##### 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, 2010
 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, 31st Floor 
New York, NY
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000
 þ o
 o o
  Large accelerated filer þAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



Tower Group Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2010
  
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements of Tower Group, Inc.Consolidated Balance Sheets  March 31, 2010 and December 31, 2009 (Unaudited)
    
    
    1Consolidated Statements of Income and Comprehensive Income  Three Months Ended
    
    
    2March 31, 2010 and 2009 (Unaudited)Consolidated Statements of Changes in Stockholders Equity  Three Months Ended
    
    
    3March 31, 2010 and Year-Ended December 31, 2009 (Unaudited)Consolidated Statements of Cash Flows  Three Months Ended March 31, 2010 and 2009 (Unaudited)
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    40PART II OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EX-31.1EX-31.2EX-32




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Tower Group, Inc.
Consolidated Balance Sheets
 March 31,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2010
    
    2009AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,756,831 and $1,729,117)
    
    $
    1,833,499
    
    
    $
    1,783,596Equity securities, available-for-sale, at fair value (cost of $78,275 and $78,051)
    
    
    78,579
    
    
    
    76,733Short-term investments, available-for-sale, at fair value (cost of $6,699 and $36,500)
    
    
    6,699
    
    
    
    36,500Total investments
    
    
    1,918,777
    
    
    
    1,896,829Cash and cash equivalents
    
    
    156,855
    
    
    
    164,882Investment income receivable
    
    
    22,264
    
    
    
    20,240Premiums receivable
    
    
    300,785
    
    
    
    308,075Reinsurance recoverable on paid losses
    
    
    18,929
    
    
    
    14,819Reinsurance recoverable on unpaid losses
    
    
    214,807
    
    
    
    199,687Prepaid reinsurance premiums
    
    
    76,670
    
    
    
    94,818Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    174,859
    
    
    
    170,652Deferred income taxes
    
    
    33,964
    
    
    
    41,757Intangible assets
    
    
    52,018
    
    
    
    53,350Goodwill
    
    
    243,748
    
    
    
    244,690Fixed assets, net of accumulated depreciation
    
    
    71,405
    
    
    
    66,429Other assets
    
    
    59,013
    
    
    
    36,724Total assets
    
    $
    3,344,094
    
    
    $
    3,312,952LiabilitiesLoss and loss adjustment expenses
    
    $
    1,195,840
    
    
    $
    1,131,989Unearned premium
    
    
    620,401
    
    
    
    658,940Reinsurance balances payable
    
    
    46,273
    
    
    
    89,080Funds held under reinsurance agreements
    
    
    60,242
    
    
    
    13,737Other liabilities
    
    
    112,194
    
    
    
    133,647Subordinated debentures
    
    
    235,058
    
    
    
    235,058Total liabilities
    
    
    2,270,008
    
    
    
    2,262,451Stockholders equityCommon stock ($0.01 par value; 100,000,000 shares authorized, 45,480,876 and
45,092,321 shares issued, and 44,973,701 and 44,984,953 shares outstanding)
    
    
    455
    
    
    
    451Treasury stock (507,175 and 107,368 shares)
    
    
    (10,636
    )
    
    
    (1,995
    )Paid-in-capital
    
    
    754,265
    
    
    
    751,878Accumulated other comprehensive income
    
    
    50,031
    
    
    
    34,554Retained earnings
    
    
    279,971
    
    
    
    265,613Total stockholders equity
    
    
    1,074,086
    
    
    
    1,050,501Total liabilities and stockholders equity
    
    $
    3,344,094
    
    
    $
    3,312,952
 See accompanying notes to the consolidated financial statements.
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Tower Group, Inc.
Consolidated Statements of Income and Comprehensive Income
 Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2010
    
    
    2009RevenuesNet premiums earned
    
    $
    268,046
    
    
    $
    168,090Ceding commission revenue
    
    
    10,188
    
    
    
    13,574Insurance services revenue
    
    
    556
    
    
    
    4,276Policy billing fees
    
    
    771
    
    
    
    521Net investment income
    
    
    23,175
    
    
    
    14,533Net realized investment gains (losses)Other-than-temporary impairments
    
    
    (6,146
    )
    
    
    (8,732
    )Portion of loss recognized in other comprehensive income
    
    
    3,215
    
    
    
    5,506Other net realized investment gains
    
    
    3,671
    
    
    
    2,554Total net realized investment gains (losses)
    
    
    740
    
    
    
    (672
    )Total revenues
    
    
    303,476
    
    
    
    200,322ExpensesLoss and loss adjustment expenses
    
    
    169,337
    
    
    
    90,256Direct and ceding commission expense
    
    
    58,045
    
    
    
    47,408Other operating expenses
    
    
    44,208
    
    
    
    26,744Acquisition-related transaction costs
    
    
    857
    
    
    
    11,348Interest expense
    
    
    4,881
    
    
    
    3,783Total expenses
    
    
    277,328
    
    
    
    179,539Other Income (expense)Equity in loss of unconsolidated affiliate
    
    
    
    
    
    
    (777
    )Gain on investment in acquired unconsolidated affiliate
    
    
    
    
    
    
    7,388Other expense
    
    
    (466
    )
    
    
    Income before income taxes
    
    
    25,682
    
    
    
    27,394Income tax expense
    
    
    8,210
    
    
    
    9,418Net income
    
    $
    17,472
    
    
    $
    17,976Gross unrealized investment holding gains arising during periods
    
    
    23,811
    
    
    
    5,067Cumulative effect of adjustment resulting from adoption of
new accounting guidance
    
    
    
    
    
    
    (2,497
    )Equity in net unrealized gains on investment in
unconsolidated affiliates investment portfolio
    
    
    
    
    
    
    3,124Less: reclassification adjustment for (gains) losses included in net
income
    
    
    (740
    )
    
    
    672Income tax (expense) related to items of other comprehensive
income
    
    
    (7,594
    )
    
    
    (2,228
    )Comprehensive net income
    
    $
    32,949
    
    
    $
    22,114Basic and diluted earnings per shareBasic
    
    $
    0.39
    
    
    $
    0.53Diluted
    
    $
    0.38
    
    
    $
    0.53Weighted average common shares outstandingBasic
    
    
    45,204
    
    
    
    33,766Diluted
    
    
    45,406
    
    
    
    33,918Dividends declared and paid per common share
    
    $
    0.07
    
    
    $
    0.05
 See accompanying notes to the consolidated financial statements.
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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, 2008
    
    
    23,408
    
    
    $
    234
    
    
    $
    (1,026
    )
    
    $
    208,094
    
    
    $
    (37,498
    )
    
    $
    165,400
    
    
    $
    335,204Cumulative effect of adjustment resulting from
adoption of new accounting guidance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,623
    )
    
    
    1,623
    
    
    
    Adjusted balance at December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (39,121
    )
    
    
    167,023
    
    
    
    335,204Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,740
    )
    
    
    (10,740
    )Stock based compensation
    
    
    346
    
    
    
    3
    
    
    
    (1,059
    )
    
    
    6,664
    
    
    
    
    
    
    
    
    
    
    
    5,608Issuance of common stock
    
    
    21,338
    
    
    
    214
    
    
    
    
    
    
    
    527,292
    
    
    
    
    
    
    
    
    
    
    
    527,506Fair value of outstanding CastlePoint stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,918
    
    
    
    
    
    
    
    
    
    
    
    9,918Warrant exercise
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,330
    
    
    
    109,330Net unrealized appreciation on securities available
for sale, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,675
    
    
    
    
    
    
    
    73,675Balance at December 31, 2009
    
    
    45,092
    
    
    
    451
    
    
    
    (1,995
    )
    
    
    751,878
    
    
    
    34,554
    
    
    
    265,613
    
    
    
    1,050,501Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,114
    )
    
    
    (3,114
    )Stock based compensation
    
    
    389
    
    
    
    4
    
    
    
    (1,193
    )
    
    
    2,387
    
    
    
    
    
    
    
    
    
    
    
    1,198Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (7,448
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,448
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,472
    
    
    
    17,472Net unrealized appreciation on securities available
for sale, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,477
    
    
    
    
    
    
    
    15,477Balance at March 31, 2010
    
    
    45,481
    
    
    $
    455
    
    
    $
    (10,636
    )
    
    $
    754,265
    
    
    $
    50,031
    
    
    $
    279,971
    
    
    $
    1,074,086
 See accompanying notes to the consolidated financial statements.
 3




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Tower Group, Inc.
Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    2009Cash flows provided by (used in) operating activities:Net income
    
    $
    17,472
    
    
    $
    17,976Adjustments to reconcile net income to net cash provided by (used in) operations:Gain on investment in acquired unconsolidated affiliate
    
    
    
    
    
    
    (7,388
    )(Gain) loss on sale of investments
    
    
    (3,671
    )
    
    
    (2,554
    )Other-than-temporary-impairment loss on investments
    
    
    2,931
    
    
    
    3,226Depreciation and amortization
    
    
    5,795
    
    
    
    5,239Amortization of bond premium or discount
    
    
    1,630
    
    
    
    (2,998
    )Amortization of restricted stock
    
    
    2,056
    
    
    
    1,193Deferred income taxes
    
    
    (540
    )
    
    
    7,693Excess tax benefits from share-based payment arrangements
    
    
    32
    
    
    
    14(Increase) decrease in assets:Investment income receivable
    
    
    (2,024
    )
    
    
    (764
    )Premiums receivable
    
    
    7,290
    
    
    
    224,693Reinsurance recoverable
    
    
    (19,230
    )
    
    
    159,864Prepaid reinsurance premiums
    
    
    18,148
    
    
    
    123,185Deferred acquisition costs, net
    
    
    (4,207
    )
    
    
    (8,476
    )Other assets
    
    
    (8,219
    )
    
    
    38Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    63,851
    
    
    
    (150,110
    )Unearned premium
    
    
    (38,539
    )
    
    
    (102,817
    )Reinsurance balances payable
    
    
    (42,807
    )
    
    
    (165,144
    )Funds held under reinsurance agreements
    
    
    46,505
    
    
    
    (1,796
    )Other liabilities
    
    
    (9,711
    )
    
    
    (46,807
    )Net cash flows provided by operations
    
    
    36,762
    
    
    
    54,267Cash flows provided by (used in) investing activities:Net cash acquired from acquisition of CastlePoint
    
    
    
    
    
    
    242,338Acquisition of Hermitage, net of cash acquired
    
    
    
    
    
    
    (42,218
    )Purchase of fixed assets
    
    
    (9,439
    )
    
    
    (4,421
    )Purchase  fixed-maturity securities
    
    
    (176,355
    )
    
    
    (148,153
    )Purchase  equity securities
    
    
    (13,841
    )
    
    
    Short-term investments, net
    
    
    29,801
    
    
    
    Sale or maturity  fixed-maturity securities
    
    
    122,875
    
    
    
    40,051Sale  equity securities
    
    
    13,616
    
    
    
    28,631Net cash flows provided by (used in) investing activities
    
    
    (33,343
    )
    
    
    116,228Exercise of stock options and warrants
    
    
    341
    
    
    
    19Excess tax benefits from share-based payment arrangements
    
    
    (32
    )
    
    
    (14
    )Treasury stock acquired-net employee share-based compensation
    
    
    (1,193
    )
    
    
    (354
    )Repurchase of Common Stock
    
    
    (7,448
    )
    
    
    Dividends paid
    
    
    (3,114
    )
    
    
    (2,019
    )Net cash flows (used in) financing activities
    
    
    (11,446
    )
    
    
    (2,368
    )Increase (decrease) in cash and cash equivalents
    
    
    (8,027
    )
    
    
    168,127Cash and cash equivalents, beginning of period
    
    
    164,882
    
    
    
    136,523Cash and cash equivalents, end of period
    
    $
    156,855
    
    
    $
    304,650
 See accompanying notes to the consolidated financial statements.
    
    (Continued)
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Tower Group, Inc.
Consolidated Statements of Cash Flows  (Continued)
 Three Months EndedMarch 31,2010
    
    2009Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    2,000
    
    
    $
    12,080Cash paid for interest
    
    
    4,881
    
    
    
    3,783Schedule of non-cash investing and financing activities:Issuance of common stock in acquisition of CastlePoint
    
    $
    
    
    
    $
    421,623Value of CastlePoint stock options at date of acquisition
    
    
    
    
    
    
    9,138
 See accompanying notes to the consolidated financial statements.
 5




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Tower Group, Inc.
Notes to Consolidated Financial Statements
 Note 1Nature of Business
   
    
    Brokerage Insurance (Brokerage) Segment offers a broad range of commercial lines
and personal lines property and casualty insurance products to small to mid-sized businesses
and individuals distributed through a network of retail and wholesale agents on both an
admitted and non-admitted basis;
 
    
    Specialty Business (Specialty) Segment provides specialty classes of business
through program underwriting agents. This segment also includes reinsurance solutions provided
primarily to small insurance companies; and
 
    
    Insurance Services (Services) Segment provides underwriting, claims and
reinsurance brokerage services to insurance companies.
   Note 2Accounting Policies and Basis of Presentation
 Basis of Presentation
   Use of Estimates
  Reclassifications
  6




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Tower Group, Inc.
Notes to Consolidated Financial Statements
 Income tax expense
  Accounting Pronouncements
 Accounting guidance adopted in 2010
    Accounting guidance not yet effective
  Pending accounting guidance
  7




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Tower Group, Inc.
Notes to Consolidated Financial Statements
 ($ millions)Commissions
    
    $
    115.7Taxes and assessments
    
    
    21.6Other deferred acquisition expenses
    
    
    55.5Deferred ceding commission revenue
    
    
    (17.9
    )Net deferred acquisition costs
    
    $
    174.9
  Note 3Acquisitions
 Acquisition of Specialty Underwriters Alliance, Inc. (SUA)
  Acquisition of the Renewal Rights of AequiCap Program Administrators Inc. (AequiCap)
  Acquisition of HIG, Inc. (Hermitage)
  Acquisition of CastlePoint Holding, Ltd. (CastlePoint)
   Note 4  Investments
  8




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Tower Group, Inc.
Notes to Consolidated Financial Statements
 Cost or
    
    Gross
    
    Gross
    
    
    
    
    
    UnrealizedAmortized
    
    Unrealized
    
    Unrealized
    
    Fair
    
    OTTI($ in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    Value
    
    Losses (1)March 31, 2010U.S. Treasury securities
    
    $
    67,725
    
    
    $
    340
    
    
    $
    (52
    )
    
    $
    68,013
    
    
    $
    U.S. Agency securities
    
    
    36,096
    
    
    
    370
    
    
    
    (145
    )
    
    
    36,321
    
    
    
    Municipal bonds
    
    
    506,848
    
    
    
    18,422
    
    
    
    (589
    )
    
    
    524,681
    
    
    
    Corporate and other bondsFinance
    
    
    204,791
    
    
    
    11,934
    
    
    
    (764
    )
    
    
    215,961
    
    
    
    Industrial
    
    
    408,843
    
    
    
    16,625
    
    
    
    (757
    )
    
    
    424,711
    
    
    
    Utilities
    
    
    54,261
    
    
    
    3,877
    
    
    
    (429
    )
    
    
    57,709
    
    
    
    Commercial mortgage-backed securities
    
    
    178,736
    
    
    
    25,188
    
    
    
    (3,416
    )
    
    
    200,508
    
    
    
    (3,319
    )Residential mortgage-backed securitiesAgency backed securities
    
    
    264,263
    
    
    
    6,650
    
    
    
    (280
    )
    
    
    270,633
    
    
    
    Non-agency backed securities
    
    
    25,832
    
    
    
    2,891
    
    
    
    (2,442
    )
    
    
    26,281
    
    
    
    (1,540
    )Asset-backed securities
    
    
    9,436
    
    
    
    385
    
    
    
    (1,140
    )
    
    
    8,681
    
    
    
    (980
    )Total fixed-maturity securities
    
    
    1,756,831
    
    
    
    86,682
    
    
    
    (10,014
    )
    
    
    1,833,499
    
    
    
    (5,839
    )Preferred stocks, principally financial sector
    
    
    77,759
    
    
    
    1,435
    
    
    
    (1,109
    )
    
    
    78,085
    
    
    
    Common stocks
    
    
    516
    
    
    
    121
    
    
    
    (143
    )
    
    
    494
    
    
    
    Short-term investments
    
    
    6,699
    
    
    
    
    
    
    
    
    
    
    
    6,699
    
    
    
    Total
    
    $
    1,841,805
    
    
    $
    88,238
    
    
    $
    (11,266
    )
    
    $
    1,918,777
    
    
    $
    (5,839
    )December 31, 2009U.S. Treasury securities
    
    $
    73,281
    
    
    $
    235
    
    
    $
    (225
    )
    
    $
    73,291
    
    
    $
    U.S. Agency securities
    
    
    40,063
    
    
    
    134
    
    
    
    (214
    )
    
    
    39,983
    
    
    
    Municipal bonds
    
    
    508,204
    
    
    
    18,241
    
    
    
    (730
    )
    
    
    525,715
    
    
    
    Corporate and other bondsFinance
    
    
    174,971
    
    
    
    11,150
    
    
    
    (1,390
    )
    
    
    184,731
    
    
    
    Industrial
    
    
    371,848
    
    
    
    13,225
    
    
    
    (1,334
    )
    
    
    383,739
    
    
    
    Utilities
    
    
    43,154
    
    
    
    3,559
    
    
    
    (62
    )
    
    
    46,651
    
    
    
    Commercial mortgage-backed securities
    
    
    195,580
    
    
    
    16,603
    
    
    
    (8,736
    )
    
    
    203,447
    
    
    
    (7,713
    )Residential mortgage-backed securitiesAgency backed securities
    
    
    283,403
    
    
    
    6,245
    
    
    
    (963
    )
    
    
    288,685
    
    
    
    Non-agency backed securities
    
    
    27,597
    
    
    
    2,772
    
    
    
    (2,924
    )
    
    
    27,445
    
    
    
    (1,948
    )Asset-backed securities
    
    
    11,016
    
    
    
    214
    
    
    
    (1,321
    )
    
    
    9,909
    
    
    
    (1,301
    )Total fixed-maturity securities
    
    
    1,729,117
    
    
    
    72,378
    
    
    
    (17,899
    )
    
    
    1,783,596
    
    
    
    (10,962
    )Preferred stocks, principally financial sector
    
    
    77,536
    
    
    
    919
    
    
    
    (2,165
    )
    
    
    76,290
    
    
    
    Common stocks
    
    
    515
    
    
    
    78
    
    
    
    (150
    )
    
    
    443
    
    
    
    Short-term investments
    
    
    36,500
    
    
    
    
    
    
    
    
    
    
    
    36,500
    
    
    
    Total
    
    $
    1,843,668
    
    
    $
    73,375
    
    
    $
    (20,214
    )
    
    $
    1,896,829
    
    
    $
    (10,962
    )
 
 (1)
    
    Represents the gross unrealized loss on other-than-temporarily impaired securities recognized in accumulated other comprehensive income (loss). 9




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
  Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    2009IncomeFixed-maturity securities
    
    $
    22,582
    
    
    $
    13,969Equity securities
    
    
    1,425
    
    
    
    315Cash and cash equivalents
    
    
    115
    
    
    
    665Dividends on common trust securities
    
    
    142
    
    
    
    53Total
    
    
    24,264
    
    
    
    15,002ExpensesInvestment expenses
    
    
    (1,089
    )
    
    
    (469
    )Net investment income
    
    $
    23,175
    
    
    $
    14,533
   Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    2009Fixed-maturity securitiesGross realized gains
    
    $
    4,958
    
    
    $
    2,489Gross realized losses
    
    
    (1,287
    )
    
    
    (135
    )3,671
    
    
    
    2,354Equity securitiesGross realized gains
    
    
    
    
    
    
    262Gross realized losses
    
    
    
    
    
    
    (62
    )
    
    
    
    200Net realized gains on investments
    
    
    3,671
    
    
    
    2,554Other-than-temporary impairment lossesFixed-maturity securities
    
    
    (2,931
    )
    
    
    (3,226
    )Equity securities
    
    
    
    
    
    
    Total other-than-temporary impairment losses
    
    
    (2,931
    )
    
    
    (3,226
    )Total net realized gains (losses), including other-than-temporary impairment losses
    
    $
    740
    
    
    $
    (672
    )
  Impairment Review
  10




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
        11




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
  Three Months Ended March 31,2010
    
    2009($ in thousands)
    
    No.
    
    Amount
    
    No.
    
    AmountCommercial mortgage-backed securities
    
    
    20
    
    
    $
    (4,598
    )
    
    
    10
    
    
    $
    (5,520
    )Residential mortgage-backed securities
    
    
    15
    
    
    
    (1,504
    )
    
    
    5
    
    
    
    (2,452
    )Asset-backed securities
    
    
    1
    
    
    
    (44
    )
    
    
    8
    
    
    
    (760
    )36
    
    
    
    (6,146
    )
    
    
    23
    
    
    
    (8,732
    )Portion of loss recognized in accumulated other comprehensive
income (loss), principally residential mortgage-backed securities
    
    
    
    
    
    
    3,215
    
    
    
    
    
    
    
    5,506Impairment losses recognized in earnings
    
    
    
    
    
    $
    (2,931
    )
    
    
    
    
    
    $
    (3,226
    )
  Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Balance, January 1,
    
    $
    40,734
    
    
    $
    24,638Cumulative effect of adjustment upon adoption of 2009 GAAP guidance on OTTI
    
    
    
    
    
    
    (2,497
    )Additional credit losses recognized during the period, related to securities for which:No OTTI has been previously recognized
    
    
    207
    
    
    
    2,775OTTI has been previously recognized
    
    
    2,724
    
    
    
    451Reductions due to:Securities sold during the period (realized)
    
    
    (4,132
    )
    
    
    Balance, March 31,
    
    $
    39,533
    
    
    $
    25,367
 Unrealized Losses
    12




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##### Table of Contents



Tower Group, Inc.  Notes to Consolidated Financial Statements
 Less than 12 Months
    
    12 Months or Longer
    
    TotalFair
    
    Unrealized
    
    
    
    
    
    Fair
    
    Unrealized
    
    
    
    
    
    Aggregate
    
    Unrealized($ in thousands)
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Fair Value
    
    LossesMarch 31, 2010U.S. Treasury securities
    
    
    12
    
    
    $
    7,180
    
    
    $
    (45
    )
    
    
    2
    
    
    $
    4,086
    
    
    $
    (7
    )
    
    
    14
    
    
    $
    11,266
    
    
    $
    (52
    )U.S. Agency securities
    
    
    2
    
    
    
    6,435
    
    
    
    (49
    )
    
    
    5
    
    
    
    12
    
    
    
    (96
    )
    
    
    7
    
    
    
    6,447
    
    
    
    (145
    )Municipal bonds
    
    
    37
    
    
    
    40,773
    
    
    
    (393
    )
    
    
    6
    
    
    
    10,030
    
    
    
    (196
    )
    
    
    43
    
    
    
    50,803
    
    
    
    (589
    )Corporate and other bondsFinance
    
    
    15
    
    
    
    19,323
    
    
    
    (228
    )
    
    
    36
    
    
    
    25,461
    
    
    
    (536
    )
    
    
    51
    
    
    
    44,784
    
    
    
    (764
    )Industrial
    
    
    21
    
    
    
    17,967
    
    
    
    (104
    )
    
    
    137
    
    
    
    36,699
    
    
    
    (653
    )
    
    
    158
    
    
    
    54,666
    
    
    
    (757
    )Utilities
    
    
    1
    
    
    
    1,971
    
    
    
    (20
    )
    
    
    43
    
    
    
    6,155
    
    
    
    (409
    )
    
    
    44
    
    
    
    8,126
    
    
    
    (429
    )Commercial mortgage-
backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    10,879
    
    
    
    (3,416
    )
    
    
    22
    
    
    
    10,879
    
    
    
    (3,416
    )Residential mortgage-
backed securitiesAgency backed
    
    
    23
    
    
    
    40,962
    
    
    
    (173
    )
    
    
    2
    
    
    
    10,947
    
    
    
    (107
    )
    
    
    25
    
    
    
    51,909
    
    
    
    (280
    )Non-agency backed
    
    
    2
    
    
    
    22
    
    
    
    (3
    )
    
    
    24
    
    
    
    17,315
    
    
    
    (2,439
    )
    
    
    26
    
    
    
    17,337
    
    
    
    (2,442
    )Asset-backed securities
    
    
    1
    
    
    
    495
    
    
    
    (13
    )
    
    
    14
    
    
    
    2,940
    
    
    
    (1,127
    )
    
    
    15
    
    
    
    3,435
    
    
    
    (1,140
    )Total fixed-maturity
securities
    
    
    114
    
    
    
    135,128
    
    
    
    (1,028
    )
    
    
    291
    
    
    
    124,524
    
    
    
    (8,986
    )
    
    
    405
    
    
    
    259,652
    
    
    
    (10,014
    )Preferred stocks
    
    
    43
    
    
    
    28,529
    
    
    
    (401
    )
    
    
    21
    
    
    
    13,570
    
    
    
    (708
    )
    
    
    64
    
    
    
    42,099
    
    
    
    (1,109
    )Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    38
    
    
    
    (143
    )
    
    
    4
    
    
    
    38
    
    
    
    (143
    )Total
    
    
    157
    
    
    $
    163,657
    
    
    $
    (1,429
    )
    
    
    316
    
    
    $
    138,132
    
    
    $
    (9,837
    )
    
    
    473
    
    
    $
    301,789
    
    
    $
    (11,266
    )December 31, 2009U.S. Treasury securities
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )U.S. Agency securities
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )Municipal bonds
    
    
    42
    
    
    
    50,526
    
    
    
    (587
    )
    
    
    5
    
    
    
    2,569
    
    
    
    (143
    )
    
    
    47
    
    
    
    53,095
    
    
    
    (730
    )Corporate and other bondsFinance
    
    
    32
    
    
    
    28,342
    
    
    
    (291
    )
    
    
    20
    
    
    
    14,906
    
    
    
    (1,099
    )
    
    
    52
    
    
    
    43,248
    
    
    
    (1,390
    )Industrial
    
    
    104
    
    
    
    69,475
    
    
    
    (726
    )
    
    
    25
    
    
    
    14,563
    
    
    
    (608
    )
    
    
    129
    
    
    
    84,038
    
    
    
    (1,334
    )Utilities
    
    
    6
    
    
    
    3,575
    
    
    
    (37
    )
    
    
    2
    
    
    
    625
    
    
    
    (25
    )
    
    
    8
    
    
    
    4,200
    
    
    
    (62
    )Commercial mortgage-
backed securities
    
    
    20
    
    
    
    25,810
    
    
    
    (598
    )
    
    
    27
    
    
    
    22,904
    
    
    
    (8,138
    )
    
    
    47
    
    
    
    48,714
    
    
    
    (8,736
    )Residential mortgage-
backed securitiesAgency backed
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )Non-agency backed
    
    
    4
    
    
    
    1,081
    
    
    
    (14
    )
    
    
    37
    
    
    
    19,672
    
    
    
    (2,910
    )
    
    
    41
    
    
    
    20,753
    
    
    
    (2,924
    )Asset-backed securities
    
    
    5
    
    
    
    334
    
    
    
    (116
    )
    
    
    11
    
    
    
    2,962
    
    
    
    (1,205
    )
    
    
    16
    
    
    
    3,296
    
    
    
    (1,321
    )Total fixed-maturity
securities
    
    
    301
    
    
    
    329,221
    
    
    
    (3,771
    )
    
    
    127
    
    
    
    78,201
    
    
    
    (14,128
    )
    
    
    428
    
    
    
    407,422
    
    
    
    (17,899
    )Preferred stocks
    
    
    87
    
    
    
    59,243
    
    
    
    (1,441
    )
    
    
    6
    
    
    
    4,827
    
    
    
    (724
    )
    
    
    93
    
    
    
    64,070
    
    
    
    (2,165
    )Common stocks
    
    
    4
    
    
    
    31
    
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    31
    
    
    
    (150
    )Total
    
    
    392
    
    
    $
    388,495
    
    
    $
    (5,362
    )
    
    
    133
    
    
    $
    83,028
    
    
    $
    (14,852
    )
    
    
    525
    
    
    $
    471,523
    
    
    $
    (20,214
    )
    13




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##### Table of Contents



Tower Group, Inc.  Notes to Consolidated Financial Statements
  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
    
    $
    53,266
    
    
    $
    (410
    )
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    (77
    )Unrealized loss for over 6 months
    
    
    78
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss for over 12 months
    
    
    22
    
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (16
    )
    
    
    2
    
    
    
    (127
    )Unrealized loss for over 18 months
    
    
    6,097
    
    
    
    (448
    )
    
    
    2
    
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss for over 2 years
    
    
    24,097
    
    
    
    (6,273
    )
    
    
    9
    
    
    
    (981
    )
    
    
    6
    
    
    
    (2,915
    )
    
    
    9
    
    
    
    (1,467
    )$
    83,560
    
    
    $
    (7,278
    )
    
    
    11
    
    
    $
    (1,091
    )
    
    
    7
    
    
    $
    (2,931
    )
    
    
    12
    
    
    $
    (1,671
    )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
    
    $
    155,983
    
    
    $
    (1,536
    )
    
    
    2
    
    
    $
    (8
    )
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    (1
    )Unrealized loss for over 6 months
    
    
    32,444
    
    
    
    (828
    )
    
    
    6
    
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (62
    )Unrealized loss for over 12 months
    
    
    384
    
    
    
    (208
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (38
    )
    
    
    4
    
    
    
    (169
    )Unrealized loss for over 18 months
    
    
    2,949
    
    
    
    (161
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss for over 2 years
    
    
    26,469
    
    
    
    (1,255
    )
    
    
    2
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    218,229
    
    
    $
    (3,988
    )
    
    
    10
    
    
    $
    (293
    )
    
    
    1
    
    
    $
    (38
    )
    
    
    7
    
    
    $
    (232
    )
  Fixed-Maturity InvestmentTime to Maturity
  March 31, 2010
    
    December 31, 2009Amortized
    
    
    
    
    
    Amortized($ in thousands)
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair ValueRemaining Time to MaturityLess than one year
    
    $
    34,344
    
    
    $
    34,679
    
    
    $
    30,282
    
    
    $
    30,465One to five years
    
    
    378,268
    
    
    
    390,202
    
    
    
    346,309
    
    
    
    355,402Five to ten years
    
    
    491,616
    
    
    
    509,648
    
    
    
    477,843
    
    
    
    492,517More than 10 years
    
    
    374,336
    
    
    
    392,867
    
    
    
    357,086
    
    
    
    375,726Mortgage and asset-backed securities
    
    
    478,267
    
    
    
    506,103
    
    
    
    517,597
    
    
    
    529,486Total
    
    $
    1,756,831
    
    
    $
    1,833,499
    
    
    $
    1,729,117
    
    
    $
    1,783,596
 Note 5Fair Value Measurements
  14




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##### Table of Contents



Tower Group, Inc.  Notes to Consolidated Financial Statements
  Level 1
 Level 2
 Level 3
   15




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##### Table of Contents



Tower Group, Inc.  Notes to Consolidated Financial Statements
 ($ in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalMarch 31, 2010Fixed-maturity securitiesU.S. Treasury securities
    
    $
    
    
    
    $
    68,013
    
    
    $
    
    
    
    $
    68,013U.S. Agency securities
    
    
    
    
    
    
    36,321
    
    
    
    
    
    
    
    36,321Municipal bonds
    
    
    
    
    
    
    524,681
    
    
    
    
    
    
    
    524,681Corporate and other bonds
    
    
    
    
    
    
    698,381
    
    
    
    
    
    
    
    698,381Commercial mortgage-backed securities
    
    
    
    
    
    
    200,508
    
    
    
    
    
    
    
    200,508Residential mortgage-backed securitiesAgency
    
    
    
    
    
    
    270,633
    
    
    
    
    
    
    
    270,633Non-agency
    
    
    
    
    
    
    18,782
    
    
    
    7,499
    
    
    
    26,281Asset-backed securities
    
    
    
    
    
    
    5,255
    
    
    
    3,426
    
    
    
    8,681Total fixed-maturities
    
    
    
    
    
    
    1,822,574
    
    
    
    10,925
    
    
    
    1,833,499Equity investments
    
    
    55,432
    
    
    
    23,147
    
    
    
    
    
    
    
    78,579Short-term investments
    
    
    5,200
    
    
    
    1,499
    
    
    
    
    
    
    
    6,699Total
    
    $
    60,632
    
    
    $
    1,847,220
    
    
    $
    10,925
    
    
    $
    1,918,777December 31, 2009Fixed-maturity securitiesU.S. Treasury securities
    
    $
    
    
    
    $
    73,291
    
    
    $
    
    
    
    $
    73,291U.S. Agency securities
    
    
    
    
    
    
    39,983
    
    
    
    
    
    
    
    39,983Municipal bonds
    
    
    
    
    
    
    525,715
    
    
    
    
    
    
    
    525,715Corporate and other bonds
    
    
    
    
    
    
    615,121
    
    
    
    
    
    
    
    615,121Commercial mortgage-backed securities
    
    
    
    
    
    
    203,447
    
    
    
    
    
    
    
    203,447Residential mortgage-backed securitiesAgency
    
    
    
    
    
    
    288,685
    
    
    
    
    
    
    
    288,685Non-agency
    
    
    
    
    
    
    16,937
    
    
    
    10,508
    
    
    
    27,445Asset-backed securities
    
    
    
    
    
    
    6,822
    
    
    
    3,087
    
    
    
    9,909Total fixed-maturities
    
    
    
    
    
    
    1,770,001
    
    
    
    13,595
    
    
    
    1,783,596Equity investments
    
    
    54,044
    
    
    
    22,689
    
    
    
    
    
    
    
    76,733Short-term investments
    
    
    36,500
    
    
    
    
    
    
    
    
    
    
    
    36,500Total
    
    $
    90,544
    
    
    $
    1,792,690
    
    
    $
    13,595
    
    
    $
    1,896,829
     16




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
     Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Beginning balance
    
    $
    13,595
    
    
    $
    18,084Total gains (losses)-realized / unrealizedIncluded in net income
    
    
    (172
    )
    
    
    (3,226
    )Included in other comprehensive income (loss)
    
    
    71
    
    
    
    (1,168
    )Purchases, issuances and settlements
    
    
    113
    
    
    
    114Net transfers into (out of) Level 3
    
    
    (2,682
    )
    
    
    933Ending balance
    
    $
    10,925
    
    
    $
    14,737
 Note 6Loss and Loss Adjustment Expense
   ($ in thousands)
    
    2010
    
    
    2009Balance at January 1,
    
    $
    1,131,989
    
    
    $
    534,991Less reinsurance recoverables on unpaid losses
    
    
    (199,687
    )
    
    
    (222,229
    )932,302
    
    
    
    312,762Net reserves, at fair value, of acquired companies
    
    
    
    
    
    
    370,001Incurred related to:Current year
    
    
    169,347
    
    
    
    93,239Prior years
    
    
    (10
    )
    
    
    (2,982
    )Total incurred
    
    
    169,337
    
    
    
    90,257Paid related to:Current year
    
    
    11,833
    
    
    
    11,830Prior years
    
    
    108,773
    
    
    
    46,603Total paid
    
    
    120,606
    
    
    
    58,433Net balance at March 31,
    
    
    981,033
    
    
    
    714,587Add reinsurance recoverables on unpaid losses
    
    
    214,807
    
    
    
    108,645Balance at March 31,
    
    $
    1,195,840
    
    
    $
    823,232
 17




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
 Note 7Stockholders Equity
 Authorized Shares of Common Stock
  Shares of Common Stock Issued
     Share Repurchase Program
  Dividends Declared
  Note 8Stock Based Compensation
 Restricted Stock
   18




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
 Three Months Ended March 31,2010
    
    
    2009Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNumber of
    
    
    Grant Date
    
    
    Number of
    
    
    Grant DateShares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueOutstanding, January 1
    
    
    474,023
    
    
    $
    24.64
    
    
    
    258,645
    
    
    $
    24.97Granted
    
    
    341,406
    
    
    
    21.83
    
    
    
    302,459
    
    
    
    22.79Vested
    
    
    (125,983
    )
    
    
    24.45
    
    
    
    (60,091
    )
    
    
    25.79Forfeitures
    
    
    (7,945
    )
    
    
    23.97
    
    
    
    (3,193
    )
    
    
    Outstanding, March 31
    
    
    681,501
    
    
    $
    23.27
    
    
    
    497,820
    
    
    $
    26.05
 Stock Options
  Three Months Ended March 31,2010
    
    
    2009Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, January 1
    
    
    1,387,019
    
    
    $
    19.62
    
    
    
    258,530
    
    
    $
    5.57Granted at fair value
    
    
    
    
    
    
    
    
    
    
    1,148,308
    
    
    
    20.61Exercised
    
    
    (17,707
    )
    
    
    9.61
    
    
    
    (7,000
    )
    
    
    2.78Forfeitures and expirations
    
    
    (23,911
    )
    
    
    22.27
    
    
    
    (122,892
    )
    
    
    21.98Outstanding, March 31
    
    
    1,345,401
    
    
    $
    19.71
    
    
    
    1,276,946
    
    
    $
    17.51Exercisable, March 31
    
    
    1,189,879
    
    
    $
    19.53
    
    
    
    710,479
    
    
    $
    15.34
      Note 9Earnings per Share
  19




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##### Table of Contents



Tower
Group, Inc.
Notes to Consolidated Financial Statements
   Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2010
    
    
    2009NumeratorNet income
    
    $
    17,472
    
    
    $
    17,976DenominatorWeighted average common shares outstanding
    
    
    45,204
    
    
    
    33,766Effect of dilutive securities:Stock options
    
    
    188
    
    
    
    133Unvested restricted stock
    
    
    14
    
    
    
    7Warrants
    
    
    
    
    
    
    12Weighted average common and potential dilutiveshares outstanding
    
    
    45,406
    
    
    
    33,918Earnings per share  basicCommon stock:Distributed earnings
    
    $
    0.07
    
    
    $
    0.05Undistributed earnings
    
    
    0.32
    
    
    
    0.48Total
    
    
    0.39
    
    
    
    0.53Earnings per share  diluted
    
    $
    0.38
    
    
    $
    0.53
  Note 10Segment Information
   20




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
 Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Brokerage Insurance SegmentRevenuesPremiums earned
    
    $
    189,427
    
    
    $
    145,696Ceding commission revenue
    
    
    8,410
    
    
    
    13,112Policy billing fees
    
    
    771
    
    
    
    532Total revenues
    
    
    198,608
    
    
    
    159,340ExpensesLoss and loss adjustment expenses
    
    
    118,956
    
    
    
    76,117Underwriting expenses
    
    
    76,112
    
    
    
    61,576Total expenses
    
    
    195,068
    
    
    
    137,693Underwriting profit
    
    $
    3,540
    
    
    $
    21,647Specialty Business SegmentRevenuesPremiums earned
    
    $
    78,619
    
    
    $
    22,394Ceding commission revenue
    
    
    1,778
    
    
    
    466Total revenues
    
    
    80,397
    
    
    
    22,860ExpensesLoss and loss adjustment expenses
    
    
    50,381
    
    
    
    14,140Underwriting expenses
    
    
    25,014
    
    
    
    8,038Total expenses
    
    
    75,395
    
    
    
    22,178Underwriting profit
    
    $
    5,002
    
    
    $
    682Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    (52
    )
    
    $
    3,107Claims administration revenue
    
    
    174
    
    
    
    846Other administration revenue
    
    
    102
    
    
    
    195Reinsurance intermediary fees
    
    
    332
    
    
    
    94Policy billing fees
    
    
    
    
    
    
    19Total revenues
    
    
    556
    
    
    
    4,261ExpensesDirect commission expense paid to producers
    
    
    122
    
    
    
    1,491Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    247
    
    
    
    859Claims expense reimbursement to TICNY
    
    
    3
    
    
    
    846Total expenses
    
    
    372
    
    
    
    3,196Insurance services pretax income
    
    $
    184
    
    
    $
    1,065
 21




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
  Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Brokerage insurance segment
    
    $
    198,608
    
    
    $
    159,340Specialty business segment
    
    
    80,397
    
    
    
    22,860Insurance services segment
    
    
    556
    
    
    
    4,261Total segment revenues
    
    
    279,561
    
    
    
    186,461Net investment income
    
    
    23,175
    
    
    
    14,533Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    740
    
    
    
    (672
    )Consolidated revenues
    
    $
    303,476
    
    
    $
    200,322
  Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Brokerage insurance segment underwriting profit
    
    $
    3,540
    
    
    $
    21,647Specialty business segment underwriting profit
    
    
    5,002
    
    
    
    682Insurance services segment pretax income
    
    
    184
    
    
    
    1,065Net investment income
    
    
    23,175
    
    
    
    14,533Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    740
    
    
    
    (672
    )Corporate expenses
    
    
    (755
    )
    
    
    (1,341
    )Acquisition-related expenses
    
    
    (857
    )
    
    
    (11,348
    )Interest expense
    
    
    (4,881
    )
    
    
    (3,783
    )Other income (loss) *
    
    
    (466
    )
    
    
    6,611Income before taxes
    
    $
    25,682
    
    
    $
    27,394
 *
    
    See Note 3  Acquisitions Note 11Contingencies
 Legal Proceedings
 inter alia inter alia
 Note 12Subsequent Events
 Acquisition of the Personal Lines Division of OneBeacon Insurance Group
  22




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##### Table of Contents



Tower Group, Inc.
Notes to Consolidated Financial Statements
  Dividends
  
 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 domestic or foreign 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, recession and
other factors;
 23




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##### Table of Contents




    
    disruptions in Towers business arising from the integration of Tower with acquired
businesses and the anticipation of potential and pending acquisitions or mergers;
    
    unanticipated difficulties in combining acquired companies; and
    
    currently pending or future litigation or governmental proceedings.
  Operating income
   Three Months Ended March 31,($ in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    %Operating income
    
    $
    17,785
    
    
    $
    28,337
    
    
    $
    (10,552
    )
    
    
    -37.2
    %Net realized gains (losses) on investments, net of tax
    
    
    481
    
    
    
    (437
    )
    
    
    918
    
    
    
    -210.1
    %Acquisition-related transaction costs, net of tax
    
    
    (794
    )
    
    
    (9,924
    )
    
    
    9,130
    
    
    
    -92.0
    %Net income
    
    $
    17,472
    
    
    $
    17,976
    
    
    $
    (504
    )
    
    
    -2.8
    %
 Critical Accounting Estimates
  Critical Accounting Policies
  Consolidated Results of Operations
    24




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##### Table of Contents



Three Months Ended March 31,($ in millions)
    
    2010
    
    
    2009
    
    
    Change
    
    
    %Brokerage insurance segment underwriting profit
    
    $
    3.6
    
    
    $
    21.6
    
    
    $
    (18.0
    )
    
    
    -83
    %Specialty business segment underwriting profit
    
    
    5.1
    
    
    
    0.7
    
    
    
    4.4
    
    
    NMInsurance services segment pretax income
    
    
    0.1
    
    
    
    1.1
    
    
    
    (1.0
    )
    
    
    -91
    %Net investment income
    
    
    23.2
    
    
    
    14.5
    
    
    
    8.7
    
    
    
    59
    %Net realized gains (losses) on investments,
including other-than-temporary impairments
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    1.4
    
    
    
    -200
    %Corporate expenses
    
    
    (0.8
    )
    
    
    (1.3
    )
    
    
    0.5
    
    
    
    -38
    %Acquisition-related transaction costs
    
    
    (0.8
    )
    
    
    (11.3
    )
    
    
    10.5
    
    
    
    -93
    %Interest expense
    
    
    (4.9
    )
    
    
    (3.8
    )
    
    
    (1.1
    )
    
    
    29
    %Other income (loss)
    
    
    (0.5
    )
    
    
    6.6
    
    
    
    (7.1
    )
    
    
    -108
    %Income before taxes
    
    
    25.7
    
    
    
    27.4
    
    
    
    (1.7
    )
    
    
    -6
    %Income tax expense
    
    
    8.2
    
    
    
    9.4
    
    
    
    (1.2
    )
    
    
    -13
    %Net income
    
    $
    17.5
    
    
    $
    18.0
    
    
    $
    (0.5
    )
    
    
    -3
    %Key MeasuresGross premiums written and produced:Written by Brokerage Insurance and Specialty
Business segments
    
    $
    283.1
    
    
    $
    199.9
    
    
    $
    83.2
    
    
    
    42
    %Produced by Insurance Services segment
    
    
    0.8
    
    
    
    10.7
    
    
    
    (9.9
    )
    
    
    -92
    %Total
    
    $
    283.9
    
    
    $
    210.6
    
    
    $
    73.3
    
    
    
    35
    %
 NM is shown where percentage change exceeds 500%
 Three Months EndedMarch 31,2010
    
    
    2009Percent of total revenues:Net premiums earned
    
    
    88.3
    %
    
    
    83.9
    %Commission and fee income
    
    
    3.8
    %
    
    
    9.2
    %Net investment income
    
    
    7.6
    %
    
    
    7.2
    %Net realized investment gains (losses)
    
    
    0.2
    %
    
    
    -0.3
    %Underwriting Ratios for Brokerage Insurance and
Specialty Business Segments CombinedCalendar Year Loss RatiosGross
    
    
    61.2
    %
    
    
    59.9
    %Net
    
    
    63.2
    %
    
    
    53.7
    %Accident Year Loss RatiosGross
    
    
    60.7
    %
    
    
    55.5
    %Net
    
    
    63.2
    %
    
    
    57.8
    %Underwriting Expense RatiosGross
    
    
    31.2
    %
    
    
    32.0
    %Net
    
    
    33.6
    %
    
    
    33.0
    %Combined RatiosGross
    
    
    92.4
    %
    
    
    91.9
    %Net
    
    
    96.8
    %
    
    
    86.7
    %Return on average equity (1)
    
    
    7.5
    %
    
    
    17.3
    %
 (1)
    
    For the three months ended March 31, 2010, the after-tax impact of acquisition-related transaction costs,
offset by net realized investment gains, lowered return on average equity by 0.1% whereas for the same period of
2009, the after-tax impact of acquisition-related transaction costs and net realized investment losses lowered
return on equity by 10.0%.
 25




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##### Table of Contents



Consolidated Results of Operations for the Three Months Ended March 31, 2010 and 2009
 Total revenues .
 Premiums earned .
 Commission and fee income .
 Net investment income and net realized gains (losses) .
  Loss and loss adjustment expenses .
 Operating expenses.
 Acquisition-related transaction costs.
 Interest expense.
 26




---



##### Table of Contents



Other income (expense).
 Income tax expense .
  Net income and return on average equity .
 27




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##### Table of Contents



Brokerage Insurance Segment Results of Operations
 Three Months Ended March 31,($ in millions)
    
    2010
    
    
    2009
    
    
    Change
    
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    237.2
    
    
    $
    189.9
    
    
    $
    47.3
    
    
    
    24.9
    %Less: ceded premiums earned
    
    
    (47.8
    )
    
    
    (44.2
    )
    
    
    (3.6
    )
    
    
    8.1
    %Net premiums earned
    
    
    189.4
    
    
    
    145.7
    
    
    
    43.7
    
    
    
    30.0
    %Ceding commission revenue
    
    
    8.4
    
    
    
    13.1
    
    
    
    (4.7
    )
    
    
    -35.9
    %Policy billing fees
    
    
    0.8
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    44.9
    %Total revenue
    
    
    198.6
    
    
    
    159.3
    
    
    
    39.3
    
    
    
    24.6
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    141.2
    
    
    
    113.5
    
    
    
    27.7
    
    
    
    24.3
    %Less: ceded loss and loss adjustment expenses
    
    
    (22.2
    )
    
    
    (37.4
    )
    
    
    15.2
    
    
    
    -40.6
    %Net loss and loss adjustment expenses
    
    
    119.0
    
    
    
    76.1
    
    
    
    42.9
    
    
    
    56.3
    %Underwriting expensesDirect commission expenses
    
    
    40.7
    
    
    
    38.2
    
    
    
    2.5
    
    
    
    6.5
    %Other underwriting expenses
    
    
    35.3
    
    
    
    23.4
    
    
    
    11.9
    
    
    
    51.5
    %Total underwriting expenses
    
    
    76.0
    
    
    
    61.6
    
    
    
    14.4
    
    
    
    23.6
    %Underwriting profit
    
    $
    3.6
    
    
    $
    21.6
    
    
    $
    (18.0
    )
    
    
    -83.6
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    212.7
    
    
    $
    170.9
    
    
    $
    41.8
    
    
    
    24.5
    %Less: ceded premiums written
    
    
    (30.6
    )
    
    
    (12.7
    )
    
    
    (17.9
    )
    
    
    142.1
    %Net premiums written
    
    $
    182.1
    
    
    $
    158.2
    
    
    $
    23.9
    
    
    
    15.1
    %Ceded premiums as a percent of
gross premiumsWritten
    
    
    14.4
    %
    
    
    7.4
    %Earned
    
    
    20.2
    %
    
    
    23.3
    %Calendar Year Loss RatiosGross
    
    
    59.5
    %
    
    
    59.8
    %Net
    
    
    62.8
    %
    
    
    52.2
    %Accident Year Loss RatiosGross
    
    
    58.9
    %
    
    
    54.8
    %Net
    
    
    62.8
    %
    
    
    57.0
    %Underwriting Expense RatiosGross
    
    
    31.8
    %
    
    
    32.1
    %Net
    
    
    35.3
    %
    
    
    32.9
    %Combined RatiosGross
    
    
    91.3
    %
    
    
    91.9
    %Net
    
    
    98.1
    %
    
    
    85.1
    %
 Brokerage Insurance Segment Results of Operations for the Three Months Ended March 31, 2010 and
2009
 Gross premiums .
  28




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##### Table of Contents



Ceded premiums.
  Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio
   Underwriting profit and combined ratio
 29




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30




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Specialty Business Segment Results of Operations
 Three Months Ended March 31,($ in millions)
    
    2010
    
    
    2009
    
    
    Change
    
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    84.6
    
    
    $
    26.1
    
    
    $
    58.5
    
    
    
    223.6
    %Less: ceded premiums earned
    
    
    (6.0
    )
    
    
    (3.8
    )
    
    
    (2.2
    )
    
    
    59.4
    %Net premiums earned
    
    
    78.6
    
    
    
    22.3
    
    
    
    56.3
    
    
    
    251.1
    %Ceding commission revenue
    
    
    1.8
    
    
    
    0.5
    
    
    
    1.3
    
    
    
    281.5
    %Total
    
    
    80.4
    
    
    
    22.8
    
    
    
    57.6
    
    
    
    251.7
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    55.8
    
    
    
    15.9
    
    
    
    39.9
    
    
    
    250.9
    %Less: ceded loss and loss adjustment expenses
    
    
    (5.4
    )
    
    
    (1.8
    )
    
    
    (3.6
    )
    
    
    207.3
    %Net loss and loss adjustment expenses
    
    
    50.4
    
    
    
    14.1
    
    
    
    36.3
    
    
    
    256.3
    %Underwriting expensesDirect commission expense
    
    
    17.3
    
    
    
    6.8
    
    
    
    10.5
    
    
    
    154.0
    %Other underwriting expenses
    
    
    7.6
    
    
    
    1.2
    
    
    
    6.4
    
    
    NMTotal underwriting expenses
    
    
    24.9
    
    
    
    8.0
    
    
    
    16.9
    
    
    
    211.2
    %Underwriting profit
    
    
    5.1
    
    
    $
    0.7
    
    
    $
    4.4
    
    
    NMKey MeasuresPremiums writtenGross premiums written
    
    $
    70.3
    
    
    $
    29.1
    
    
    $
    41.2
    
    
    
    141.9
    %Less: ceded premiums written
    
    
    (5.3
    )
    
    
    (1.0
    )
    
    
    (4.3
    )
    
    
    419.0
    %Net premiums written
    
    
    65.0
    
    
    $
    28.1
    
    
    $
    36.9
    
    
    
    131.8
    %NM is shown where percentage change exceeds 500%Ceded premiums as a percent
of gross premiumsWritten
    
    
    7.5
    %
    
    
    3.4
    %Earned
    
    
    7.1
    %
    
    
    14.6
    %Calendar Year Loss RatiosGross
    
    
    65.9
    %
    
    
    60.8
    %Net
    
    
    64.1
    %
    
    
    63.1
    %Accident Year Loss RatiosGross
    
    
    65.9
    %
    
    
    60.8
    %Net
    
    
    64.2
    %
    
    
    63.1
    %Underwriting Expense RatiosGross
    
    
    29.6
    %
    
    
    30.7
    %Net
    
    
    29.6
    %
    
    
    33.8
    %Combined RatiosGross
    
    
    95.5
    %
    
    
    91.5
    %Net
    
    
    93.7
    %
    
    
    96.9
    %
 Specialty Business Segment Results of Operations for the Three Months Ended March 31, 2010 and
2009
 Gross premiums.
  31




---



##### Table of Contents



Ceded premiums.
 Net premiums.
 Loss and loss adjustment expenses
  Underwriting expenses and underwriting expense ratio.
    Underwriting profit and combined ratio.
 32




---



##### Table of Contents



Insurance Services Segment Results of Operations
 Three Months Ended March 31,($ in millions)
    
    2010
    
    2009
    
    Change
    
    PercentRevenueDirect commission revenue from managing general agency
    
    $
    (0.1
    )
    
    $
    3.1
    
    
    $
    (3.2
    )
    
    
    (101.7
    %)Claims administration revenue
    
    
    0.2
    
    
    
    0.8
    
    
    
    (0.6
    )
    
    
    (79.4
    %)Other administration revenue
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (47.7
    %)Reinsurance intermediary fees
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    253.2
    %Policy billing fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    NMTotal revenue
    
    
    0.5
    
    
    
    4.2
    
    
    
    (3.7
    )
    
    
    (87.0
    %)ExpensesDirect commission expenses paid to producers
    
    
    0.1
    
    
    
    1.5
    
    
    
    (1.4
    )
    
    
    (91.8
    %)Other insurance services expenses
    
    
    0.3
    
    
    
    0.9
    
    
    
    (0.6
    )
    
    
    (71.2
    %)Claims expense reimbursement to TICNY
    
    
    
    
    
    
    0.8
    
    
    
    (0.8
    )
    
    
    (99.6
    %)Total expenses
    
    
    0.4
    
    
    
    3.2
    
    
    
    (2.8
    )
    
    
    (88.4
    %)Insurance services pre-tax income
    
    $
    0.1
    
    
    $
    1.0
    
    
    $
    (0.9
    )
    
    
    (82.7
    %)Premiums produced by TRM on behalf of issuing companies
    
    $
    0.8
    
    
    $
    10.7
    
    
    $
    (9.9
    )
    
    
    (92.3
    %)NM is shown where percentage change exceeds 500%
 Insurance Services Segment Results of Operations for the Three Months Ended March 31, 2010 and
2009
 Total revenue and expenses
  Pre-tax income .
 33




---



##### 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, 2010U.S. Treasury securities
    
    $
    67,725
    
    
    $
    340
    
    
    $
    (45
    )
    
    $
    (7
    )
    
    $
    68,013
    
    
    
    3.5
    %U.S. Agency securities
    
    
    36,096
    
    
    
    370
    
    
    
    (49
    )
    
    
    (96
    )
    
    
    36,321
    
    
    
    1.9
    %Municipal bonds
    
    
    506,848
    
    
    
    18,422
    
    
    
    (393
    )
    
    
    (196
    )
    
    
    524,681
    
    
    
    27.4
    %Corporate and other bonds
    
    
    667,895
    
    
    
    32,436
    
    
    
    (352
    )
    
    
    (1,598
    )
    
    
    698,381
    
    
    
    36.4
    %Commercial, residential and
asset-backed securities
    
    
    478,267
    
    
    
    35,114
    
    
    
    (189
    )
    
    
    (7,089
    )
    
    
    506,103
    
    
    
    26.4
    %Total fixed-maturity securities
    
    
    1,756,831
    
    
    
    86,682
    
    
    
    (1,028
    )
    
    
    (8,986
    )
    
    
    1,833,499
    
    
    
    95.6
    %Equity securities
    
    
    78,275
    
    
    
    1,556
    
    
    
    (401
    )
    
    
    (851
    )
    
    
    78,579
    
    
    
    4.1
    %Short-term investments
    
    
    6,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,699
    
    
    
    0.3
    %Total
    
    $
    1,841,805
    
    
    $
    88,238
    
    
    $
    (1,429
    )
    
    $
    (9,837
    )
    
    $
    1,918,777
    
    
    
    100.0
    %December 31, 2009U.S. Treasury securities
    
    $
    73,281
    
    
    $
    235
    
    
    $
    (225
    )
    
    $
    
    
    
    $
    73,291
    
    
    
    3.9
    %U.S. Agency securities
    
    
    40,063
    
    
    
    134
    
    
    
    (214
    )
    
    
    
    
    
    
    39,983
    
    
    
    2.1
    %Municipal bonds
    
    
    508,204
    
    
    
    18,241
    
    
    
    (587
    )
    
    
    (143
    )
    
    
    525,715
    
    
    
    27.7
    %Corporate and other bonds
    
    
    589,973
    
    
    
    27,934
    
    
    
    (1,054
    )
    
    
    (1,732
    )
    
    
    615,121
    
    
    
    32.4
    %Commercial, residential and
asset-backed securities
    
    
    517,596
    
    
    
    25,834
    
    
    
    (1,691
    )
    
    
    (12,253
    )
    
    
    529,486
    
    
    
    27.9
    %Total fixed-maturity securities
    
    
    1,729,117
    
    
    
    72,378
    
    
    
    (3,771
    )
    
    
    (14,128
    )
    
    
    1,783,596
    
    
    
    94.0
    %Equity securities
    
    
    78,051
    
    
    
    997
    
    
    
    (1,591
    )
    
    
    (724
    )
    
    
    76,733
    
    
    
    4.1
    %Short-term investments
    
    
    36,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,500
    
    
    
    1.9
    %Total
    
    $
    1,843,668
    
    
    $
    73,375
    
    
    $
    (5,362
    )
    
    $
    (14,852
    )
    
    $
    1,896,829
    
    
    
    100.0
    %
 Credit Rating of Fixed-Maturity Securities
  March 31, 2010
    
    December 31, 2009Percentage
    
    
    
    
    
    Percentageof Fair
    
    
    
    
    
    of Fair($ in thousands)
    
    Fair Value
    
    Value
    
    Fair Value
    
    ValueRatingU.S. Treasury securities
    
    $
    68,013
    
    
    
    3.7
    %
    
    $
    73,291
    
    
    
    4.1
    %AAA
    
    
    549,282
    
    
    
    30.0
    %
    
    
    597,932
    
    
    
    33.5
    %AA
    
    
    392,269
    
    
    
    21.4
    %
    
    
    377,283
    
    
    
    21.2
    %A
    
    
    457,044
    
    
    
    24.9
    %
    
    
    400,639
    
    
    
    22.5
    %BBB
    
    
    155,816
    
    
    
    8.5
    %
    
    
    165,173
    
    
    
    9.2
    %Below BBB
    
    
    211,075
    
    
    
    11.5
    %
    
    
    169,278
    
    
    
    9.5
    %Total
    
    $
    1,833,499
    
    
    
    100.0
    %
    
    $
    1,783,596
    
    
    
    100.0
    %
 34




---



##### Table of Contents



Fixed-Maturity Investments with Third Party Guarantees
  With
    
    
    Without($ in thousands)
    
    Guarantee
    
    
    GuaranteeAAA
    
    $
    3,885
    
    
    $
    2,025AA
    
    
    146,301
    
    
    
    123,878A
    
    
    54,500
    
    
    
    68,360BBB
    
    
    
    
    
    
    2,601BB
    
    
    993
    
    
    
    993No underlying rating
    
    
    
    
    
    
    7,822Total
    
    $
    205,679
    
    
    $
    205,679
  Guaranteed
    
    
    Percent($ in thousands)
    
    Amount
    
    
    of TotalNational Public Finance Guarantee Corp.
    
    $
    91,017
    
    
    
    44.3
    %Ambac Financial Corp.
    
    
    33,725
    
    
    
    16.4
    %Berkshire Hathaway Assurance Corp.
    
    
    5,753
    
    
    
    2.8
    %FGIC Corp.
    
    
    5,467
    
    
    
    2.7
    %Assured Guaranty Municipal Corp.
    
    
    52,258
    
    
    
    25.4
    %Others
    
    
    17,459
    
    
    
    8.4
    %Total
    
    $
    205,679
    
    
    
    100.0
    %
 Fair Value Consideration
     35




---



##### Table of Contents



Level 3 AssetsAssets Carried at
    
    
    
    
    
    
    as a Percentage ofFair Value at
    
    
    Fair Value of
    
    
    Total Assets Carried($ in thousands)
    
    March 31, 2010
    
    
    Level 3 Assets
    
    
    at Fair ValueFixed-maturity investments
    
    $
    1,833,499
    
    
    $
    10,925
    
    
    
    0.6
    %Equity investments
    
    
    78,579
    
    
    
    Short-term investments
    
    
    6,699
    
    
    
    Total investments available for sale
    
    
    1,918,777
    
    
    
    10,925
    
    
    
    0.6
    %Cash and cash equivalents
    
    
    156,855
    
    
    
    Total
    
    $
    2,075,632
    
    
    $
    10,925
    
    
    
    0.5
    %
 Unrealized Losses
    36




---



##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalFair
    
    Unrealized
    
    
    
    
    
    Fair
    
    Unrealized
    
    
    
    
    
    Aggregate
    
    Unrealized($ in thousands)
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Fair Value
    
    LossesMarch 31, 2010U.S. Treasury securities
    
    
    12
    
    
    $
    7,180
    
    
    $
    (45
    )
    
    
    2
    
    
    $
    4,086
    
    
    $
    (7
    )
    
    
    14
    
    
    $
    11,266
    
    
    $
    (52
    )U.S. Agency securities
    
    
    2
    
    
    
    6,435
    
    
    
    (49
    )
    
    
    5
    
    
    
    12
    
    
    
    (96
    )
    
    
    7
    
    
    
    6,447
    
    
    
    (145
    )Municipal bonds
    
    
    37
    
    
    
    40,773
    
    
    
    (393
    )
    
    
    6
    
    
    
    10,030
    
    
    
    (196
    )
    
    
    43
    
    
    
    50,803
    
    
    
    (589
    )Corporate and other bondsFinance
    
    
    15
    
    
    
    19,323
    
    
    
    (228
    )
    
    
    36
    
    
    
    25,461
    
    
    
    (536
    )
    
    
    51
    
    
    
    44,784
    
    
    
    (764
    )Industrial
    
    
    21
    
    
    
    17,967
    
    
    
    (104
    )
    
    
    137
    
    
    
    36,699
    
    
    
    (653
    )
    
    
    158
    
    
    
    54,666
    
    
    
    (757
    )Utilities
    
    
    1
    
    
    
    1,971
    
    
    
    (20
    )
    
    
    43
    
    
    
    6,155
    
    
    
    (409
    )
    
    
    44
    
    
    
    8,126
    
    
    
    (429
    )Commercial mortgage-
backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    10,879
    
    
    
    (3,416
    )
    
    
    22
    
    
    
    10,879
    
    
    
    (3,416
    )Residential mortgage-
backed securitiesAgency backed
    
    
    23
    
    
    
    40,962
    
    
    
    (173
    )
    
    
    2
    
    
    
    10,947
    
    
    
    (107
    )
    
    
    25
    
    
    
    51,909
    
    
    
    (280
    )Non-agency backed
    
    
    2
    
    
    
    22
    
    
    
    (3
    )
    
    
    24
    
    
    
    17,315
    
    
    
    (2,439
    )
    
    
    26
    
    
    
    17,337
    
    
    
    (2,442
    )Asset-backed securities
    
    
    1
    
    
    
    495
    
    
    
    (13
    )
    
    
    14
    
    
    
    2,940
    
    
    
    (1,127
    )
    
    
    15
    
    
    
    3,435
    
    
    
    (1,140
    )Total fixed-maturity
securities
    
    
    114
    
    
    
    135,128
    
    
    
    (1,028
    )
    
    
    291
    
    
    
    124,524
    
    
    
    (8,986
    )
    
    
    405
    
    
    
    259,652
    
    
    
    (10,014
    )Preferred stocks
    
    
    43
    
    
    
    28,529
    
    
    
    (401
    )
    
    
    21
    
    
    
    13,570
    
    
    
    (708
    )
    
    
    64
    
    
    
    42,099
    
    
    
    (1,109
    )Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    38
    
    
    
    (143
    )
    
    
    4
    
    
    
    38
    
    
    
    (143
    )Total
    
    
    157
    
    
    $
    163,657
    
    
    $
    (1,429
    )
    
    
    316
    
    
    $
    138,132
    
    
    $
    (9,837
    )
    
    
    473
    
    
    $
    301,789
    
    
    $
    (11,266
    )December 31, 2009U.S. Treasury securities
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )U.S. Agency securities
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )Municipal bonds
    
    
    42
    
    
    
    50,526
    
    
    
    (587
    )
    
    
    5
    
    
    
    2,569
    
    
    
    (143
    )
    
    
    47
    
    
    
    53,095
    
    
    
    (730
    )Corporate and other bondsFinance
    
    
    32
    
    
    
    28,342
    
    
    
    (291
    )
    
    
    20
    
    
    
    14,906
    
    
    
    (1,099
    )
    
    
    52
    
    
    
    43,248
    
    
    
    (1,390
    )Industrial
    
    
    104
    
    
    
    69,475
    
    
    
    (726
    )
    
    
    25
    
    
    
    14,563
    
    
    
    (608
    )
    
    
    129
    
    
    
    84,038
    
    
    
    (1,334
    )Utilities
    
    
    6
    
    
    
    3,575
    
    
    
    (37
    )
    
    
    2
    
    
    
    625
    
    
    
    (25
    )
    
    
    8
    
    
    
    4,200
    
    
    
    (62
    )Commercial mortgage-
backed securities
    
    
    20
    
    
    
    25,810
    
    
    
    (598
    )
    
    
    27
    
    
    
    22,904
    
    
    
    (8,138
    )
    
    
    47
    
    
    
    48,714
    
    
    
    (8,736
    )Residential mortgage-
backed securitiesAgency backed
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )Non-agency backed
    
    
    4
    
    
    
    1,081
    
    
    
    (14
    )
    
    
    37
    
    
    
    19,672
    
    
    
    (2,910
    )
    
    
    41
    
    
    
    20,753
    
    
    
    (2,924
    )Asset-backed securities
    
    
    5
    
    
    
    334
    
    
    
    (116
    )
    
    
    11
    
    
    
    2,962
    
    
    
    (1,205
    )
    
    
    16
    
    
    
    3,296
    
    
    
    (1,321
    )Total fixed-maturity
securities
    
    
    301
    
    
    
    329,221
    
    
    
    (3,771
    )
    
    
    127
    
    
    
    78,201
    
    
    
    (14,128
    )
    
    
    428
    
    
    
    407,422
    
    
    
    (17,899
    )Preferred stocks
    
    
    87
    
    
    
    59,243
    
    
    
    (1,441
    )
    
    
    6
    
    
    
    4,827
    
    
    
    (724
    )
    
    
    93
    
    
    
    64,070
    
    
    
    (2,165
    )Common stocks
    
    
    4
    
    
    
    31
    
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    31
    
    
    
    (150
    )Total
    
    
    392
    
    
    $
    388,495
    
    
    $
    (5,362
    )
    
    
    133
    
    
    $
    83,028
    
    
    $
    (14,852
    )
    
    
    525
    
    
    $
    471,523
    
    
    $
    (20,214
    )
   Unrealized LossPercent of
    
    
    Fair Value by Security RatingFair
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or($ in thousands)
    
    Count
    
    
    Value
    
    
    Amount
    
    
    Cost
    
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    LowerU.S. Treasury securities
    
    
    14
    
    
    $
    11,266
    
    
    $
    (52
    )
    
    
    0
    %
    
    
    100
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %U.S. Agency securities
    
    
    7
    
    
    
    6,447
    
    
    
    (145
    )
    
    
    -2
    %
    
    
    100
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Municipal bonds
    
    
    43
    
    
    
    50,803
    
    
    
    (589
    )
    
    
    -1
    %
    
    
    43
    %
    
    
    40
    %
    
    
    12
    %
    
    
    1
    %
    
    
    4
    %Corporate and other bonds
    
    
    253
    
    
    
    107,576
    
    
    
    (1,950
    )
    
    
    -2
    %
    
    
    1
    %
    
    
    17
    %
    
    
    47
    %
    
    
    12
    %
    
    
    23
    %Commercial mortgage-
backed securities
    
    
    22
    
    
    
    10,879
    
    
    
    (3,416
    )
    
    
    -24
    %
    
    
    8
    %
    
    
    11
    %
    
    
    18
    %
    
    
    17
    %
    
    
    46
    %Residential mortgage-backed
securities
    
    
    51
    
    
    
    69,246
    
    
    
    (2,722
    )
    
    
    -4
    %
    
    
    53
    %
    
    
    30
    %
    
    
    0
    %
    
    
    1
    %
    
    
    16
    %Asset-backed securities
    
    
    15
    
    
    
    3,435
    
    
    
    (1,140
    )
    
    
    -25
    %
    
    
    33
    %
    
    
    7
    %
    
    
    15
    %
    
    
    0
    %
    
    
    45
    %Equities
    
    
    68
    
    
    
    42,137
    
    
    
    (1,252
    )
    
    
    -3
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    100
    %
 37




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows
    Three Months EndedMarch 31,($ in thousands)
    
    2010
    
    
    2009Cash provided by (used in):Operating activities
    
    $
    36,762
    
    
    $
    54,267Investing activities
    
    
    (33,343
    )
    
    
    116,228Financing activities
    
    
    (11,446
    )
    
    
    (2,368
    )Net increase in cash and cash equivalents
    
    
    (8,027
    )
    
    
    168,127Cash and cash equivalents, beginning of year
    
    
    164,882
    
    
    
    136,523Cash and cash equivalents, end of period
    
    $
    156,855
    
    
    $
    304,650
      
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  38




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##### Table of Contents



Interest Rate Risk
    Sensitivity Analysis
     Estimated
    
    EstimatedIncrease
    
    Percentage(Decrease)
    
    Increasein Fair Value
    
    (Decrease)Change in interest rate
    
    (in thousands)
    
    in Fair Value300 basis point rise
    
    $
    (275,067
    )
    
    
    (14.4
    %)200 basis point rise
    
    
    (188,737
    )
    
    
    (9.9
    %)100 basis point rise
    
    
    (96,438
    )
    
    
    (5.0
    %)As of March 31, 2010
    
    
    
    
    
    
    0.0
    %100 basis point decline
    
    
    96,151
    
    
    
    5.0
    %
   39




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##### Table of Contents



Item 4. Controls and Procedures
  Changes in internal control over financial reporting
  
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 inter alia inter alia
 40




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Total Numberof Shares
    
    
    ApproximatePurchased as
    
    
    Dollar ValuePart of
    
    
    of Shares thatTotal
    
    
    
    
    
    
    Publically
    
    
    May Yet beNumber
    
    
    Average
    
    
    Announced
    
    
    Purchasedof Shares
    
    
    Price Paid
    
    
    Plan or
    
    
    Under Plan orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramJanuary 1 - 31, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    February 1 - 28, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 - 31, 2010 (1)
    
    
    391,862
    
    
    
    22.05
    
    
    
    337,782
    
    
    
    92,552,431Total
    
    
    391,862
    
    
    $
    22.05
    
    
    
    337,782
    
    
    $
    92,552,431
 (1)
    
    Includes 54,080 shares that were withheld to satisfy tax withholding amount due from employees upon the receipt of
previously restricted shares. 
 Item 6. Exhibits
 31.1
    
    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
 41




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##### Table of Contents



Signatures
  Tower Group, Inc.
RegistrantDate: May 10, 2010
    /s/ Michael H. LeeMichael H. LeeChairman of the Board,
President and Chief Executive OfficerDate: May 10, 2010
    /s/ William E. HitselbergerWilliam E. HitselbergerSenior Vice President,
Chief Financial Officer 42