1
    
    
    
    582
    
    
    
    (20
    )
    
    
    7
    
    
    
    3,990
    
    
    
    (36
    )Non-agency backed
    
    
    32
    
    
    
    12,676
    
    
    
    (3,536
    )
    
    
    16
    
    
    
    9,953
    
    
    
    (3,594
    )
    
    
    48
    
    
    
    22,629
    
    
    
    (7,130
    )Asset-backed securities
    
    
    20
    
    
    
    6,481
    
    
    
    (2,652
    )
    
    
    2
    
    
    
    552
    
    
    
    (49
    )
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701
    )Total fixed maturity
securities
    
    
    296
    
    
    
    203,208
    
    
    
    (27,037
    )
    
    
    114
    
    
    
    66,610
    
    
    
    (30,472
    )
    
    
    410
    
    
    
    269,818
    
    
    
    (57,508
    )Preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )Common stocks
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )Total
    
    
    297
    
    
    $
    204,648
    
    
    $
    (27,096
    )
    
    
    120
    
    
    $
    70,304
    
    
    $
    (32,329
    )
    
    
    417
    
    
    $
    274,952
    
    
    $
    (59,424
    )
    16




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##### Table of Contents



Securitized AssetsTotal Gross
    
    Decline of Investment ValueFair
    
    Unrealized
    
    >15%
    
    >25%
    
    >50%($ in thousands)
    
    Value
    
    Losses
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountUnrealized loss for less than 6 months
    
    $
    44,103
    
    
    $
    (3,867
    )
    
    
    3
    
    
    $
    (839
    )
    
    
    4
    
    
    $
    (109
    )
    
    
    3
    
    
    $
    (168
    )Unrealized loss for over 6 months
    
    
    11,532
    
    
    
    (4,202
    )
    
    
    1
    
    
    
    (77
    )
    
    
    11
    
    
    
    (3,119
    )
    
    
    4
    
    
    
    (668
    )Unrealized loss for over 12 months
    
    
    17,248
    
    
    
    (10,220
    )
    
    
    4
    
    
    
    (670
    )
    
    
    16
    
    
    
    (4,245
    )
    
    
    6
    
    
    
    (4,535
    )Unrealized loss for over 18 months
    
    
    9,863
    
    
    
    (12,383
    )
    
    
    1
    
    
    
    (324
    )
    
    
    3
    
    
    
    (2,419
    )
    
    
    13
    
    
    
    (9,613
    )Unrealized loss for over 2 years
    
    
    10,464
    
    
    
    (8,788
    )
    
    
    1
    
    
    
    (268
    )
    
    
    7
    
    
    
    (1,621
    )
    
    
    10
    
    
    
    (6,610
    )$
    93,211
    
    
    $
    (39,460
    )
    
    
    10
    
    
    $
    (2,178
    )
    
    
    41
    
    
    $
    (11,513
    )
    
    
    36
    
    
    $
    (21,594
    )All Other AssetsTotal Gross
    
    Decline of Investment ValueFair
    
    Unrealized
    
    >15%
    
    >25%
    
    >50%($ in thousands)
    
    Value
    
    Losses
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountUnrealized loss for less than 6 months
    
    $
    176,410
    
    
    $
    (7,578
    )
    
    
    21
    
    
    $
    (1,381
    )
    
    
    14
    
    
    $
    (2,207
    )
    
    
    3
    
    
    $
    (112
    )Unrealized loss for over 6 months
    
    
    49,356
    
    
    
    (6,705
    )
    
    
    10
    
    
    
    (676
    )
    
    
    7
    
    
    
    (1,566
    )
    
    
    4
    
    
    
    (2,210
    )Unrealized loss for over 12 months
    
    
    49,848
    
    
    
    (10,141
    )
    
    
    8
    
    
    
    (994
    )
    
    
    10
    
    
    
    (4,862
    )
    
    
    5
    
    
    
    (1,644
    )Unrealized loss for over 18 months
    
    
    19,112
    
    
    
    (4,535
    )
    
    
    5
    
    
    
    (529
    )
    
    
    13
    
    
    
    (2,899
    )
    
    
    2
    
    
    
    (390
    )Unrealized loss for over 2 years
    
    
    19,564
    
    
    
    (6,356
    )
    
    
    1
    
    
    
    (98
    )
    
    
    11
    
    
    
    (3,169
    )
    
    
    3
    
    
    
    (2,276
    )$
    314,290
    
    
    $
    (35,315
    )
    
    
    45
    
    
    $
    (3,678
    )
    
    
    55
    
    
    $
    (14,703
    )
    
    
    17
    
    
    $
    (6,632
    )
  Note 5Fair Value Measurements
   Level 1
 Level 2
 17




---



##### Table of Contents



Level 3
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalFixed-maturity investmentsU.S. Treasury securities
    
    $
    
    
    
    $
    28,770
    
    
    $
    
    
    
    $
    28,770U.S. Agency securities
    
    
    
    
    
    
    23,878
    
    
    
    
    
    
    
    23,878Municipal bonds
    
    
    
    
    
    
    310,515
    
    
    
    
    
    
    
    310,515Corporate and other bonds
    
    
    
    
    
    
    318,381
    
    
    
    
    
    
    
    318,381Commercial mortgage-backed securities
    
    
    
    
    
    
    158,355
    
    
    
    4,085
    
    
    
    162,440Residential mortgage-backed securitiesAgency
    
    
    
    
    
    
    273,045
    
    
    
    
    
    
    
    273,045Non-agency
    
    
    
    
    
    
    14,150
    
    
    
    6,537
    
    
    
    20,687Asset-backed securities
    
    
    
    
    
    
    21,216
    
    
    
    4,116
    
    
    
    25,332Total fixed maturities
    
    
    
    
    
    
    1,148,310
    
    
    
    14,737
    
    
    
    1,163,048Equity investments
    
    
    3,871
    
    
    
    7,787
    
    
    
    
    
    
    
    11,658Total
    
    $
    3,871
    
    
    $
    1,156,097
    
    
    $
    14,737
    
    
    $
    1,174,706
   ($ in thousands)Beginning balance
    
    $
    18,084Total gains (losses)-realized / unrealized
Included in net income
    
    
    (3,226
    )Included in other comprehensive income (loss)
    
    
    (1,168
    )Purchases, issuances and settlements
    
    
    114Net transfers into (out of) Level 3
    
    
    933Ending balance
    
    $
    14,737
 Note 6Goodwill and Intangible Assets
 Goodwill
  Brokerage
    
    Specialty
    
    Insurance($ in thousands)
    
    Insurance
    
    Business
    
    Services
    
    TotalBalance, January 1, 2009
    
    $
    18,962
    
    
    $
    
    
    
    $
    
    
    
    $
    18,962Additions (a)
    
    
    161,219
    
    
    
    54,547
    
    
    
    
    
    
    
    215,766Balance, March 31, 2009
    
    $
    180,181
    
    
    $
    54,547
    
    
    $
    
    
    
    $
    234,728
 (a)
    
    In 2009, primarily relates to the acquisition of CastlePoint and Hermitage. 18




---



##### Table of Contents



Intangibles
     March 31, 2009
    
    December 31, 2008Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetUseful
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    Carrying($ in thousands)
    
    Life (in yrs)
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountInsurance licenses
    
    
    
    
    
    $
    10,603
    
    
    $
    
    
    
    $
    10,603
    
    
    $
    6,503
    
    
    $
    
    
    
    $
    6,503Customer relationships
    
    
    10-20
    
    
    
    30,580
    
    
    
    (3,648
    )
    
    
    26,932
    
    
    
    17,090
    
    
    
    (3,129
    )
    
    
    13,961Trademarks
    
    
    5
    
    
    
    2,340
    
    
    
    (51
    )
    
    
    2,289
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    43,523
    
    
    $
    (3,699
    )
    
    $
    39,824
    
    
    $
    23,593
    
    
    $
    (3,129
    )
    
    $
    20,464
  ($ in thousands)2009
    
    $
    2,6312010
    
    
    3,5912011
    
    
    3,1352012
    
    
    2,7692014
    
    
    2,4782013
    
    
    1,832
 19




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##### Table of Contents



Note 7Investment in Unconsolidated AffiliateCastlePoint
  ($ in millions)Carrying value of equity investment, January 1, 2009
    
    $
    29.3Equity in net loss of CastlePoint
    
    
    (0.8
    )Equity in net unrealized gain / (loss) of the CastlePoint investment portfolio
    
    
    (0.8
    )Dividends received from CastlePoint
    
    
    (0.1
    )Acquisition of CastlePoint by Tower on February 5, 2009
    
    
    (27.6
    )Carrying value of equity investment, March 31, 2009
    
    $
    0.0
   Affiliated Agreements with CastlePoint
  Master Agreement
  Reinsurance Agreements
   20




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##### Table of Contents



Ceded
    
    Ceded
    
    Ceding
    
    CedingPremiums
    
    Premiums
    
    Commissions
    
    Commission($ in thousands)
    
    Written
    
    Earned
    
    Revenue
    
    PercentageJanuary 1 - February 5, 2009Brokerage business
    
    $
    (407
    )
    
    $
    8,989
    
    
    $
    3,232
    
    
    
    36.0
    %Traditional program business
    
    
    109
    
    
    
    490
    
    
    
    155
    
    
    
    31.6
    %Specialty program business and
insurance risk-sharing business
    
    
    (805
    )
    
    
    4,600
    
    
    
    1,574
    
    
    
    34.2
    %Total
    
    $
    (1,103
    )
    
    $
    14,079
    
    
    $
    4,961
    
    
    
    35.2
    %Three months ended March 31, 2008Brokerage business
    
    $
    45,544
    
    
    $
    52,348
    
    
    $
    16,407
    
    
    
    36.0
    %Traditional program business
    
    
    2,524
    
    
    
    1,178
    
    
    
    819
    
    
    
    32.5
    %Specialty program business and
insurance risk-sharing business
    
    
    8,008
    
    
    
    3,265
    
    
    
    3,145
    
    
    
    39.3
    %Total
    
    $
    56,076
    
    
    $
    56,791
    
    
    $
    20,371
    
    
    
    36.3
    %
   TICNY Service and Expense Sharing Agreements
  TRM Service and Expense Sharing Agreements
  Note 8Other Assets
 (Unaudited)March 31,
    
    December 31,($ in thousands)
    
    2009
    
    2008Assumed premiums receivable
    
    $
    6,924
    
    
    $
    1,837Receivable  claims paid by agency
    
    
    5,049
    
    
    
    4,639Federal and
state taxes recoverable
    
    
    243
    
    
    
    Investment in statutory business trusts, equity method
    
    
    7,058
    
    
    
    3,036Deferred merger and acquisition expenses
    
    
    
    
    
    
    9,412Prepaids, deposits and advances
    
    
    6,060
    
    
    
    4,006Receivable from residual market plans
    
    
    2,778
    
    
    
    2,818Commission receivable from issuing carriers
    
    
    5,965
    
    
    
    7,887Other
    
    
    5,323
    
    
    
    1,532Other assets
    
    $
    39,400
    
    
    $
    35,167
 21




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##### Table of Contents



Note 9Loss and Loss Adjustment Expenses
    ($ in thousands)Balance at January 1, 2009
    
    $
    534,991Less reinsurance recoverables
    
    
    (222,229
    )312,762CastlePoint net reserves at date of acquisition
    
    
    282,434Hermitage net reserves at date of acquisition
    
    
    87,567Incurred related to:Current year
    
    
    93,239Prior years
    
    
    (2,982
    )Total incurred
    
    
    90,257Paid related to:Current year
    
    
    11,830Prior years
    
    
    46,603Total paid
    
    
    58,433Net balance
at end of period
    
    
    714,587Add reinsurance recoverables
    
    
    108,645Balance at March 31, 2009
    
    $
    823,232
 Note 10Accounts Payable, Accrued Liabilities and Other Liabilities
 (Unaudited)March 31,
    
    December 31,($ in thousands)
    
    2009
    
    2008Accounts payable and accrued expenses
    
    $
    28,214
    
    
    $
    12,470Funds held as agent
    
    
    3,089
    
    
    
    3,516Deferred rent liability
    
    
    6,918
    
    
    
    7,014Payable for securities
    
    
    19,492
    
    
    
    561Federal income taxes payable
    
    
    6,018
    
    
    
    Other
    
    
    13,608
    
    
    
    7,001Accounts payable, accrued expenses and other liabilities
    
    $
    77,339
    
    
    $
    30,562
 Note 11Debt
 Subordinated Debentures
  22




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##### Table of Contents



PrincipalAmount of
    
    Amount ofInvestment in
    
    JuniorCommon
    
    SubordinatedSecurities of
    
    DebentureIssue Date
    
    Amount
    
    Issuer
    
    Maturity Date
    
    Early Redemption
    
    Interest Rate
    
    Trust
    
    Issued to TrustSeptember 2007
    
    $30.0 million
    
    CastlePoint Bermuda
Capital 
Trust I
    
    September 2037
    
    At our option at
par on or after
September 27, 2012
    
    8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
    
    $0.9 million
    
    $30.9 millionDecember 2006
    
    $50.0 million
    
    CastlePoint
Management
Statutory Trust II
    
    December 2036
    
    At our option at
par on or after
December 14, 2011
    
    8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter
    
    $1.6 million
    
    $51.6 millionDecember 2006
    
    $50.0 million
    
    CastlePoint
Management
Statutory Trust I
    
    December 2036
    
    At our option at
par on or after
December 1, 2011
    
    8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
    
    $1.6 million
    
    $51.6 million
   ($ in thousands)2033
    
    $
    20,6202034
    
    
    25,7752035
    
    
    13,4032036
    
    
    123,7412037
    
    
    51,519$
    235,058
 Note 12Stockholders Equity
 Authorized Shares of Common Stock
  23




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##### Table of Contents



Shares of Common Stock Issued
  Warrants
  Warrants
    
    TreasuryExercise Date
    
    Exercised by
    
    Exercise Type
    
    Surrendered
    
    Shares IssuedJanuary 2, 2009
    
    FBR employee
    
    Cashless
    
    
    5,000
    
    
    
    3,211March 2, 2009
    
    FBR employee
    
    Cashless
    
    
    6,000
    
    
    
    3,945March 30, 2009
    
    FBR employee
    
    Cashless
    
    
    6,000
    
    
    
    3,823
  Dividends Declared
  Note 13Stock Based Compensation
 Restricted Stock Awards
   Three Months Ended March 31,2009
    
    2008Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber of
    
    Grant Date
    
    Number of
    
    Grant DateShares
    
    Fair Value
    
    Shares
    
    Fair ValueOutstanding, January 1
    
    
    258,645
    
    
    $
    24.97
    
    
    
    195,468
    
    
    $
    24.97Granted
    
    
    302,459
    
    
    
    22.79
    
    
    
    132,358
    
    
    
    32.20Vested
    
    
    (60,091
    )
    
    
    25.79
    
    
    
    (26,418
    )
    
    
    15.11Forfeitures
    
    
    (3,193
    )
    
    
    
    
    
    
    (442
    )
    
    
    22.59Outstanding, March 31
    
    
    497,820
    
    
    $
    26.05
    
    
    
    300,966
    
    
    $
    24.97
 Stock Options
  24




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##### Table of Contents



Three Months Ended March 31,2009
    
    2008Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, January 1
    
    
    258,530
    
    
    $
    5.57
    
    
    
    281,896
    
    
    $
    4.94Granted at fair value
    
    
    1,148,308
    
    
    
    20.61
    
    
    
    
    
    
    
    Exercised
    
    
    (7,000
    )
    
    
    2.78
    
    
    
    (23,366
    )
    
    
    2.78Forfeitures and expirations
    
    
    (122,892
    )
    
    
    21.98
    
    
    
    
    
    
    
    Outstanding, March 31
    
    
    1,276,946
    
    
    $
    17.51
    
    
    
    258,530
    
    
    $
    5.57Exercisable, March 31
    
    
    710,479
    
    
    $
    15.34
    
    
    
    233,296
    
    
    $
    4.95
        Note 14Income Taxes
  25




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##### Table of Contents



March 31,
    
    December 31,($ in thousands)
    
    2009
    
    2008Deferred tax asset:Claims reserve discount
    
    $
    26,217
    
    
    $
    11,863Unearned premium
    
    
    31,798
    
    
    
    12,837Allowance for doubtful accounts
    
    
    151
    
    
    
    136Equity compensation plans
    
    
    4,438
    
    
    
    273Net unrealized depreciation of securities
    
    
    18,634
    
    
    
    18,919Investment impairments
    
    
    8,655
    
    
    
    8,680Net operating loss carryforwards
    
    
    19,678
    
    
    
    13,632Capital loss carryforwards
    
    
    
    
    
    
    2,848Other
    
    
    7,744
    
    
    
    514Total deferred tax assets
    
    
    117,317
    
    
    
    69,702Deferred tax liability:Deferred acquisition costs net of deferred ceding commission revenue
    
    
    34,222
    
    
    
    18,578Depreciation and amortization
    
    
    9,659
    
    
    
    7,096Warrant received from unconsolidated affiliate
    
    
    
    
    
    
    1,612Gain from issuance of common stock by unconsolidated affiliate
    
    
    
    
    
    
    3,706Equity income in unconsolidated affiliate
    
    
    
    
    
    
    1,111Salvage and subrogation
    
    
    764
    
    
    
    764Accrual of bond discount
    
    
    641
    
    
    
    628Other
    
    
    913
    
    
    
    Total deferred tax liabilities
    
    
    46,199
    
    
    
    33,495Net deferred income tax asset
    
    $
    71,118
    
    
    $
    36,207
      26




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##### Table of Contents



Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
   Note
15Security Requirements
  Note 16Fair Value of Financial Instruments
  Equity and fixed income investments:
 Common trust securitiesstatutory business trusts:
 Agents balances receivable, assumed premiums receivable, receivable-claims paid by agency:
 Reinsurance balances payable, payable to issuing carrier and funds held:
 Subordinated debentures:
 Note 17Earnings per Share


27



---



##### Table of Contents



Three Months Ended March 31,($ in thousands, except share and per share amounts)
    
    2009
    
    2008NumeratorNet income
    
    $
    17,976
    
    
    $
    14,853DenominatorWeighted average common shares outstanding
    
    
    33,766,141
    
    
    
    23,214,655Effect of dilutive securities:Stock options
    
    
    132,895
    
    
    
    146,167Restricted stock units
    
    
    7,335
    
    
    
    20,915Warrants
    
    
    11,733
    
    
    
    25,179Weighted average common and potential dilutive shares outstanding
    
    
    33,918,103
    
    
    
    23,406,916Earnings per share  basicCommon stock:Distributed earnings
    
    $
    0.05
    
    
    $
    0.05Undistributed earnings
    
    
    0.48
    
    
    
    0.59Total
    
    
    0.53
    
    
    
    0.64Earnings per share  diluted
    
    $
    0.53
    
    
    $
    0.64
 Note 18Changes in Estimates
   Note 19Segment Information
   28




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##### Table of Contents



Three Months EndedMarch 31,($ in thousands)
    
    2009
    
    2008Brokerage Insurance SegmentRevenuesNet premiums earned
    
    $
    127,311
    
    
    $
    66,330Ceding commission revenue
    
    
    10,668
    
    
    
    18,408Policy billing fees
    
    
    532
    
    
    
    502Total revenues
    
    
    138,511
    
    
    
    85,240ExpensesNet loss and loss adjustment expenses
    
    
    65,908
    
    
    
    36,062Underwriting expenses
    
    
    53,292
    
    
    
    39,269Total expenses
    
    
    119,200
    
    
    
    75,331Underwriting profit
    
    $
    19,311
    
    
    $
    9,909Specialty Business SegmentRevenuesNet premiums earned
    
    $
    40,779
    
    
    $
    2,100Ceding commission revenue
    
    
    2,910
    
    
    
    2,246Total revenues
    
    
    43,689
    
    
    
    4,346ExpensesNet loss and loss adjustment expenses
    
    
    24,349
    
    
    
    1,235Underwriting expenses
    
    
    16,322
    
    
    
    2,717Total expenses
    
    
    40,671
    
    
    
    3,952Underwriting profit
    
    $
    3,018
    
    
    $
    394Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    3,107
    
    
    $
    8,164Claims administration revenue
    
    
    846
    
    
    
    957Other administration revenue
    
    
    195
    
    
    
    372Reinsurance intermediary fees
    
    
    94
    
    
    
    168Policy billing fees
    
    
    19
    
    
    
    76Total revenues
    
    
    4,261
    
    
    
    9,737ExpensesDirect commission expense paid to producers
    
    
    1,491
    
    
    
    3,370Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    859
    
    
    
    1,574Claims expense reimbursement to TICNY
    
    
    846
    
    
    
    957Total expenses
    
    
    3,196
    
    
    
    5,901Insurance services pretax income
    
    $
    1,065
    
    
    $
    3,836
 29




---



##### Table of Contents



Three Months EndedMarch 31,($ in thousands)
    
    2009
    
    2008Brokerage insurance segment
    
    $
    138,511
    
    
    $
    85,240Specialty business segment
    
    
    43,689
    
    
    
    4,346Reinsurance segmentInsurance services  segment
    
    
    4,261
    
    
    
    9,736Total segment revenues
    
    
    186,461
    
    
    
    99,322Net investment income
    
    
    14,533
    
    
    
    9,796Net realized gains (losses) on investments, including other-than-temporary impairments
    
    
    (672
    )
    
    
    1,374Consolidated revenues
    
    $
    200,322
    
    
    $
    110,492
  Three Months EndedMarch 31,($ in thousands)
    
    2009
    
    2008Brokerage insurance segment underwriting profit
    
    $
    19,311
    
    
    $
    9,909Specialty business segment underwriting profit
    
    
    3,018
    
    
    
    394Insurance services segment pretax income
    
    
    1,065
    
    
    
    3,834Net investment income
    
    
    14,533
    
    
    
    9,796Net realized gains (losses) on investments, including impairment losses
    
    
    (672
    )
    
    
    1,374Corporate expenses
    
    
    (1,341
    )
    
    
    (386
    )Interest expense
    
    
    (3,783
    )
    
    
    (2,322
    )Other income (loss) *
    
    
    (4,737
    )
    
    
    760Income before taxes
    
    $
    27,394
    
    
    $
    23,359
 
 *
    
    See Note 3Acquisitions and Note 7Investment in Unconsolidated AffiliateCastlePoint Note 20Subsequent Events
 Dividends
  30




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note on Forward-Looking Statements
   
    
    ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions;
    
    developments that may delay or limit our ability to enter new markets as quickly as we
anticipate;
    
    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 acceptance of our 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;
    
    changes in the percentage of our premiums written that we cede to reinsurers;
    
    decreased demand for our insurance or reinsurance products;
    
    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;
    
    changes in general economic conditions, including inflation, interest rates and other
factors;
    
    disruptions in Towers business arising from the integration of CastlePoint and Hermitage
into Tower;
    
    increases in Towers exposure to risk of loss arising from the CastlePoint merger or the
Hermitage acquisition;
    
    the possibility that Tower will incur significant charges on writing down the goodwill and
intangibles established in connection with the CastlePoint merger and the Hermitage
acquisition if CastlePoints or Hermitages businesses do not perform well or Tower does not
integrate CastlePoints and Hermitages businesses successfully; and
    
    the absence at Hermitage of internal controls over financial
reporting that meet the
standard required of a publicly traded company.
 31




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##### Table of Contents



Critical Accounting Policies
  Consolidated Results of Operations
    32




---



##### Table of Contents



Three Months EndedMarch 31,($ in millions)
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    216.1
    
    
    $
    135.1
    
    
    $
    80.9
    
    
    
    59.9
    %Less: Ceded premiums earned
    
    
    (48.0
    )
    
    
    (66.7
    )
    
    
    18.7
    
    
    
    (28.1
    %)Net premiums earned
    
    
    168.1
    
    
    
    68.4
    
    
    
    99.7
    
    
    
    145.6
    %Total commission and fee income
    
    
    18.4
    
    
    
    30.9
    
    
    
    (12.5
    )
    
    
    (40.5
    %)Net investment income
    
    
    14.5
    
    
    
    9.8
    
    
    
    4.7
    
    
    
    48.4
    %Net realized investment (losses) gains
    
    
    (0.7
    )
    
    
    1.4
    
    
    
    (2.0
    )
    
    
    (148.9
    %)Total
    
    
    200.3
    
    
    
    110.5
    
    
    
    89.8
    
    
    
    81.3
    %ExpensesNet loss and loss adjustment expenses
    
    
    90.3
    
    
    
    37.3
    
    
    
    53.0
    
    
    
    142.0
    %Operating expenses
    
    
    74.2
    
    
    
    48.3
    
    
    
    25.9
    
    
    
    53.6
    %Interest expense
    
    
    3.8
    
    
    
    2.3
    
    
    
    1.5
    
    
    
    62.9
    %Total expenses
    
    
    168.2
    
    
    
    87.9
    
    
    
    80.3
    
    
    
    91.4
    %Equity in income (loss) of unconsolidated
affiliate
    
    
    (0.8
    )
    
    
    0.8
    
    
    
    (1.5
    )
    
    
    (202.2
    %)Acquisition-related transaction costs
    
    
    (11.3
    )
    
    
    
    
    
    
    (11.3
    )Gain on investment in acquired unconsolidated
affiliate
    
    
    7.4
    
    
    
    
    
    
    
    7.4Income before taxes
    
    
    27.4
    
    
    
    23.4
    
    
    
    4.0
    
    
    
    17.3
    %Federal and state income taxes
    
    
    9.4
    
    
    
    8.5
    
    
    
    0.9
    
    
    
    10.7
    %Net Income
    
    $
    18.0
    
    
    $
    14.9
    
    
    $
    3.1
    
    
    
    21.0
    %Key MeasuresGross premiums written and produced:Written by Brokerage and Specialy Insurance Segments
    
    $
    199.9
    
    
    $
    135.1
    
    
    $
    64.8
    
    
    
    48.0
    %Produced by Insurance Services Segment
    
    
    10.7
    
    
    
    23.3
    
    
    
    (12.6
    )
    
    
    (53.9
    %)Assumed premiums
    
    
    0.6
    
    
    
    (1.0
    )
    
    
    1.7
    
    
    
    (161.0
    %)Total
    
    $
    211.2
    
    
    $
    157.4
    
    
    $
    53.9
    
    
    
    34.3
    %Percent of total revenues:Net premiums earned
    
    
    83.9
    %
    
    
    61.9
    %Commission and fee income
    
    
    9.2
    %
    
    
    28.0
    %Net investment income
    
    
    7.3
    %
    
    
    8.9
    %Net realized investment gains (losses)
    
    
    (0.3
    %)
    
    
    1.2
    %Return on average equity(1)
    
    
    17.3
    %
    
    
    19.1
    %
 
 (1)
    
    Net realized investment losses and acquisition-related transaction costs, net of tax
for the three months ended March 31, 2009
reduced return on average equity by 10.0% and net realized investment gains for the three months
ended March 31, 2008 increased
return on average equity by 1.0%. Consolidated Results of Operations Three Months Ended March 31, 2009 and 2008
 Total revenues .
 33




---



##### Table of Contents



Premiums earned .
 Commission and fee income .
 Net investment income and net realized gains (losses) .
 34




---



##### Table of Contents



Losses and loss adjustment expenses .
 Operating expenses .
 Other income (loss).
 Interest expense .
 Income tax expense .
 Net
income and return on average equity .
 35




---



##### Table of Contents



Brokerage Insurance Segment Results of Operations
 Three Months EndedMarch 31,($ in millions)
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    162.5
    
    
    $
    126.2
    
    
    $
    36.2
    
    
    
    28.7
    %Less: ceded premiums earned
    
    
    (35.2
    )
    
    
    (59.9
    )
    
    
    24.7
    
    
    
    41.3
    %Net premiums earned
    
    
    127.3
    
    
    
    66.3
    
    
    
    61.0
    
    
    
    91.9
    %Ceding commission revenue
    
    
    10.7
    
    
    
    18.4
    
    
    
    (7.7
    )
    
    
    (42.0
    %)Policy billing fees
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.0
    
    
    
    6.0
    %Total
    
    
    138.5
    
    
    
    85.2
    
    
    
    53.3
    
    
    
    62.5
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    98.2
    
    
    
    61.9
    
    
    
    36.3
    
    
    
    58.6
    %Less:ceded loss and loss adjustment expenses
    
    
    (32.3
    )
    
    
    (25.9
    )
    
    
    (6.4
    )
    
    
    24.8
    %Net loss and loss adjustment expenses
    
    
    65.9
    
    
    
    36.1
    
    
    
    29.8
    
    
    
    82.8
    %Underwriting expensesDirect commission expense
    
    
    31.2
    
    
    
    20.9
    
    
    
    10.3
    
    
    
    49.4
    %Other underwriting expenses
    
    
    22.1
    
    
    
    18.4
    
    
    
    3.7
    
    
    
    20.1
    %Total underwriting expenses
    
    
    53.3
    
    
    
    39.3
    
    
    
    14.0
    
    
    
    35.7
    %Underwriting profit
    
    $
    19.3
    
    
    $
    9.9
    
    
    $
    9.4
    
    
    
    94.9
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    153.2
    
    
    $
    114.9
    
    
    $
    38.3
    
    
    
    33.4
    %Less: ceded premiums written
    
    
    (11.3
    )
    
    
    (51.7
    )
    
    
    40.4
    
    
    
    78.2
    %Net premiums written
    
    $
    141.9
    
    
    $
    63.2
    
    
    $
    78.7
    
    
    
    124.6
    %Ceded premiums as a percent of gross premiumsWritten
    
    
    7.4
    %
    
    
    45.0
    %Earned
    
    
    21.6
    %
    
    
    47.5
    %Loss RatiosGross
    
    
    60.4
    %
    
    
    49.1
    %Net
    
    
    51.8
    %
    
    
    54.4
    %Accident Year Loss RatiosGross
    
    
    54.3
    %
    
    
    50.2
    %Net
    
    
    54.1
    %
    
    
    54.4
    %Underwriting Expense RatiosGross
    
    
    32.5
    %
    
    
    30.7
    %Net
    
    
    33.1
    %
    
    
    30.7
    %Combined RatiosGross
    
    
    92.9
    %
    
    
    79.8
    %Net
    
    
    84.8
    %
    
    
    85.1
    %
 36




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##### Table of Contents



Brokerage Insurance Segment Results of Operations for Three Months Ended March 31, 2009 and 2008
 Gross premiums .
  Ceded premiums .
   Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
 37




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##### Table of Contents



Underwriting expenses and underwriting expense ratio
    Underwriting profit and combined ratio .
 38




---



##### Table of Contents



Specialty Business Segment Results of Operations
 Three Months EndedMarch 31,($ in millions)
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    53.6
    
    
    $
    8.9
    
    
    $
    44.7
    
    
    NMLess: ceded premiums earned
    
    
    (12.8
    )
    
    
    (6.8
    )
    
    
    (6.0
    )
    
    
    88.5
    %Net premiums earned
    
    
    40.8
    
    
    
    2.1
    
    
    
    38.7
    
    
    NMCeding commission revenue
    
    
    2.9
    
    
    
    2.2
    
    
    
    0.7
    
    
    
    29.6
    %Total
    
    
    43.7
    
    
    
    4.3
    
    
    
    39.3
    
    
    NMExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    31.3
    
    
    
    5.2
    
    
    
    26.1
    
    
    NMLess: ceded loss and loss adjustment expenses
    
    
    (6.9
    )
    
    
    (4.0
    )
    
    
    (2.9
    )
    
    
    74.0
    %Net loss and loss adjustment expenses
    
    
    24.3
    
    
    
    1.2
    
    
    
    23.1
    
    
    NMUnderwriting expensesDirect commission expense
    
    
    13.8
    
    
    
    2.4
    
    
    
    11.4
    
    
    
    484.5
    %Other underwriting expenses
    
    
    2.5
    
    
    
    0.4
    
    
    
    2.2
    
    
    NMTotal underwriting expenses
    
    
    16.3
    
    
    
    2.7
    
    
    
    13.6
    
    
    NMUnderwriting profit
    
    $
    3.0
    
    
    $
    0.4
    
    
    $
    2.6
    
    
    NMKey MeasuresPremiums writtenGross premiums written
    
    $
    46.7
    
    
    $
    20.2
    
    
    $
    26.5
    
    
    
    130.9
    %Less: ceded premiums written
    
    
    (2.4
    )
    
    
    (15.1
    )
    
    
    12.7
    
    
    
    84.1
    %Net premiums written
    
    $
    44.3
    
    
    $
    5.2
    
    
    $
    39.2
    
    
    NMNM is shown where percentage change exceeds 500%Ceded premiums as a percent of gross premiumsWritten
    
    
    5.1
    %
    
    
    74.5
    %Earned
    
    
    23.9
    %
    
    
    76.4
    %Loss RatiosGross
    
    
    58.3
    %
    
    
    58.6
    %Net
    
    
    59.7
    %
    
    
    58.8
    %Accident Year Loss RatiosGross
    
    
    58.3
    %
    
    
    58.6
    %Net
    
    
    59.7
    %
    
    
    58.8
    %Underwriting Expense RatiosGross
    
    
    30.5
    %
    
    
    30.6
    %Net
    
    
    32.9
    %
    
    
    22.4
    %Combined RatiosGross
    
    
    88.8
    %
    
    
    89.1
    %Net
    
    
    92.6
    %
    
    
    81.2
    %
 39




---



##### Table of Contents



Specialty Business Segment Results of Operations for Three Months Ended March 31, 2009 and 2008
 Gross premiums.
  Ceded premiums.
 Ceding commission revenue
 Loss and loss adjustment expenses
 Underwriting expenses and underwriting expense ratio.
    40




---



##### Table of Contents



Underwriting profit and combined ratio.
 41




---



##### Table of Contents



Insurance Services Segment Results of Operations
 Three Months EndedMarch 31,($ in millions)
    
    2009
    
    2008
    
    Change
    
    PercentRevenueDirect commission revenue from
managing general agency
    
    $
    3.1
    
    
    $
    8.2
    
    
    $
    (5.1
    )
    
    
    (61.9
    %)Claims administration revenue
    
    
    0.8
    
    
    
    1.0
    
    
    
    (0.1
    )
    
    
    (11.6
    %)Other administration revenue
    
    
    0.2
    
    
    
    0.4
    
    
    
    (0.2
    )
    
    
    (47.4
    %)Reinsurance intermediary fees
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (44.0
    %)Policy billing fees
    
    
    0.0
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (75.5
    %)Total
    
    
    4.3
    
    
    
    9.7
    
    
    
    (5.5
    )
    
    
    (56.2
    %)ExpensesDirect commission expense paid to producers
    
    
    1.5
    
    
    
    3.4
    
    
    
    (1.9
    )
    
    
    (55.8
    %)Other insurance services expenses
    
    
    0.9
    
    
    
    1.6
    
    
    
    (0.7
    )
    
    
    (45.4
    %)Claims expense reimbursement to TICNY
    
    
    0.8
    
    
    
    1.0
    
    
    
    (0.1
    )
    
    
    (11.6
    %)Total
    
    
    3.2
    
    
    
    5.9
    
    
    
    (2.7
    )
    
    
    (45.9
    %)Insurance services pre-tax income (loss)
    
    $
    1.1
    
    
    $
    3.8
    
    
    $
    (2.8
    )
    
    
    (72.2
    %)Premiums produced by TRM on behalf
of issuing companies
    
    $
    10.7
    
    
    
    23.3
    
    
    $
    (12.6
    )
    
    
    (53.9
    %)
 Total revenues.
 Direct commission expense .
 Other insurance services expenses .
 Claims expense reimbursement .
 Pre-tax income .
 42




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##### Table of Contents



Investments
 Portfolio Summary
  Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    % ofAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    Fair($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    ValueMarch 31, 2009U.S. Treasury securities
    
    $
    28,320
    
    
    $
    450
    
    
    $
    
    
    
    $
    
    
    
    $
    28,770
    
    
    
    2.4
    %U.S. Agency securities
    
    
    23,619
    
    
    
    296
    
    
    
    (3
    )
    
    
    (35
    )
    
    
    23,878
    
    
    
    2.0
    %Municipal bonds
    
    
    306,281
    
    
    
    6,021
    
    
    
    (880
    )
    
    
    (907
    )
    
    
    310,515
    
    
    
    26.4
    %Corporate and other bonds
    
    
    346,442
    
    
    
    2,144
    
    
    
    (13,678
    )
    
    
    (16,527
    )
    
    
    318,381
    
    
    
    27.1
    %Commercial, residential and
asset-backed securities
    
    
    508,967
    
    
    
    12,127
    
    
    
    (10,062
    )
    
    
    (29,528
    )
    
    
    481,504
    
    
    
    41.0
    %Total fixed maturity
securities
    
    
    1,213,629
    
    
    
    21,038
    
    
    
    (24,623
    )
    
    
    (46,997
    )
    
    
    1,163,048
    
    
    
    99.0
    %Equity securities
    
    
    14,897
    
    
    
    47
    
    
    
    (587
    )
    
    
    (2,698
    )
    
    
    11,658
    
    
    
    1.0
    %Total
    
    $
    1,228,526
    
    
    $
    21,084
    
    
    $
    (25,210
    )
    
    $
    (49,695
    )
    
    $
    1,174,706
    
    
    
    100.0
    %December 31, 2008U.S. Treasury securities
    
    $
    26,482
    
    
    $
    524
    
    
    $
    
    
    
    $
    
    
    
    $
    27,006
    
    
    
    5.0
    %U.S. Agency securities
    
    
    361
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    0.1
    %Municipal bonds
    
    
    179,734
    
    
    
    2,865
    
    
    
    (2,485
    )
    
    
    (166
    )
    
    
    179,948
    
    
    
    33.3
    %Corporate and other bonds
    
    
    210,007
    
    
    
    932
    
    
    
    (13,948
    )
    
    
    (10,016
    )
    
    
    186,975
    
    
    
    34.6
    %Commercial, residential and
asset-backed securities
    
    
    164,886
    
    
    
    1,838
    
    
    
    (10,603
    )
    
    
    (20,290
    )
    
    
    135,830
    
    
    
    25.1
    %Total fixed maturity
securities
    
    
    581,470
    
    
    
    6,197
    
    
    
    (27,036
    )
    
    
    (30,472
    )
    
    
    530,159
    
    
    
    98.0
    %Equity securities
    
    
    12,726
    
    
    
    5
    
    
    
    (60
    )
    
    
    (1,857
    )
    
    
    10,814
    
    
    
    2.0
    %Total
    
    $
    594,196
    
    
    $
    6,202
    
    
    $
    (27,096
    )
    
    $
    (32,329
    )
    
    $
    540,973
    
    
    
    100.0
    %
 Credit Rating of Fixed Maturity Securities
  March 31, 2009
    
    December 31, 2008Percentage of
    
    
    
    
    
    Percentage ofFair Market
    
    Fair Market
    
    Fair Market
    
    Fair Market($ in thousands)
    
    Value
    
    Value
    
    Value
    
    ValueRatingU.S. Treasury securities
    
    $
    28,770
    
    
    
    2.5
    %
    
    $
    27,006
    
    
    
    4.4
    %AAA
    
    
    597,866
    
    
    
    51.4
    %
    
    
    187,377
    
    
    
    47.2
    %AA
    
    
    174,272
    
    
    
    15.0
    %
    
    
    110,601
    
    
    
    11.9
    %A
    
    
    199,150
    
    
    
    17.1
    %
    
    
    113,651
    
    
    
    13.3
    %BBB
    
    
    103,073
    
    
    
    8.9
    %
    
    
    62,566
    
    
    
    12.8
    %Below BBB
    
    
    59,917
    
    
    
    5.2
    %
    
    
    28,958
    
    
    
    10.4
    %Total
    
    $
    1,163,048
    
    
    
    100.0
    %
    
    $
    530,159
    
    
    
    100.0
    %
 Fixed Maturity InvestmentsTime to Maturity
  43




---



##### Table of Contents



March 31, 2009
    
    December 31, 2008Percentage of
    
    
    
    
    
    Percentage ofFair Market
    
    Fair Market
    
    Fair Market
    
    Fair Market($ in thousands)
    
    Value
    
    Value
    
    Value
    
    ValueRemaining Time to MaturityLess than one year
    
    $
    23,324
    
    
    
    2.0
    %
    
    $
    8,789
    
    
    
    2.1
    %One to five years
    
    
    190,880
    
    
    
    16.4
    %
    
    
    112,514
    
    
    
    19.4
    %Five to ten years
    
    
    278,771
    
    
    
    24.0
    %
    
    
    176,218
    
    
    
    31.0
    %More than 10 years
    
    
    188,569
    
    
    
    16.2
    %
    
    
    96,807
    
    
    
    13.7
    %Mortgage and asset-backed securities
    
    
    481,504
    
    
    
    41.4
    %
    
    
    135,831
    
    
    
    33.8
    %Total
    
    $
    1,163,048
    
    
    
    100.0
    %
    
    $
    530,159
    
    
    
    100.0
    %
 Fixed Maturity Investments with Third Party Guarantees
  With
    
    Without($ in thousands)
    
    Guarantee
    
    GuaranteeAAA
    
    $
    9,807
    
    
    $
    2,032AA
    
    
    86,307
    
    
    
    63,648A
    
    
    30,469
    
    
    
    40,290BBB
    
    
    944
    
    
    
    944No underlying rating
    
    
    
    
    
    
    20,612Total
    
    $
    127,527
    
    
    $
    127,527
  Guaranteed
    
    Percent($ in thousands)
    
    Amount
    
    of TotalMBIA Inc.
    
    $
    52,091
    
    
    
    41
    %Financial Security Assurance
    
    
    29,592
    
    
    
    23
    %Ambac Financial Corp.
    
    
    20,244
    
    
    
    16
    %FGIC Corp.
    
    
    11,147
    
    
    
    9
    %Others
    
    
    14,453
    
    
    
    11
    %Total
    
    $
    127,527
    
    
    
    100
    %
 Fair Value Consideration
   44




---



##### Table of Contents



Level 3 AssetsAssets
    
    
    
    
    
    As a PercentageCarried at
    
    
    
    
    
    of Total AssetsFair Value at
    
    Fair Value of
    
    Carried at($ in thousands)
    
    March 31, 2009
    
    Level 3 Assets
    
    Fair ValueFixed-maturity investments
    
    $
    1,163,048
    
    
    $
    14,737
    
    
    
    1.3
    %Equity investments
    
    
    11,658
    
    
    
    
    
    
    
    0.0
    %Total invesments available for sale
    
    
    1,174,706
    
    
    
    14,737
    
    
    
    1.3
    %Cash and
cash equivalents (1)
    
    
    304,650
    
    
    
    
    
    
    
    0.0
    %Total
    
    $
    1,479,356
    
    
    $
    14,737
    
    
    
    1.0
    %
 (1)
    
    Amount includes $395,664 of cash acquired with the
acquisitions of CastlePoint and Hermitage. Unrealized Losses
   45




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##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    Aggregate Fair
    
    Unrealized($ in thousands)
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Value
    
    LossesMarch 31, 2009U.S. Treasury securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    U.S. Agency securities
    
    
    4
    
    
    $
    220
    
    
    $
    (3
    )
    
    
    1
    
    
    $
    976
    
    
    $
    (35
    )
    
    
    5
    
    
    $
    1,196
    
    
    $
    (37
    )Municipal bonds
    
    
    61
    
    
    
    78,436
    
    
    
    (880
    )
    
    
    16
    
    
    
    13,506
    
    
    
    (907
    )
    
    
    77
    
    
    
    91,942
    
    
    
    (1,787
    )Corporate and other bondsFinance
    
    
    109
    
    
    
    60,201
    
    
    
    (9,039
    )
    
    
    47
    
    
    
    27,969
    
    
    
    (9,689
    )
    
    
    156
    
    
    
    88,170
    
    
    
    (18,728
    )Industrial
    
    
    101
    
    
    
    74,798
    
    
    
    (4,398
    )
    
    
    56
    
    
    
    34,139
    
    
    
    (6,516
    )
    
    
    157
    
    
    
    108,937
    
    
    
    (10,914
    )Utilities
    
    
    15
    
    
    
    10,787
    
    
    
    (242
    )
    
    
    8
    
    
    
    3,550
    
    
    
    (321
    )
    
    
    23
    
    
    
    14,336
    
    
    
    (563
    )Commercial mortgage-
backed securites
    
    
    34
    
    
    
    39,689
    
    
    
    (4,939
    )
    
    
    26
    
    
    
    16,014
    
    
    
    (19,929
    )
    
    
    60
    
    
    
    55,703
    
    
    
    (24,867
    )Residential mortgage-
backed securitesAgency backed
    
    
    9
    
    
    
    4,274
    
    
    
    (11
    )
    
    
    5
    
    
    
    4,741
    
    
    
    (15
    )
    
    
    14
    
    
    
    9,016
    
    
    
    (26
    )Non-agency backed
    
    
    24
    
    
    
    5,673
    
    
    
    (3,295
    )
    
    
    25
    
    
    
    14,154
    
    
    
    (7,199
    )
    
    
    49
    
    
    
    19,828
    
    
    
    (10,494
    )Asset-backed securities
    
    
    12
    
    
    
    3,749
    
    
    
    (869
    )
    
    
    13
    
    
    
    4,915
    
    
    
    (3,204
    )
    
    
    25
    
    
    
    8,664
    
    
    
    (4,073
    )Total fixed maturity
securities
    
    
    369
    
    
    
    277,828
    
    
    
    (23,674
    )
    
    
    197
    
    
    
    119,965
    
    
    
    (47,815
    )
    
    
    566
    
    
    
    397,792
    
    
    
    (71,489
    )Preferred stocks
    
    
    8
    
    
    
    6,813
    
    
    
    (467
    )
    
    
    6
    
    
    
    2,853
    
    
    
    (2,698
    )
    
    
    14
    
    
    
    9,666
    
    
    
    (3,165
    )Common stocks
    
    
    4
    
    
    
    43
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    43
    
    
    
    (120
    )Total
    
    
    381
    
    
    $
    284,684
    
    
    $
    (24,262
    )
    
    
    203
    
    
    
    122,818
    
    
    
    (50,513
    )
    
    
    584
    
    
    $
    407,501
    
    
    $
    (74,775
    )December 31, 2008U.S. Treasury securitiesU.S. Agency securitiesMunicipal bonds
    
    
    53
    
    
    $
    49,879
    
    
    $
    (2,485
    )
    
    
    1
    
    
    $
    371
    
    
    $
    (166
    )
    
    
    54
    
    
    $
    50,250
    
    
    $
    (2,651
    )Corporate and other bondsFinance
    
    
    55
    
    
    
    42,007
    
    
    
    (6,003
    )
    
    
    38
    
    
    
    20,575
    
    
    
    (4,173
    )
    
    
    93
    
    
    
    62,582
    
    
    
    (10,176
    )Industrial
    
    
    110
    
    
    
    72,787
    
    
    
    (7,740
    )
    
    
    32
    
    
    
    17,701
    
    
    
    (5,639
    )
    
    
    142
    
    
    
    90,488
    
    
    
    (13,379
    )Utilities
    
    
    5
    
    
    
    1,974
    
    
    
    (205
    )
    
    
    2
    
    
    
    446
    
    
    
    (204
    )
    
    
    7
    
    
    
    2,420
    
    
    
    (409
    )Commercial mortgage-
backed securites
    
    
    15
    
    
    
    13,997
    
    
    
    (4,399
    )
    
    
    22
    
    
    
    16,431
    
    
    
    (16,626
    )
    
    
    37
    
    
    
    30,427
    
    
    
    (21,026
    )Residential mortgage-
backed securitesAgency backed
    
    
    6
    
    
    
    3,408
    
    
    
    (16
    )
    
    
    1
    
    
    
    582
    
    
    
    (20
    )
    
    
    7
    
    
    
    3,990
    
    
    
    (36
    )Non-agency backed
    
    
    32
    
    
    
    12,676
    
    
    
    (3,536
    )
    
    
    16
    
    
    
    9,953
    
    
    
    (3,594
    )
    
    
    48
    
    
    
    22,629
    
    
    
    (7,130
    )Asset-backed securities
    
    
    20
    
    
    
    6,481
    
    
    
    (2,652
    )
    
    
    2
    
    
    
    552
    
    
    
    (49
    )
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701
    )Total fixed maturity
securities
    
    
    296
    
    
    
    203,208
    
    
    
    (27,037
    )
    
    
    114
    
    
    
    66,610
    
    
    
    (30,472
    )
    
    
    410
    
    
    
    269,818
    
    
    
    (57,508
    )Preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )Common stocks
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )Total
    
    
    297
    
    
    $
    204,648
    
    
    $
    (27,096
    )
    
    
    120
    
    
    $
    70,304
    
    
    $
    (32,329
    )
    
    
    417
    
    
    $
    274,952
    
    
    $
    (59,424
    )
   Unrealized LossPercent of
    
    Fair Value by Security RatingFair
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or($ in thousands)
    
    Count
    
    Value
    
    Amount
    
    Cost
    
    AAA
    
    AA
    
    A
    
    BBB
    
    LowerU.S. Agency securities
    
    
    5
    
    
    $
    1,196
    
    
    $
    (37
    )
    
    
    (3
    %)
    
    
    14
    %
    
    
    0
    %
    
    
    86
    %
    
    
    0
    %
    
    
    1
    %Municipal bonds
    
    
    77
    
    
    $
    91,942
    
    
    $
    (1,787
    )
    
    
    (2
    %)
    
    
    65
    %
    
    
    18
    %
    
    
    14
    %
    
    
    2
    %
    
    
    0
    %Corporate and other bonds
    
    
    336
    
    
    
    211,443
    
    
    
    (30,205
    )
    
    
    (12
    %)
    
    
    0
    %
    
    
    9
    %
    
    
    44
    %
    
    
    38
    %
    
    
    9
    %Commercial mortgage-backed securities
    
    
    60
    
    
    
    55,703
    
    
    
    (24,867
    )
    
    
    (31
    %)
    
    
    75
    %
    
    
    3
    %
    
    
    5
    %
    
    
    0
    %
    
    
    17
    %Residential mortgage-backed securities
    
    
    49
    
    
    
    19,828
    
    
    
    (10,494
    )
    
    
    (35
    %)
    
    
    67
    %
    
    
    2
    %
    
    
    2
    %
    
    
    7
    %
    
    
    22
    %Asset-backed securities
    
    
    25
    
    
    
    8,664
    
    
    
    (4,073
    )
    
    
    (32
    %)
    
    
    7
    %
    
    
    16
    %
    
    
    33
    %
    
    
    3
    %
    
    
    41
    %Equities
    
    
    18
    
    
    
    9,709
    
    
    
    (3,285
    )
    
    
    (25
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    10
    %
    
    
    79
    %
    
    
    11
    %
  46




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows .
    Cash Flow Summary
 March 31,($ in thousands)
    
    2009
    
    
    2008Cash provided by (used in):Operating activities
    
    $
    54,268
    
    
    $
    14,445Investing activities
    
    
    (279,301
    )
    
    
    2,372Financing activities
    
    
    (2,369
    )
    
    
    (1,057
    )Net increase (decrease) in cash and cash equivalents
    
    
    (227,402
    )
    
    
    15,760Cash and cash equivalents, beginning of year
    
    
    532,052
    
    
    
    77,679Cash and cash equivalents, end of year
    
    $
    304,650
    
    
    $
    93,439
      Security Requirements
  Subordinated Debentures
  47




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##### Table of Contents



Off-Balance Sheet Arrangements
  48




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk
    Sensitivity Analysis
     Estimated Increase
    
    Estimated Percentage(Decrease) in Fair Value
    
    Increase (Decrease)Change in interest rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    
    (134,131
    )
    
    
    (10.7
    %)200 basis point rise
    
    
    (90,187
    )
    
    
    (7.2
    %)100 basis point rise
    
    
    (45,521
    )
    
    
    (3.6
    %)As of March 31, 2009
    
    
    0
    
    
    
    0.0
    %100 basis point decline
    
    
    45,614
    
    
    
    3.6
    %
 49




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##### Table of Contents



Item 4. Controls and Procedures
  50




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##### Table of Contents



Changes in internal control over financial reporting
  51




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Maximum Number (orTotal Number of Shares
    
    Approximate DollarTotal Number
    
    
    
    
    
    Purchased as Part of
    
    Value) of Shares that Mayof Shares
    
    Average Price
    
    Publicly Announced Plans
    
    Yet Be Purchased UnderPeriod
    
    Purchased
    
    Paid per Share
    
    or Programs
    
    the Plans or ProgramsJanuary 1 - 31, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    February 1 - 28, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 - 31, 2009
    
    
    15,155
    
    
    
    23.43
    
    
    
    
    
    
    
    Total
    
    
    15,155
    
    
    $
    23.43
    
    
    
    
    
    
    $
    
 
 Item 6. Exhibits
 10.1
    
    Employment Agreement, dated March 23, 2009, by and between Tower Group, Inc. and Richard
Barrow31.1
    
    Chief Executive Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30231.2
    
    Chief Financial Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30232
    
    Chief Executive Officer and Chief Financial Officer  Certification pursuant to
Sarbanes-Oxley Act of 2002 Section 906
 52




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##### Table of Contents



Signatures
  Tower Group, Inc.
RegistrantDate: May 11, 2009
    /s/ Michael H. LeeMichael H. LeeChairman of the Board,
President and Chief Executive OfficerDate: May 11, 2009
    /s/ Francis M. ColalucciFrancis M. ColalucciSenior Vice President,
Chief Financial Officer and Treasurer 53