##### 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 June 30, 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.
 
 Delaware
    
    13-3894120(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)120 Broadway, 31st FloorNew York, NY
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000  (Registrants telephone number, including area code
 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  June 30, 2009 (unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Income and Comprehensive Net Income
Three and six months ended June 30, 2009 and 2008 (unaudited)
    
    
    2Consolidated Statements of Changes in Stockholders Equity
Three and six months ended June 30, 2009 and 2008 (unaudited)
    
    
    3Consolidated Statements of Cash Flows
Six months ended June 30, 2009 and 2008 (unaudited)
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4. Controls and Procedures
    
    
    52PART II OTHER INFORMATION
    
    
    54Item 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    54Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 6. Exhibits
    
    
    57SIGNATURES
    
    
    58EX-31.1EX-31.2EX-32




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
  
 Tower Group, Inc.
 Consolidated Balance Sheets
 (Unaudited)June 30,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2009
    
    2008AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,427,156 and $581,470)
    
    $
    1,421,612
    
    
    $
    530,159Equity securities, available-for-sale, at fair value (cost of $8,785 and $12,726)
    
    
    7,169
    
    
    
    10,814Total investments
    
    
    1,428,781
    
    
    
    540,973Cash and cash equivalents
    
    
    152,795
    
    
    
    136,253Investment income receivable
    
    
    14,982
    
    
    
    6,972Premiums receivable
    
    
    213,901
    
    
    
    188,643Reinsurance recoverable on unpaid losses
    
    
    114,935
    
    
    
    222,229Reinsurance recoverable on paid losses
    
    
    21,825
    
    
    
    50,377Prepaid reinsurance premiums
    
    
    64,438
    
    
    
    153,650Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    146,008
    
    
    
    53,080Deferred income taxes
    
    
    58,550
    
    
    
    36,207Intangible assets
    
    
    38,963
    
    
    
    20,464Goodwill
    
    
    236,407
    
    
    
    18,962Fixed assets, net of accumulated depreciation
    
    
    46,590
    
    
    
    39,038Investment in unconsolidated affiliate
    
    
    
    
    
    
    29,293Other assets
    
    
    38,079
    
    
    
    42,240Total assets
    
    $
    2,576,254
    
    
    $
    1,538,381LiabilitiesLoss and loss adjustment expenses
    
    $
    833,175
    
    
    $
    534,991Unearned premium
    
    
    523,113
    
    
    
    328,847Reinsurance balances payable
    
    
    51,419
    
    
    
    134,598Payable to issuing carriers
    
    
    47
    
    
    
    47,301Funds held under reinsurance agreements
    
    
    15,558
    
    
    
    20,474Accounts payable, accrued liabilities and other liabilities
    
    
    70,585
    
    
    
    35,930Subordinated debentures
    
    
    235,058
    
    
    
    101,036Total liabilities
    
    
    1,728,955
    
    
    
    1,203,177Stockholders EquityCommon stock ($0.01 par value; 100,000,000 shares authorized, 40,565,221 and
23,408,145 shares issued, and 40,489,847 and 23,339,470 shares outstanding)
    
    
    405
    
    
    
    234Treasury stock (75,374 and 68,675 shares)
    
    
    (1,330
    )
    
    
    (1,026
    )Paid-in-capital
    
    
    642,047
    
    
    
    208,094Accumulated other comprehensive net loss
    
    
    (4,655
    )
    
    
    (37,498
    )Retained earnings
    
    
    210,832
    
    
    
    165,400Total stockholders equity
    
    
    847,299
    
    
    
    335,204Total liabilities and stockholders equity
    
    $
    2,576,254
    
    
    $
    1,538,381
 See accompanying notes to the consolidated financial statements.
 1




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##### Table of Contents



Tower Group, Inc.
Consolidated Statements of Income and Comprehensive Income
 Three Monts Ended
    
    Six Months Ended($ in thousands, except
    
    June 30,
    
    June 30,per share and share amounts)
    
    2009
    
    2008
    
    2009
    
    2008RevenuesNet premiums earned
    
    $
    229,451
    
    
    $
    70,114
    
    
    $
    397,541
    
    
    $
    138,544Ceding commission revenue
    
    
    7,167
    
    
    
    21,491
    
    
    
    20,741
    
    
    
    42,145Insurance services revenue
    
    
    (293
    )
    
    
    14,242
    
    
    
    3,983
    
    
    
    23,902Policy billing fees
    
    
    799
    
    
    
    555
    
    
    
    1,320
    
    
    
    1,133Net investment income
    
    
    17,417
    
    
    
    8,366
    
    
    
    31,950
    
    
    
    18,162Net realized gains (losses) on investments
    
    
    4,570
    
    
    
    323
    
    
    
    7,124
    
    
    
    4,133Other-than-temporary impairment losses
    
    
    (6,139
    )
    
    
    (8,293
    )
    
    
    (14,871
    )
    
    
    (10,729
    )Portion of loss recognized in other accumulated
comprehensive net loss
    
    
    2,011
    
    
    
    
    
    
    
    7,517
    
    
    
    Net impairment losses recognized in earnings
    
    
    (4,128
    )
    
    
    (8,293
    )
    
    
    (7,354
    )
    
    
    (10,729
    )Total revenues
    
    
    254,983
    
    
    
    106,798
    
    
    
    455,305
    
    
    
    217,290ExpensesLoss and loss adjustment expenses
    
    
    119,828
    
    
    
    36,923
    
    
    
    210,083
    
    
    
    74,219Direct and ceding commission expense
    
    
    52,541
    
    
    
    30,026
    
    
    
    99,949
    
    
    
    56,634Other operating expenses
    
    
    31,419
    
    
    
    22,193
    
    
    
    58,163
    
    
    
    43,858Interest expense
    
    
    4,659
    
    
    
    2,161
    
    
    
    8,442
    
    
    
    4,484Total expenses
    
    
    208,447
    
    
    
    91,303
    
    
    
    376,637
    
    
    
    179,195Other Income (expense)Equity income (loss) in unconsolidated affiliate
    
    
    
    
    
    
    762
    
    
    
    (777
    )
    
    
    1,522Acquisition-related transaction costs
    
    
    
    
    
    
    
    
    
    
    (11,348
    )
    
    
    Gain on investment in acquired unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    7,388
    
    
    
    Income before income taxes
    
    
    46,536
    
    
    
    16,257
    
    
    
    73,931
    
    
    
    39,617Income tax expense
    
    
    15,909
    
    
    
    6,088
    
    
    
    25,327
    
    
    
    14,595Net income
    
    $
    30,627
    
    
    $
    10,169
    
    
    $
    48,604
    
    
    $
    25,022Gross unrealized investment holding gains/
(losses) arising during period
    
    
    43,493
    
    
    
    (9,550
    )
    
    
    48,559
    
    
    
    (22,074
    )Cumulative effect of adjustment resulting from
adoption of FSP FAS 115-2
    
    
    
    
    
    
    
    
    
    
    (2,497
    )
    
    
    Equity in net unrealized gains (losses) on investment in
unconsolidated affiliates investment portfolio
    
    
    
    
    
    
    (324
    )
    
    
    3,124
    
    
    
    (1,107
    )Less: reclassification adjustment for (gains) losses
included in net income
    
    
    (442
    )
    
    
    7,970
    
    
    
    230
    
    
    
    6,596Income tax (benefit) expense related to items of other
comprehensive income
    
    
    (14,345
    )
    
    
    666
    
    
    
    (16,573
    )
    
    
    5,805Comprehensive net income
    
    $
    59,333
    
    
    $
    8,931
    
    
    $
    81,447
    
    
    $
    14,242Basic and diluted earnings per shareBasicCommon stock:Distributed
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.10Undistributed
    
    
    0.69
    
    
    
    0.39
    
    
    
    1.19
    
    
    
    0.98Total
    
    $
    0.76
    
    
    $
    0.44
    
    
    $
    1.31
    
    
    $
    1.08Diluted
    
    $
    0.75
    
    
    $
    0.44
    
    
    $
    1.30
    
    
    $
    1.07Weighted average common shares outstandingBasic
    
    
    40,467,037
    
    
    
    23,321,911
    
    
    
    37,109,965
    
    
    
    23,268,226Diluted
    
    
    40,606,326
    
    
    
    23,527,262
    
    
    
    37,255,790
    
    
    
    23,461,117Dividends declared and paid per common shareCommon stock
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.10
 See accompanying notes to the consolidated financial statements.
 2




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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 and FAS 124-2, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,623
    )
    
    
    1,623
    
    
    
    Adjusted balance at
December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (39,121
    )
    
    
    167,023
    
    
    
    335,204Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,795
    )
    
    
    (4,795
    )Stock based compensation
    
    
    279
    
    
    
    2
    
    
    
    (394
    )
    
    
    3,451
    
    
    
    
    
    
    
    
    
    
    
    3,059Issuance of common stock
    
    
    16,878
    
    
    
    169
    
    
    
    
    
    
    
    421,454
    
    
    
    
    
    
    
    
    
    
    
    421,623Fair value of outstanding
CastlePoint stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,138
    
    
    
    
    
    
    
    
    
    
    
    9,138Warrant exercise
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,604
    
    
    
    48,604Net unrealized appreciation on
securities available for sale,
net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,466
    
    
    
    
    
    
    
    34,466Balance at June 30, 2009
    
    
    40,565
    
    
    $
    405
    
    
    $
    (1,330
    )
    
    $
    642,047
    
    
    $
    (4,655
    )
    
    $
    210,832
    
    
    $
    847,299
 3




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##### Table of Contents



Tower Group, Inc.
Consolidated Statements of Cash Flows
 Six Months EndedJune 30,($ in thousands)
    
    2009
    
    2008Cash flows provided by (used in) operating activities:Net income
    
    $
    48,604
    
    
    $
    25,022Adjustments 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
    
    
    (7,124
    )
    
    
    (4,133
    )Other-than-temporary-impairment loss on investments
    
    
    7,354
    
    
    
    10,729Depreciation and amortization
    
    
    9,625
    
    
    
    5,659Amortization of bond premium or discount
    
    
    (276
    )
    
    
    Amortization of restricted stock
    
    
    2,020
    
    
    
    1,153Deferred income taxes
    
    
    (2,515
    )
    
    
    1,611Excess tax benefits from share-based payment arrangements
    
    
    (43
    )
    
    
    (80
    )(Increase) decrease in assets:Investment income receivable
    
    
    (3,147
    )
    
    
    (446
    )Premiums receivable
    
    
    192,884
    
    
    
    (34
    )Reinsurance recoverable
    
    
    151,405
    
    
    
    (23,476
    )Prepaid reinsurance premiums
    
    
    118,021
    
    
    
    (17,461
    )Deferred acquisition costs, net
    
    
    (14,645
    )
    
    
    (8,231
    )Federal and state income taxes recoverable/payable
    
    
    6,908
    
    
    
    Intangible assets and goodwill
    
    
    (5,447
    )
    
    
    Investment in unconsolidated affiliate
    
    
    
    
    
    
    (1,523
    )Other assets
    
    
    8,809
    
    
    
    (6,307
    )Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    (140,167
    )
    
    
    18,395Unearned premium
    
    
    (91,640
    )
    
    
    27,004Reinsurance balances payable
    
    
    (141,236
    )
    
    
    21,677Payable to issuing carriers
    
    
    (47,254
    )
    
    
    (15,733
    )Accounts payable and accrued expenses
    
    
    38,077
    
    
    
    (7,634
    )Funds held under reinsurance agreement
    
    
    (40,094
    )
    
    
    (7,415
    )Other
    
    
    225
    
    
    
    145Net cash flows provided by operations
    
    
    82,956
    
    
    
    18,922Cash flows provided by (used in) investing activities:Cash acquired from acquisition of CastlePoint
    
    
    242,338
    
    
    
    Acquisition of Hermitage, net of cash acquired
    
    
    (42,218
    )
    
    
    Purchase of fixed assets
    
    
    (10,778
    )
    
    
    (9,009
    )Purchase  fixed-maturity securities
    
    
    (579,013
    )
    
    
    (218,247
    )Sale or maturity  fixed-maturity securities
    
    
    293,550
    
    
    
    228,384Sale  equity securities
    
    
    34,194
    
    
    
    5,066Net cash flows provided by (used in) investing activities
    
    
    (61,927
    )
    
    
    6,194Cash flows provided by (used in) financing activities:Exercise of stock options & warrants
    
    
    387
    
    
    
    231Excess tax benefits from share-based payment arrangements
    
    
    43
    
    
    
    80Treasury stock acquired-net employee share-based compensation
    
    
    (392
    )
    
    
    (545
    )Dividends paid
    
    
    (4,795
    )
    
    
    (2,303
    )Net cash flows (used in) provided by financing activities
    
    
    (4,757
    )
    
    
    (2,537
    )Increase (decrease) in cash and cash equivalents
    
    
    16,272
    
    
    
    22,579Cash and cash equivalents, beginning of period
    
    
    136,523
    
    
    
    77,679Cash and cash equivalents, end of period
    
    $
    152,795
    
    
    $
    100,258Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    21,075
    
    
    $
    16,893Cash paid for interest
    
    
    9,246
    
    
    
    4,048Schedule 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.
 4




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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
  5




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##### Table of Contents



Consolidation
  Statement of Cash Flow
  Loss and Loss Adjustment Expenses (LAE)
    Deferred Acquisition Costs / Commission Revenue
  6




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##### Table of Contents



Use of Estimates
  Reclassifications
  Accounting Pronouncements
 Business Combinations
 Effective Date of FASB Statement No. 157
 Determination of the Useful Life of Intangible
Assets
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
 7




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##### Table of Contents



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
 
    
    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 Disclosures
about Fair Value of Financial Instruments Interim Financial Reporting
 Subsequent Events
 8




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##### Table of Contents



Accounting for Transfers of Financial Assets, ,
 Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities
 The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles
 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 / VOBA
    
    
    
    
    
    
    
    
    
    
    68,231
    
    
    
    68,231Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    27,414
    
    
    
    27,414Goodwill
    
    
    
    
    
    
    
    
    
    
    183,138
    
    
    
    183,138Intangibles
    
    
    
    
    
    
    
    
    
    
    9,100
    
    
    
    9,100Other assets
    
    
    
    
    
    
    
    
    
    
    7,448
    
    
    
    7,448Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333,263Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    291,076
    
    
    
    291,076Unearned premium
    
    
    
    
    
    
    
    
    
    
    242,365
    
    
    
    242,365Other liabilities
    
    
    
    
    
    
    
    
    
    
    130,623
    
    
    
    130,623Subordinated debt
    
    
    
    
    
    
    
    
    
    
    134,022
    
    
    
    134,022Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798,086Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535,177Total liabilities and stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,333,263
  10




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##### Table of Contents



Acquisition of Hermitage Insurance Group
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    $
    151
    
    
    $
    101,033
    
    
    $
    263
    
    
    $
    101,447Cash and cash equivalents
    
    
    88,167
    
    
    
    
    
    
    
    
    
    
    
    88,167Receivables
    
    
    
    
    
    
    
    
    
    
    11,761
    
    
    
    11,761Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    5,385
    
    
    
    5,385Reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    7,310
    
    
    
    7,310Deferred acquisition costs / VOBA
    
    
    
    
    
    
    
    
    
    
    11,319
    
    
    
    11,319Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    6,366
    
    
    
    6,366Goodwill
    
    
    
    
    
    
    
    
    
    
    34,307
    
    
    
    34,307Intangibles
    
    
    
    
    
    
    
    
    
    
    10,830
    
    
    
    10,830Other assets
    
    
    
    
    
    
    
    
    
    
    2,077
    
    
    
    2,077Totalassets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278,969Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    92,147
    
    
    
    92,147Unearned premium
    
    
    
    
    
    
    
    
    
    
    43,541
    
    
    
    43,541Other liabilities
    
    
    
    
    
    
    
    
    
    
    13,166
    
    
    
    13,166Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148,854Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,115Total liabilities and stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    278,969
 11




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30, 2009
    
    June 30, 2009($ in thousands)
    
    CastlePoint
    
    Hermitage
    
    CastlePoint
    
    HermitageTotal revenue
    
    $
    113,325
    
    
    $
    25,080
    
    
    $
    195,432
    
    
    $
    33,668Net income
    
    
    10,626
    
    
    
    6,782
    
    
    
    21,333
    
    
    
    8,488
  Significant Factors Affecting Acquisition Date Fair Values
 Value of Business Acquired (VOBA)
    Intangibles
  12




---



##### Table of Contents



Loss and Loss Adjustment Expense Reserves Acquired
   Non-financial Assets and Liabilities
  Pro Forma Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Total revenue
    
    $
    254,983
    
    
    $
    211,744
    
    
    $
    500,885
    
    
    $
    406,790Net income
    
    
    30,627
    
    
    
    20,667
    
    
    $
    47,979
    
    
    
    36,629Net income per share  basic
    
    $
    0.76
    
    
    $
    0.52
    
    
    $
    1.19
    
    
    $
    0.99Net income per share  diluted
    
    $
    0.76
    
    
    $
    0.51
    
    
    $
    1.19
    
    
    $
    0.99Weighted average common shares outstandingBasic
    
    
    40,467,037
    
    
    
    39,919,362
    
    
    
    40,292,226
    
    
    
    39,896,642Diluted
    
    
    40,606,326
    
    
    
    40,145,278
    
    
    
    40,438,053
    
    
    
    40,105,731
 Note:
  Note 4Investments
  13




---



##### Table of Contents



Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    UnrealizedAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    OTTI($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    LossesJune 30, 2009U.S. Treasury securities
    
    $
    35,734
    
    
    $
    329
    
    
    $
    (105
    )
    
    $
    
    
    
    $
    35,957
    
    
    $
    U.S. Agency securities
    
    
    17,122
    
    
    
    205
    
    
    
    (89
    )
    
    
    
    
    
    
    17,239
    
    
    
    Municipal bonds
    
    
    428,763
    
    
    
    7,566
    
    
    
    (2,392
    )
    
    
    (747
    )
    
    
    433,190
    
    
    
    Corporate and other bondsFinance
    
    
    153,522
    
    
    
    4,777
    
    
    
    (929
    )
    
    
    (5,497
    )
    
    
    151,873
    
    
    
    Industrial
    
    
    243,538
    
    
    
    4,872
    
    
    
    (1,122
    )
    
    
    (3,384
    )
    
    
    243,904
    
    
    
    Utilities
    
    
    28,969
    
    
    
    1,423
    
    
    
    (8
    )
    
    
    (186
    )
    
    
    30,198
    
    
    
    Commercial
mortgage-backed securities
    
    
    208,023
    
    
    
    14,126
    
    
    
    (1,556
    )
    
    
    (18,619
    )
    
    
    201,973
    
    
    
    (5,567
    )Residential mortgage-backed
securitiesAgency backed
    
    
    259,869
    
    
    
    4,885
    
    
    
    (3
    )
    
    
    
    
    
    
    264,751
    
    
    
    Non-agency backed
    
    
    26,606
    
    
    
    447
    
    
    
    (1,845
    )
    
    
    (4,414
    )
    
    
    20,793
    
    
    
    (1,896
    )Asset-backed securities
    
    
    25,011
    
    
    
    251
    
    
    
    (417
    )
    
    
    (3,111
    )
    
    
    21,734
    
    
    
    (2,536
    )Total fixed maturity securities
    
    
    1,427,156
    
    
    
    38,882
    
    
    
    (8,468
    )
    
    
    (35,959
    )
    
    
    1,421,612
    
    
    
    (9,999
    )Preferred stocks
    
    
    8,558
    
    
    
    83
    
    
    
    (12
    )
    
    
    (1,649
    )
    
    
    6,980
    
    
    
    Common stocks
    
    
    227
    
    
    
    59
    
    
    
    (97
    )
    
    
    
    
    
    
    189
    
    
    
    Total
    
    $
    1,435,941
    
    
    $
    39,024
    
    
    $
    (8,577
    )
    
    $
    (37,607
    )
    
    $
    1,428,781
    
    
    $
    (9,999
    )December 31, 2008U.S. Treasury securities
    
    $
    26,482
    
    
    $
    524
    
    
    $
    
    
    
    $
    
    
    
    $
    27,006U.S. Agency securities
    
    
    361
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    399Municipal bonds
    
    
    179,734
    
    
    
    2,865
    
    
    
    (2,485
    )
    
    
    (166
    )
    
    
    179,948Corporate and other bondsFinance
    
    
    84,579
    
    
    
    457
    
    
    
    (6,003
    )
    
    
    (4,173
    )
    
    
    74,860Industrial
    
    
    122,599
    
    
    
    475
    
    
    
    (7,740
    )
    
    
    (5,639
    )
    
    
    109,695Utilities
    
    
    2,829
    
    
    
    
    
    
    
    (205
    )
    
    
    (204
    )
    
    
    2,420Commercial mortgage-backed securities
    
    
    52,558
    
    
    
    3
    
    
    
    (4,399
    )
    
    
    (16,626
    )
    
    
    31,535Residential mortgage-backed
securitiesAgency backed
    
    
    70,416
    
    
    
    1,799
    
    
    
    (16
    )
    
    
    (20
    )
    
    
    72,178Non-agency backed
    
    
    31,441
    
    
    
    4
    
    
    
    (3,536
    )
    
    
    (3,594
    )
    
    
    24,315Asset-backed securities
    
    
    10,471
    
    
    
    32
    
    
    
    (2,652
    )
    
    
    (49
    )
    
    
    7,802Total fixed maturity securities
    
    
    581,470
    
    
    
    6,198
    
    
    
    (27,036
    )
    
    
    (30,471
    )
    
    
    530,158Preferred stocks
    
    
    5,551
    
    
    
    
    
    
    
    
    
    
    
    (1,857
    )
    
    
    3,694Common stocks
    
    
    7,175
    
    
    
    5
    
    
    
    (60
    )
    
    
    
    
    
    
    7,120Total
    
    $
    594,196
    
    
    $
    6,203
    
    
    $
    (27,096
    )
    
    $
    (32,328
    )
    
    $
    540,973
   Three months ended
    
    Six months endedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008IncomeFixed-maturity securities
    
    $
    17,579
    
    
    $
    7,577
    
    
    $
    31,548
    
    
    $
    16,275Equity securities
    
    
    234
    
    
    
    109
    
    
    
    549
    
    
    
    495Cash and cash equivalents
    
    
    159
    
    
    
    870
    
    
    
    824
    
    
    
    1,715Dividends on common trust securities
    
    
    220
    
    
    
    83
    
    
    
    273
    
    
    
    164Total
    
    
    18,192
    
    
    
    8,639
    
    
    
    33,194
    
    
    
    18,649ExpensesInvestment expenses
    
    
    775
    
    
    
    273
    
    
    
    1,244
    
    
    
    487Net investment income
    
    $
    17,417
    
    
    $
    8,366
    
    
    $
    31,950
    
    
    $
    18,162
 14




---



##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Fixed-maturity securitiesGross realized gains
    
    $
    4,627
    
    
    $
    526
    
    
    $
    7,116
    
    
    $
    4,432Gross realized losses
    
    
    (188
    )
    
    
    (272
    )
    
    
    (324
    )
    
    
    (368
    )4,439
    
    
    
    254
    
    
    
    6,792
    
    
    
    4,064Equity securitiesGross realized gains
    
    
    131
    
    
    
    144
    
    
    
    393
    
    
    
    144Gross realized losses
    
    
    
    
    
    
    (75
    )
    
    
    (61
    )
    
    
    (75
    )131
    
    
    
    69
    
    
    
    332
    
    
    
    69Net realized gains (losses) on investments
    
    
    4,570
    
    
    
    323
    
    
    
    7,124
    
    
    
    4,133Other-than-temporary impairment lossesFixed-maturity securities
    
    
    (4,128
    )
    
    
    (8,293
    )
    
    
    (7,354
    )
    
    
    (8,293
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,436
    )Total other-than-temporary impairment losses
    
    
    (4,128
    )
    
    
    (8,293
    )
    
    
    (7,354
    )
    
    
    (10,729
    )Total net realized gains (losses), including other-than
temporary impairment losses
    
    $
    442
    
    
    $
    (7,970
    )
    
    $
    (230
    )
    
    $
    (6,596
    )
 Impairment Review
  Recognition and Presentation of Other-Than-Temporary Impairments,
  15




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2009
    
    2008
    
    2009
    
    2008($ in thousands)
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountCorporate and other bonds
    
    
    8
    
    
    $
    (1,366
    )
    
    
    
    
    
    $
    
    
    
    
    8
    
    
    
    (1,366
    )
    
    
    
    
    
    $
    Commercial mortgage-backed securities
    
    
    6
    
    
    
    (2,505
    )
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    (8,026
    )
    
    
    
    
    
    
    Residential mortgage-backed securities
    
    
    16
    
    
    
    (1,207
    )
    
    
    15
    
    
    
    (8,293
    )
    
    
    21
    
    
    
    (3,662
    )
    
    
    15
    
    
    
    (8,293
    )Asset-backed securities
    
    
    8
    
    
    
    (1,061
    )
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    (1,817
    )
    
    
    
    
    
    
    Equities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (2,436
    )38
    
    
    $
    (6,139
    )
    
    
    15
    
    
    $
    (8,293
    )
    
    
    60
    
    
    $
    (14,871
    )
    
    
    22
    
    
    $
    (10,729
    )Portion of loss recognized in accumulated
other comprehensive net loss,
principally
residential mortgage-backed securities
    
    
    
    
    
    
    2,011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,517
    
    
    
    
    
    
    
    Net impairment losses recognized
in earnings
    
    
    
    
    
    $
    (4,128
    )
    
    
    
    
    
    $
    (8,293
    )
    
    
    
    
    
    $
    (7,354
    )
    
    
    
    
    
    $
    (10,729
    )
  Six MonthsEnded($ in thousands)
    
    June 30, 2009Balance, January 1, 2009
    
    $
    24,637Non-Credit
losses recognized upon adoption of FSP 115-2 and 124-2
    
    
    (2,497
    )Additional credit losses recognized during the period, related to securities
for which:No OTTI has been previously recognized
    
    
    5,122OTTI has been previulsy recognized
    
    
    2,246Reductions due to:Securities sold during the period (realized)
    
    
    Securities which will be sold in coming periods
    
    
    Balance, June 30, 2009
    
    $
    29,509
 Unrealized Losses
  16




---



##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    Aggregate
    
    Unrealized($ in thousands)
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Fair Value
    
    Losses
    
    No.
    
    Fair Value
    
    LossesJune 30, 2009U.S. Treasury securities
    
    
    11
    
    
    $
    7,388
    
    
    $
    (105
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    11
    
    
    $
    7,388
    
    
    $
    (105
    )U.S. Agency securities
    
    
    5
    
    
    
    1,023
    
    
    
    (89
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    1,023
    
    
    
    (89
    )Municipal bonds
    
    
    114
    
    
    
    148,421
    
    
    
    (2,392
    )
    
    
    17
    
    
    
    12,576
    
    
    
    (747
    )
    
    
    131
    
    
    
    160,996
    
    
    
    (3,140
    )Corporate and other bondsFinance
    
    
    71
    
    
    
    31,679
    
    
    
    (929
    )
    
    
    46
    
    
    
    37,800
    
    
    
    (5,497
    )
    
    
    117
    
    
    
    69,479
    
    
    
    (6,426
    )Industrial
    
    
    207
    
    
    
    69,892
    
    
    
    (1,122
    )
    
    
    58
    
    
    
    33,652
    
    
    
    (3,384
    )
    
    
    265
    
    
    
    103,544
    
    
    
    (4,506
    )Utilities
    
    
    14
    
    
    
    3,465
    
    
    
    (8
    )
    
    
    5
    
    
    
    1,397
    
    
    
    (186
    )
    
    
    19
    
    
    
    4,862
    
    
    
    (194
    )Commercial mortgage-
backed securites
    
    
    34
    
    
    
    38,370
    
    
    
    (1,556
    )
    
    
    31
    
    
    
    23,269
    
    
    
    (18,619
    )
    
    
    65
    
    
    
    61,639
    
    
    
    (20,175
    )Residential mortgage-
backed securitesAgency backed
    
    
    3
    
    
    
    1,502
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1,502
    
    
    
    (3
    )Non-agency backed
    
    
    15
    
    
    
    5,168
    
    
    
    (1,845
    )
    
    
    25
    
    
    
    13,751
    
    
    
    (4,414
    )
    
    
    40
    
    
    
    18,919
    
    
    
    (6,260
    )Asset-backed securities
    
    
    9
    
    
    
    787
    
    
    
    (417
    )
    
    
    15
    
    
    
    5,498
    
    
    
    (3,111
    )
    
    
    24
    
    
    
    6,285
    
    
    
    (3,529
    )Total fixed maturity
securities
    
    
    483
    
    
    
    307,695
    
    
    
    (8,468
    )
    
    
    197
    
    
    
    127,943
    
    
    
    (35,959
    )
    
    
    680
    
    
    
    435,638
    
    
    
    (44,427
    )Preferred stocks
    
    
    2
    
    
    
    1,689
    
    
    
    (12
    )
    
    
    6
    
    
    
    3,902
    
    
    
    (1,649
    )
    
    
    8
    
    
    
    5,591
    
    
    
    (1,661
    )Common stocks
    
    
    4
    
    
    
    66
    
    
    
    (97
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    66
    
    
    
    (97
    )Total
    
    
    489
    
    
    $
    309,450
    
    
    $
    (8,577
    )
    
    
    203
    
    
    
    131,846
    
    
    
    (37,607
    )
    
    
    692
    
    
    $
    441,296
    
    
    $
    (46,184
    )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
    )
  17




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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 month
    
    $
    38,396
    
    
    $
    (1,552
    )
    
    
    3
    
    
    $
    (609
    )
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Unrealized loss for over 6 months
    
    
    6,230
    
    
    
    (1,770
    )
    
    
    7
    
    
    
    (579
    )
    
    
    3
    
    
    
    (887
    )
    
    
    4
    
    
    
    (245
    )Unrealized loss for over 12 months
    
    
    15,631
    
    
    
    (4,707
    )
    
    
    5
    
    
    
    (649
    )
    
    
    11
    
    
    
    (1,937
    )
    
    
    8
    
    
    
    (1,700
    )Unrealized loss for over 18 months
    
    
    9,427
    
    
    
    (5,455
    )
    
    
    3
    
    
    
    (358
    )
    
    
    7
    
    
    
    (2,262
    )
    
    
    5
    
    
    
    (2,583
    )Unrealized loss for over 2 years
    
    
    18,662
    
    
    
    (16,483
    )
    
    
    4
    
    
    
    (1,887
    )
    
    
    10
    
    
    
    (2,043
    )
    
    
    14
    
    
    
    (12,503
    )$
    88,346
    
    
    $
    (29,967
    )
    
    
    22
    
    
    $
    (4,081
    )
    
    
    31
    
    
    $
    (7,129
    )
    
    
    31
    
    
    $
    (17,031
    )
 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 month
    
    $
    239,560
    
    
    $
    (3,474
    )
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    (1
    )
    
    
    1
    
    
    $
    (34
    )Unrealized loss for over 6 months
    
    
    22,627
    
    
    
    (1,182
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (10
    )
    
    
    3
    
    
    
    (93
    )Unrealized loss for over 12 months
    
    
    48,844
    
    
    
    (4,770
    )
    
    
    3
    
    
    
    (479
    )
    
    
    2
    
    
    
    (1,201
    )
    
    
    1
    
    
    
    (210
    )Unrealized loss for over 18 months
    
    
    16,199
    
    
    
    (2,777
    )
    
    
    10
    
    
    
    (2,071
    )
    
    
    1
    
    
    
    (66
    )
    
    
    1
    
    
    
    (238
    )Unrealized loss for over 2 years
    
    
    25,720
    
    
    
    (4,014
    )
    
    
    11
    
    
    
    (1,628
    )
    
    
    3
    
    
    
    (1,054
    )
    
    
    1
    
    
    
    (267
    )$
    352,950
    
    
    $
    (16,217
    )
    
    
    24
    
    
    $
    (4,177
    )
    
    
    9
    
    
    $
    (2,331
    )
    
    
    7
    
    
    $
    (841
    )
  Fixed Maturity InvestmentTime to Maturity
  18




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##### Table of Contents



June 30, 2009
    
    December 31, 2008Amortized
    
    
    
    
    
    Amortized($ in thousands)
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair ValueRemaining Time to MaturityLess than one year
    
    $
    19,704
    
    
    $
    19,806
    
    
    $
    8,813
    
    
    $
    8,789One to five years
    
    
    287,720
    
    
    
    291,172
    
    
    
    115,645
    
    
    
    112,514Five to ten years
    
    
    322,186
    
    
    
    320,696
    
    
    
    189,267
    
    
    
    176,218More than 10 years
    
    
    278,038
    
    
    
    280,687
    
    
    
    102,859
    
    
    
    96,807Mortgage and asset-backed securities
    
    
    519,509
    
    
    
    509,252
    
    
    
    164,886
    
    
    
    135,831Total
    
    $
    1,427,157
    
    
    $
    1,421,612
    
    
    $
    581,470
    
    
    $
    530,159
 Note 5Fair Value Measurements
   Level 1
 Level 2
 Level 3
   19




---



##### Table of Contents



($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalFixed-maturity investmentsU.S. Treasury securities
    
    $
    
    
    
    $
    35,957
    
    
    $
    
    
    
    $
    35,957U.S. Agency securities
    
    
    
    
    
    
    17,239
    
    
    
    
    
    
    
    17,239Municipal bonds
    
    
    
    
    
    
    433,190
    
    
    
    
    
    
    
    433,190Corporate and other bonds
    
    
    
    
    
    
    425,975
    
    
    
    
    
    
    
    425,975Commercial mortgage-backed securities
    
    
    
    
    
    
    198,376
    
    
    
    3,597
    
    
    
    201,973Residential mortgage-backed securitiesAgency
    
    
    
    
    
    
    264,751
    
    
    
    
    
    
    
    264,751Non-agency
    
    
    
    
    
    
    6,872
    
    
    
    13,922
    
    
    
    20,793Asset-backed securities
    
    
    
    
    
    
    16,341
    
    
    
    5,393
    
    
    
    21,734Total fixed maturities
    
    
    
    
    
    
    1,398,701
    
    
    
    22,912
    
    
    
    1,421,612Equity investments
    
    
    6,832
    
    
    
    336
    
    
    
    
    
    
    
    7,169Total
    
    $
    6,832
    
    
    $
    1,399,036
    
    
    $
    22,912
    
    
    $
    1,428,781
   ($ in thousands)Beginning balance
    
    $
    18,084Total gains (losses)-realized / unrealizedIncluded in net income
    
    
    (6,002
    )Included in other comprehensive income (loss)
    
    
    (201
    )Purchases, issuances and settlements
    
    
    747Net transfers into (out of) Level 3
    
    
    10,284Ending balance
    
    $
    22,912
 Note 6Goodwill and Intangible Assets
 Goodwill
   20




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##### Table of Contents



Intangibles
     June 30, 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
    
    
    
    (4,435
    )
    
    
    26,145
    
    
    
    17,090
    
    
    
    (3,129
    )
    
    
    13,961Trademarks
    
    
    5
    
    
    
    2,340
    
    
    
    (125
    )
    
    
    2,215
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    43,523
    
    
    $
    (4,560
    )
    
    $
    38,963
    
    
    $
    23,593
    
    
    $
    (3,129
    )
    
    $
    20,464
  $ in thousands)2009
    
    $
    1,7542010
    
    
    3,5912011
    
    
    3,1352012
    
    
    2,7692013
    
    
    2,4782014
    
    
    1,832
 Note 7Investment in Unconsolidated AffiliateCastlePoint
  21




---



##### Table of Contents



($ 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, June 30, 2009
    
    $
    0.0
   Note 8Other Assets
 (Unaudited)June 30,
    
    
    December 31,($ in thousands)
    
    2009
    
    
    2008Receivable  claims paid by agency
    
    $
    6,812
    
    
    $
    4,639Investment in statutory business trusts, equity method
    
    
    7,058
    
    
    
    3,036Receivable for securities
    
    
    
    
    
    
    3,542Deferred merger and acquisition expenses
    
    
    
    
    
    
    9,412Prepaids, deposits and advances
    
    
    4,537
    
    
    
    4,006Receivable from residual market plans
    
    
    2,973
    
    
    
    2,818Commission receivable from issuing carriers
    
    
    5,653
    
    
    
    7,887Other
    
    
    11,046
    
    
    
    6,900Other assets
    
    $
    38,079
    
    
    $
    42,240
 Note 9Loss and Loss Adjustment Expense
   22




---



##### Table of Contents



($ in thousands)Balance at January 1, 2009
    
    $
    534,991Less reinsurance recoverables on unpaid losses
    
    
    (222,229
    )312,762CastlePoint net reserves at date of acquisition
    
    
    282,434Hermitage net reserves at date of acquisition
    
    
    87,567Incurred related to:Current year
    
    
    216,571Prior years
    
    
    (6,488
    )Total incurred
    
    
    210,083Paid related to:Current year
    
    
    47,857Prior years
    
    
    126,749Total paid
    
    
    174,606Net balance at end of year
    
    
    718,240Add reinsurance recoverables on unpaid losses
    
    
    114,935Balance at June 30, 2009
    
    $
    833,175
 Note 10Accounts Payable, Accrued Liabilities and Other Liabilities
 (Unaudited)June 30,
    
    December 31,($ in thousands)
    
    2009
    
    2008Funds held as agent
    
    $
    2,711
    
    
    $
    3,516Accounts payable and accrued expenses
    
    
    41,564
    
    
    
    12,470Deferred rent liability
    
    
    6,844
    
    
    
    7,014Payable for securities
    
    
    1,064
    
    
    
    Federal and state income taxes payable
    
    
    10,715
    
    
    
    5,368Other
    
    
    7,687
    
    
    
    7,562Accounts payable, accrued expenses and other liabilities
    
    $
    70,585
    
    
    $
    35,930
 Note 11Debt
 Subordinated Debentures
  PrincipalAmount ofAmount of
    
    JuniorInvestment in
    
    SubordinatedCommon
    
    DebentureMaturity
    
    Early
    
    
    
    Securities of
    
    Issued toIssue Date
    
    Amount
    
    Issuer
    
    Date
    
    Redemption
    
    Interest Rate
    
    Trust
    
    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 million
 23




---



##### Table of Contents



PrincipalAmount ofAmount of
    
    JuniorInvestment in
    
    SubordinatedCommon
    
    DebentureMaturity
    
    Early
    
    
    
    Securities of
    
    Issued toIssue Date
    
    Amount
    
    Issuer
    
    Date
    
    Redemption
    
    Interest Rate
    
    Trust
    
    TrustDecember 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
  Shares of Common Stock Issued
  Warrants
  24




---



##### Table of Contents



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
    
    
    
    3,823April 6, 2009
    
    FBR employee
    
    Cashless
    
    
    8,000
    
    
    
    5,214
  Dividends Declared
  Note 13Stock Based Compensation
 Restricted Stock Awards
   Six Months Ended June 30,2009
    
    2008Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber of
    
    Grant Date
    
    Number of
    
    Grant DateShares
    
    Fair Value
    
    Shares
    
    Fair ValueOutstanding, January 1
    
    
    258,645
    
    
    $
    26.01
    
    
    
    195,468
    
    
    $
    24.97Granted
    
    
    317,545
    
    
    
    22.89
    
    
    
    138,326
    
    
    
    24.75Vested
    
    
    (73,945
    )
    
    
    26.24
    
    
    
    (71,641
    )
    
    
    20.72Forfeitures
    
    
    (5,048
    )
    
    
    27.16
    
    
    
    (518
    )
    
    
    29.03Outstanding, June 30
    
    
    497,197
    
    
    $
    23.99
    
    
    
    261,635
    
    
    $
    26.01
 Stock Options
  25




---



##### Table of Contents



Six Months Ended June 30,2009
    
    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
    
    
    (32,615
    )
    
    
    12.75
    
    
    
    (16,616
    )
    
    
    8.22Forfeitures and expirations
    
    
    (105,462
    )
    
    
    22.11
    
    
    
    
    
    
    
    Outstanding, June 30
    
    
    1,268,761
    
    
    $
    17.60
    
    
    
    265,280
    
    
    $
    5.40Exercisable, June 30
    
    
    766,761
    
    
    $
    15.78
    
    
    
    216,680
    
    
    $
    4.70
        Note 14Income Taxes
  26




---



##### Table of Contents



June 30,
    
    December 31,($ in thousands)
    
    2009
    
    2008Deferred tax asset:Claims reserve discount
    
    $
    26,177
    
    
    $
    11,863Unearned premium
    
    
    32,796
    
    
    
    12,837Equity compensation plans
    
    
    4,714
    
    
    
    273Depreciation and amortization
    
    
    2,272
    
    
    
    (7,096
    )Net unrealized depreciation of securities
    
    
    2,506
    
    
    
    18,919Investment impairments
    
    
    10,483
    
    
    
    8,680Net operating loss carryforwards
    
    
    19,307
    
    
    
    13,632Capital loss carryforwards
    
    
    
    
    
    
    2,848Allowance for doubtful accounts
    
    
    232
    
    
    
    136Other
    
    
    3,210
    
    
    
    514Total deferred tax assets
    
    
    101,697
    
    
    
    62,606Deferred tax liability:Deferred acquisition costs net of deferred ceding commission revenue
    
    
    41,590
    
    
    
    18,578Equity compensation plans
    
    
    
    
    
    
    Warrant received from unconsolidated affiliate
    
    
    
    
    
    
    1,612Gain from issuance of common stock by unconsolidated affiliate
    
    
    
    
    
    
    3,706Equity income in unconsolidated affiliate
    
    
    121
    
    
    
    1,111Salvage and subrogation
    
    
    764
    
    
    
    764Accrual of bond discount
    
    
    641
    
    
    
    628Other
    
    
    31
    
    
    
    Total deferred tax liabilities
    
    
    43,147
    
    
    
    26,399Net deferred income tax asset
    
    $
    58,550
    
    
    $
    36,207
      27




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##### Table of Contents



Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
   Note 15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 16Earnings per Share
   28




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,($ in thousands, except share and per share amount
    
    2009
    
    2008
    
    2009
    
    2008NumeratorNet income
    
    $
    30,627
    
    
    $
    10,169
    
    
    $
    48,604
    
    
    $
    25,022DenominatorWeighted average common shares outstanding
    
    
    40,467,037
    
    
    
    23,321,911
    
    
    
    37,109,965
    
    
    
    23,268,226Effect of dilutive securities:Stock options
    
    
    130,375
    
    
    
    136,620
    
    
    
    131,827
    
    
    
    141,356Unvested restricted stock units
    
    
    8,860
    
    
    
    44,607
    
    
    
    8,107
    
    
    
    26,860Warrants
    
    
    58
    
    
    
    24,124
    
    
    
    5,901
    
    
    
    24,675Weighted average common and potential dilutive
shares outstanding
    
    
    40,606,331
    
    
    
    23,527,262
    
    
    
    37,255,799
    
    
    
    23,461,117Earnings per share  basicCommon stock:Distributed earnings
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.10Undistributed earnings
    
    
    0.69
    
    
    
    0.39
    
    
    
    1.19
    
    
    
    0.98Total
    
    
    0.76
    
    
    
    0.44
    
    
    
    1.31
    
    
    
    1.08Earnings per share  diluted
    
    $
    0.75
    
    
    $
    0.44
    
    
    $
    1.30
    
    
    $
    1.07
 Note 17Changes in Estimates
   Note 18Segment Information
   29




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage Insurance SegmentRevenuesNet premiums earned
    
    $
    173,552
    
    
    $
    62,143
    
    
    $
    300,863
    
    
    $
    128,473Ceding commission revenue
    
    
    5,885
    
    
    
    17,380
    
    
    
    16,553
    
    
    
    35,788Policy billing fees
    
    
    709
    
    
    
    459
    
    
    
    1,241
    
    
    
    961Total revenues
    
    
    180,145
    
    
    
    79,982
    
    
    
    318,656
    
    
    
    165,222ExpensesNet loss and loss adjustment expenses
    
    
    89,749
    
    
    
    32,673
    
    
    
    155,657
    
    
    
    68,735Underwriting expenses
    
    
    65,274
    
    
    
    35,549
    
    
    
    118,564
    
    
    
    74,820Total expenses
    
    
    155,023
    
    
    
    68,222
    
    
    
    274,221
    
    
    
    143,555Underwriting profit
    
    $
    25,121
    
    
    $
    11,759
    
    
    $
    44,434
    
    
    $
    21,667Specialty Business SegmentRevenuesNet premiums earned
    
    $
    55,899
    
    
    $
    7,971
    
    
    $
    96,678
    
    
    $
    10,072Ceding commission revenue
    
    
    1,280
    
    
    
    4,111
    
    
    
    4,190
    
    
    
    6,357Total revenues
    
    
    57,178
    
    
    
    12,082
    
    
    
    100,867
    
    
    
    16,429ExpensesNet loss and loss adjustment expenses
    
    
    30,077
    
    
    
    4,250
    
    
    
    54,426
    
    
    
    5,485Underwriting expenses
    
    
    17,050
    
    
    
    6,711
    
    
    
    33,372
    
    
    
    9,428Total expenses
    
    
    47,127
    
    
    
    10,961
    
    
    
    87,798
    
    
    
    14,913Underwriting profit
    
    $
    10,052
    
    
    $
    1,121
    
    
    $
    13,070
    
    
    $
    1,516Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    (824
    )
    
    $
    11,903
    
    
    $
    2,283
    
    
    $
    20,067Claims administration revenue
    
    
    136
    
    
    
    1,013
    
    
    
    982
    
    
    
    1,970Other administration revenue
    
    
    221
    
    
    
    1,209
    
    
    
    416
    
    
    
    1,580Reinsurance intermediary fees
    
    
    207
    
    
    
    117
    
    
    
    301
    
    
    
    285Policy billing fees
    
    
    60
    
    
    
    96
    
    
    
    79
    
    
    
    172Total revenues
    
    
    (200
    )
    
    
    14,338
    
    
    
    4,061
    
    
    
    24,074ExpensesDirect commission expense paid to producers
    
    
    125
    
    
    
    5,154
    
    
    
    1,616
    
    
    
    8,525Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    181
    
    
    
    3,171
    
    
    
    1,040
    
    
    
    4,745Claims expense reimbursement to TICNY
    
    
    136
    
    
    
    1,013
    
    
    
    982
    
    
    
    1,970Total expenses
    
    
    441
    
    
    
    9,338
    
    
    
    3,637
    
    
    
    15,240Insurance services pretax income (loss)
    
    $
    (641
    )
    
    $
    5,000
    
    
    $
    424
    
    
    $
    8,834
 30




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage insurance segment
    
    $
    180,145
    
    
    $
    79,982
    
    
    $
    318,656
    
    
    $
    165,222Specialty business segment
    
    
    57,178
    
    
    
    12,082
    
    
    
    100,867
    
    
    
    16,429Insurance services segment
    
    
    (200
    )
    
    
    14,338
    
    
    
    4,061
    
    
    
    24,074Total segment revenues
    
    
    237,124
    
    
    
    106,402
    
    
    
    423,585
    
    
    
    205,725Net investment income
    
    
    17,417
    
    
    
    8,366
    
    
    
    31,950
    
    
    
    18,162Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    442
    
    
    
    (7,970
    )
    
    
    (230
    )
    
    
    (6,596
    )Consolidated revenues
    
    $
    254,983
    
    
    $
    106,798
    
    
    $
    455,305
    
    
    $
    217,290
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage insurance segment underwriting profit
    
    $
    25,121
    
    
    $
    11,759
    
    
    $
    44,434
    
    
    $
    21,667Specialty business segment underwriting profit
    
    
    10,052
    
    
    
    1,121
    
    
    
    13,070
    
    
    
    1,516Insurance services segment pretax income
    
    
    (641
    )
    
    
    5,000
    
    
    
    424
    
    
    
    8,834Net investment income
    
    
    17,417
    
    
    
    8,366
    
    
    
    31,950
    
    
    
    18,162Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    442
    
    
    
    (7,970
    )
    
    
    (230
    )
    
    
    (6,596
    )Corporate expenses
    
    
    (1,196
    )
    
    
    (619
    )
    
    
    (2,538
    )
    
    
    (1,004
    )Interest expense
    
    
    (4,659
    )
    
    
    (2,162
    )
    
    
    (8,442
    )
    
    
    (4,484
    )Other income (loss) *
    
    
    
    
    
    
    762
    
    
    
    (4,737
    )
    
    
    1,522Income before taxes
    
    $
    46,536
    
    
    $
    16,257
    
    
    $
    73,931
    
    
    $
    39,617
 *
    
    See Note 3Acquisitions and Note 7Investment in Unconsolidated AffiliateCastlePoint
 Note 19Subsequent Events
  Pending Acquisition of Specialty Underwriters Alliance, Inc.
   31




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##### Table of Contents



Legal Proceedings
 inter alia inter alia
 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;
 32




---



##### Table of Contents




    
    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, recession 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 acquisitions if those businesses do not perform
well or Tower does not integrate these acquired businesses successfully;
    
    the possibility that the proposed merger with SUA may not be completed or may be delayed;
    
    the risk that governmental and other consents needed to complete the merger with SUA may be
delayed, not granted or granted with unacceptable conditions;
    
    unanticipated difficulties in combining Tower and SUA;
    
    disruptions in Towers business arising from the anticipation of the transactions and the
integration of Tower and SUA; and
    
    Currently pending or future litigation or governmental proceedings.
  Critical Accounting Policies
  Consolidated Results of Operations
  33




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in millions)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Percent


2009
    
    
    2008
    
    
    Change
    
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    267.6
    
    
    $
    138.6
    
    
    $
    129.0
    
    
    
    93.1
    %
    
    $
    483.7
    
    
    $
    273.8
    
    
    $
    209.9
    
    
    
    76.7
    %Less: Ceded premiums earned
    
    
    (38.2
    )
    
    
    (68.5
    )
    
    
    30.3
    
    
    
    (44.3
    %)
    
    
    (86.2
    )
    
    
    (135.2
    )
    
    
    49.1
    
    
    
    (36.3
    %)Net premiums earned
    
    
    229.5
    
    
    
    70.1
    
    
    
    159.3
    
    
    
    227.3
    %
    
    
    397.5
    
    
    
    138.5
    
    
    
    259.0
    
    
    
    186.9
    %Total commission and fee income
    
    
    7.7
    
    
    
    36.3
    
    
    
    (28.6
    )
    
    
    (78.9
    %)
    
    
    26.0
    
    
    
    67.2
    
    
    
    (41.1
    )
    
    
    (61.2
    %)Net investment income
    
    
    17.4
    
    
    
    8.4
    
    
    
    9.1
    
    
    
    108.2
    %
    
    
    31.9
    
    
    
    18.2
    
    
    
    13.8
    
    
    
    75.9
    %Net realized investment (losses) gains
    
    
    0.4
    
    
    
    (8.0
    )
    
    
    8.4
    
    
    
    (105.5
    %)
    
    
    (0.2
    )
    
    
    (6.6
    )
    
    
    6.4
    
    
    
    (96.5
    %)Total
    
    
    255.0
    
    
    
    106.8
    
    
    
    148.2
    
    
    
    138.8
    %
    
    
    455.3
    
    
    
    217.3
    
    
    
    238.0
    
    
    
    109.5
    %ExpensesNet loss and loss adjustment expenses
    
    
    119.8
    
    
    
    36.9
    
    
    
    82.9
    
    
    
    224.5
    %
    
    
    210.1
    
    
    
    74.2
    
    
    
    135.9
    
    
    
    183.1
    %Operating expenses
    
    
    84.0
    
    
    
    52.2
    
    
    
    31.7
    
    
    
    60.8
    %
    
    
    158.1
    
    
    
    100.5
    
    
    
    57.6
    
    
    
    57.3
    %Interest expense
    
    
    4.7
    
    
    
    2.2
    
    
    
    2.5
    
    
    
    115.5
    %
    
    
    8.4
    
    
    
    4.5
    
    
    
    4.0
    
    
    
    88.3
    %Total expenses
    
    
    208.4
    
    
    
    91.3
    
    
    
    117.1
    
    
    
    128.3
    %
    
    
    376.6
    
    
    
    179.2
    
    
    
    197.4
    
    
    
    110.2
    %Equity in income (loss) of unconsolidated
affiliate
    
    
    
    
    
    
    0.8
    
    
    
    (0.8
    )
    
    
    (100.0
    %)
    
    
    (0.8
    )
    
    
    1.5
    
    
    
    (2.3
    )
    
    
    (151.0
    %)Acquisition-related transaction costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.3
    )
    
    
    
    
    
    
    (11.3
    )
    
    NMGain on investment in acquired unconsolidated
affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.4
    
    
    
    
    
    
    
    7.4
    
    
    NMIncome before taxes
    
    
    46.5
    
    
    
    16.3
    
    
    
    30.3
    
    
    
    186.2
    %
    
    
    73.9
    
    
    
    39.6
    
    
    
    34.3
    
    
    
    86.6
    %Federal and state income taxes
    
    
    15.9
    
    
    
    6.1
    
    
    
    9.8
    
    
    
    161.3
    %
    
    
    25.3
    
    
    
    14.6
    
    
    
    10.7
    
    
    
    73.5
    %Net Income
    
    $
    30.6
    
    
    $
    10.2
    
    
    $
    20.5
    
    
    
    201.2
    %
    
    $
    48.6
    
    
    $
    25.0
    
    
    $
    23.6
    
    
    
    94.2
    %Percent of total revenues:Net premiums earned
    
    
    90.0
    %
    
    
    65.7
    %
    
    
    
    
    
    
    
    
    
    
    87.3
    %
    
    
    63.8
    %Commission and fee income
    
    
    3.0
    %
    
    
    34.0
    %
    
    
    
    
    
    
    
    
    
    
    5.7
    %
    
    
    30.9
    %Net investment income
    
    
    6.8
    %
    
    
    7.8
    %
    
    
    
    
    
    
    
    
    
    
    7.0
    %
    
    
    8.4
    %Net realized investment gains (losses)
    
    
    0.2
    %
    
    
    (7.5
    %)
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    (3.0
    %)Return on average equity(1)
    
    
    15.0
    %
    
    
    12.8
    %
    
    
    
    
    
    
    
    
    
    
    18.6
    %
    
    
    15.9
    %
 
 (1)
    
    The impact of net realized investment gains and acquisition-related transaction costs,
net of tax, increased return on average equity by 0.6% for the second quarter of 2009
and lowered return on average equity by 3.6% for the six months ended June 30, 2009. 34




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in millions)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Percent
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    PercentKey MeasuresGross premiums written and produced:Written by Brokerage and Specialty
    
    $
    260.7
    
    
    $
    166.0
    
    
    
    94.8
    
    
    
    57.1
    %
    
    $
    460.7
    
    
    $
    301.1
    
    
    
    159.6
    
    
    
    53.0
    %Insurance SegmentsProduced by Insurance Services Segment
    
    
    0.5
    
    
    
    36.1
    
    
    
    (35.6
    )
    
    
    (98.7
    %)
    
    
    11.2
    
    
    
    59.4
    
    
    
    (48.2
    )
    
    
    (81.1
    %)Assumed premiums
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    80.4
    %
    
    
    0.3
    
    
    
    (1.2
    )
    
    
    1.5
    
    
    
    (128.9
    %)Total
    
    $
    260.9
    
    
    $
    201.9
    
    
    $
    59.0
    
    
    
    29.2
    %
    
    $
    472.2
    
    
    $
    359.3
    
    
    $
    113.0
    
    
    
    31.4
    %Underwriting Ratios for Brokerage Insurance and Specialty Business Segments CombinedLoss RatiosGross
    
    
    50.5
    %
    
    
    50.5
    %
    
    
    
    
    
    
    
    
    
    
    54.7
    %
    
    
    50.1
    %Net
    
    
    52.2
    %
    
    
    52.7
    %
    
    
    
    
    
    
    
    
    
    
    52.8
    %
    
    
    53.6
    %Accident Year Loss RatiosGross
    
    
    53.6
    %
    
    
    51.5
    %
    
    
    
    
    
    
    
    
    
    
    54.4
    %
    
    
    51.1
    %Net
    
    
    53.7
    %
    
    
    54.5
    %
    
    
    
    
    
    
    
    
    
    
    54.4
    %
    
    
    54.5
    %Underwriting Expense RatiosGross
    
    
    30.5
    %
    
    
    30.2
    %
    
    
    
    
    
    
    
    
    
    
    31.2
    %
    
    
    30.4
    %Net
    
    
    32.4
    %
    
    
    29.0
    %
    
    
    
    
    
    
    
    
    
    
    32.7
    %
    
    
    29.7
    %Combined RatiosGross
    
    
    81.0
    %
    
    
    80.6
    %
    
    
    
    
    
    
    
    
    
    
    85.8
    %
    
    
    80.5
    %Net
    
    
    84.7
    %
    
    
    81.6
    %
    
    
    
    
    
    
    
    
    
    
    85.5
    %
    
    
    83.3
    %
 Consolidated Results of Operations Three and Six Months Ended June 30, 2009 and 2008
 Total revenues .
   35




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##### Table of Contents



Premiums earned .
 Commission and fee income .
 Net investment income and net realized gains (losses) .
   Loss and loss adjustment expenses .
 36




---



##### Table of Contents



Operating expenses .
 Other income (expense).
 Interest expense.
 Income tax expense .
 Net income and return on average equity .
  37




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##### Table of Contents



Brokerage
Insurance Segment Results of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in millions)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Percent
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    201.6
    
    
    $
    117.9
    
    
    $
    83.7
    
    
    
    71.0
    %
    
    $
    364.1
    
    
    $
    244.2
    
    
    $
    119.9
    
    
    
    49.1
    %Less: ceded premiums earned
    
    
    (28.1
    )
    
    
    (55.8
    )
    
    
    27.7
    
    
    
    (49.7
    %)
    
    
    (63.2
    )
    
    
    (115.7
    )
    
    
    52.5
    
    
    
    (45.3
    %)Net premiums earned
    
    
    173.6
    
    
    
    62.1
    
    
    
    111.4
    
    
    
    179.3
    %
    
    
    300.9
    
    
    
    128.5
    
    
    
    172.4
    
    
    
    134.2
    %Ceding commission revenue
    
    
    5.9
    
    
    
    17.4
    
    
    
    (11.5
    )
    
    
    (66.1
    %)
    
    
    16.6
    
    
    
    35.8
    
    
    
    (19.2
    )
    
    
    (53.7
    %)Policy billing fees
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    54.4
    %
    
    
    1.2
    
    
    
    1.0
    
    
    
    0.3
    
    
    
    29.1
    %Total
    
    
    180.1
    
    
    
    80.0
    
    
    
    100.2
    
    
    
    125.2
    %
    
    
    318.7
    
    
    
    165.2
    
    
    
    153.4
    
    
    
    92.9
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    97.0
    
    
    
    58.5
    
    
    
    38.5
    
    
    
    65.8
    %
    
    
    195.2
    
    
    
    120.4
    
    
    
    74.8
    
    
    
    62.1
    %Less:ceded loss and loss adjustment
expenses
    
    
    (7.3
    )
    
    
    (25.8
    )
    
    
    18.6
    
    
    
    (71.9
    %)
    
    
    (39.5
    )
    
    
    (51.7
    )
    
    
    12.2
    
    
    
    (23.5
    %)Net loss and loss adjustment expenses
    
    
    89.7
    
    
    
    32.7
    
    
    
    57.1
    
    
    
    174.7
    %
    
    
    155.7
    
    
    
    68.7
    
    
    
    86.9
    
    
    
    126.5
    %Underwriting expensesDirect commission expense
    
    
    41.3
    
    
    
    19.8
    
    
    
    21.5
    
    
    
    108.6
    %
    
    
    72.5
    
    
    
    40.7
    
    
    
    31.8
    
    
    
    78.2
    %Other underwriting expenses
    
    
    24.0
    
    
    
    15.8
    
    
    
    8.2
    
    
    
    52.3
    %
    
    
    46.1
    
    
    
    34.2
    
    
    
    11.9
    
    
    
    35.0
    %Total underwriting expenses
    
    
    65.3
    
    
    
    35.5
    
    
    
    29.7
    
    
    
    83.6
    %
    
    
    118.6
    
    
    
    74.8
    
    
    
    43.8
    
    
    
    58.5
    %Underwriting profit
    
    $
    25.1
    
    
    $
    11.8
    
    
    $
    13.4
    
    
    
    113.6
    %
    
    $
    44.4
    
    
    $
    21.7
    
    
    $
    22.8
    
    
    
    105.1
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    212.5
    
    
    $
    133.7
    
    
    $
    78.8
    
    
    
    58.9
    %
    
    $
    365.7
    
    
    $
    248.5
    
    
    $
    117.1
    
    
    
    47.1
    %Less: ceded premiums written
    
    
    (13.0
    )
    
    
    (60.7
    )
    
    
    47.7
    
    
    
    (78.7
    %)
    
    
    (24.2
    )
    
    
    (112.4
    )
    
    
    88.2
    
    
    
    (78.4
    %)Net premiums written
    
    $
    199.5
    
    
    $
    73.0
    
    
    $
    126.5
    
    
    
    173.4
    %
    
    $
    341.4
    
    
    $
    136.1
    
    
    $
    205.3
    
    
    
    150.8
    %Ceded premiums as a percent
of gross premiumsWritten
    
    
    6.1
    %
    
    
    45.4
    %
    
    
    
    
    
    
    
    
    
    
    6.6
    %
    
    
    45.2
    %Earned
    
    
    13.9
    %
    
    
    47.3
    %
    
    
    
    
    
    
    
    
    
    
    17.4
    %
    
    
    47.4
    %Loss RatiosGross
    
    
    48.1
    %
    
    
    49.6
    %
    
    
    
    
    
    
    
    
    
    
    53.6
    %
    
    
    49.3
    %Net
    
    
    51.7
    %
    
    
    52.6
    %
    
    
    
    
    
    
    
    
    
    
    51.7
    %
    
    
    53.5
    %Accident Year Loss RatiosGross
    
    
    51.9
    %
    
    
    50.8
    %
    
    
    
    
    
    
    
    
    
    
    53.0
    %
    
    
    50.5
    %Net
    
    
    53.0
    %
    
    
    54.7
    %
    
    
    
    
    
    
    
    
    
    
    53.5
    %
    
    
    54.5
    %Underwriting Expense RatiosGross
    
    
    32.0
    %
    
    
    29.8
    %
    
    
    
    
    
    
    
    
    
    
    32.2
    %
    
    
    30.2
    %Net
    
    
    33.8
    %
    
    
    28.5
    %
    
    
    
    
    
    
    
    
    
    
    33.5
    %
    
    
    29.6
    %Combined RatiosGross
    
    
    80.1
    %
    
    
    79.4
    %
    
    
    
    
    
    
    
    
    
    
    85.8
    %
    
    
    79.6
    %Net
    
    
    85.5
    %
    
    
    81.1
    %
    
    
    
    
    
    
    
    
    
    
    85.2
    %
    
    
    83.1
    %
 38




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##### Table of Contents



Brokerage Insurance Segment Results of Operations for Three and Six Months Ended June 30, 2009 and
2008
 Gross premiums .
    Ceded premiums .
   Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
 39




---



##### Table of Contents



Underwriting expenses and underwriting expense ratio
    Underwriting profit and combined ratio .
 40




---



##### Table of Contents



Specialty Business Segment Results of Operations
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    66.0
    
    
    $
    20.7
    
    
    $
    45.3
    
    
    
    218.9
    %
    
    $
    119.6
    
    
    $
    29.6
    
    
    $
    90.0
    
    
    
    304.2
    %Less: ceded premiums earned
    
    
    (10.1
    )
    
    
    (12.7
    )
    
    
    2.6
    
    
    
    (20.5
    %)
    
    
    (22.9
    )
    
    
    (19.5
    )
    
    
    (3.4
    )
    
    
    17.4
    %Net premiums earned
    
    
    55.9
    
    
    
    8.0
    
    
    
    47.9
    
    
    NM
    
    
    96.7
    
    
    
    10.1
    
    
    
    86.6
    
    
    NMCeding commission revenue
    
    
    1.3
    
    
    
    4.1
    
    
    
    (2.8
    )
    
    
    (68.9
    %)
    
    
    4.2
    
    
    
    6.4
    
    
    
    (2.2
    )
    
    
    (34.1
    %)Total
    
    
    57.2
    
    
    
    12.1
    
    
    
    45.1
    
    
    
    373.2
    %
    
    
    100.9
    
    
    
    16.4
    
    
    
    84.4
    
    
    NMExpensesLoss and loss adjustment expensesGross loss and loss
adjustment expenses
    
    
    38.0
    
    
    
    11.4
    
    
    
    26.6
    
    
    
    232.3
    %
    
    
    69.3
    
    
    
    16.7
    
    
    
    52.6
    
    
    
    316.1
    %Less: ceded loss and loss
adjustment expenses
    
    
    (8.0
    )
    
    
    (7.2
    )
    
    
    (0.8
    )
    
    
    10.6
    %
    
    
    (14.9
    )
    
    
    (11.2
    )
    
    
    (3.7
    )
    
    
    33.1
    %Net loss and loss
adjustment expenses
    
    
    30.1
    
    
    
    4.3
    
    
    
    25.8
    
    
    NM
    
    
    54.4
    
    
    
    5.5
    
    
    
    48.9
    
    
    NMUnderwriting expensesDirect commission expense
    
    
    12.1
    
    
    
    5.1
    
    
    
    7.0
    
    
    
    137.8
    %
    
    
    25.9
    
    
    
    7.4
    
    
    
    18.4
    
    
    
    247.6
    %Other underwriting expenses
    
    
    5.0
    
    
    
    1.6
    
    
    
    3.3
    
    
    
    204.9
    %
    
    
    7.5
    
    
    
    2.0
    
    
    
    5.5
    
    
    
    277.6
    %Total underwriting expenses
    
    
    17.0
    
    
    
    6.7
    
    
    
    10.3
    
    
    
    154.1
    %
    
    
    33.4
    
    
    
    9.4
    
    
    
    23.9
    
    
    
    254.0
    %Underwriting profit
    
    $
    10.1
    
    
    $
    1.1
    
    
    $
    8.9
    
    
    NM
    
    $
    13.1
    
    
    $
    1.5
    
    
    $
    11.6
    
    
    NMKey MeasuresPremiums writtenGross premiums written
    
    $
    48.3
    
    
    $
    32.3
    
    
    $
    16.0
    
    
    
    49.5
    %
    
    $
    95.0
    
    
    $
    52.5
    
    
    $
    42.5
    
    
    
    80.8
    %Less: ceded premiums written
    
    
    (12.0
    )
    
    
    (22.6
    )
    
    
    10.7
    
    
    
    (47.1
    %)
    
    
    (14.4
    )
    
    
    (37.7
    )
    
    
    23.3
    
    
    
    (61.9
    %)Net premiums written
    
    $
    36.3
    
    
    $
    9.7
    
    
    $
    26.7
    
    
    
    275.8
    %
    
    $
    80.7
    
    
    $
    14.8
    
    
    $
    65.8
    
    
    
    443.7
    %NM is shown where percentage change exceeds 500%Ceded premiums as a percent
of gross premiumsWritten
    
    
    24.8
    %
    
    
    70.1
    %
    
    
    
    
    
    
    
    
    
    
    15.1
    %
    
    
    71.8
    %Earned
    
    
    15.3
    %
    
    
    61.5
    %
    
    
    
    
    
    
    
    
    
    
    19.2
    %
    
    
    66.0
    %Loss RatiosGross
    
    
    57.6
    %
    
    
    55.3
    %
    
    
    
    
    
    
    
    
    
    
    57.9
    %
    
    
    56.3
    %Net
    
    
    53.8
    %
    
    
    53.3
    %
    
    
    
    
    
    
    
    
    
    
    56.3
    %
    
    
    54.5
    %Accident Year Loss RatiosGross
    
    
    59.1
    %
    
    
    55.3
    %
    
    
    
    
    
    
    
    
    
    
    58.7
    %
    
    
    56.3
    %Net
    
    
    55.8
    %
    
    
    53.3
    %
    
    
    
    
    
    
    
    
    
    
    57.4
    %
    
    
    54.5
    %Underwriting Expense RatiosGross
    
    
    25.8
    %
    
    
    32.4
    %
    
    
    
    
    
    
    
    
    
    
    27.9
    %
    
    
    31.9
    %Net
    
    
    28.2
    %
    
    
    32.6
    %
    
    
    
    
    
    
    
    
    
    
    30.2
    %
    
    
    30.5
    %Combined RatiosGross
    
    
    83.4
    %
    
    
    87.7
    %
    
    
    
    
    
    
    
    
    
    
    85.8
    %
    
    
    88.1
    %Net
    
    
    82.0
    %
    
    
    85.9
    %
    
    
    
    
    
    
    
    
    
    
    86.5
    %
    
    
    84.9
    %
 41




---



##### Table of Contents



Specialty Business Segment Results of Operations for Three and Six Months Ended June 30, 2009 and
2008
 Gross premiums.
  Ceded premiums.
 Net premiums.
 Loss and loss adjustment expenses
   Underwriting expenses and underwriting expense ratio.
  42




---



##### Table of Contents



Underwriting profit and combined ratio.
 Insurance Services Segment Results of Operations
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenueDirect commission revenue from
managing general agency
    
    $
    (0.8
    )
    
    $
    11.9
    
    
    $
    (12.7
    )
    
    
    (106.9
    %)
    
    $
    2.3
    
    
    $
    20.1
    
    
    $
    (17.8
    )
    
    
    (88.6
    %)Claims administration revenue
    
    
    0.1
    
    
    
    1.0
    
    
    
    (0.9
    )
    
    
    (86.6
    %)
    
    
    1.0
    
    
    
    2.0
    
    
    
    (1.0
    )
    
    
    (50.2
    %)Other administration revenue
    
    
    0.2
    
    
    
    1.2
    
    
    
    (1.0
    )
    
    
    (81.7
    %)
    
    
    0.4
    
    
    
    1.6
    
    
    
    (1.2
    )
    
    
    (73.7
    %)Reinsurance intermediary fees
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    77.0
    %
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.0
    
    
    
    5.6
    %Policy billing fees
    
    
    0.1
    
    
    
    0.1
    
    
    
    (0.0
    )
    
    
    (37.1
    %)
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (53.8
    %)Total
    
    
    (0.2
    )
    
    
    14.3
    
    
    
    (14.5
    )
    
    
    (101.4
    %)
    
    
    4.1
    
    
    
    24.1
    
    
    
    (20.0
    )
    
    
    (83.1
    %)ExpensesDirect commission expense paid to producers
    
    
    0.1
    
    
    
    5.2
    
    
    
    (5.0
    )
    
    
    (97.6
    %)
    
    
    1.6
    
    
    
    8.5
    
    
    
    (6.9
    )
    
    
    (81.0
    %)Other insurance services expenses
    
    
    0.2
    
    
    
    3.2
    
    
    
    (3.0
    )
    
    
    (94.3
    %)
    
    
    1.0
    
    
    
    4.7
    
    
    
    (3.7
    )
    
    
    (78.1
    %)Claims expense reimbursement to TICNY
    
    
    0.1
    
    
    
    1.0
    
    
    
    (0.9
    )
    
    
    (86.6
    %)
    
    
    1.0
    
    
    
    2.0
    
    
    
    (1.0
    )
    
    
    (50.2
    %)Total
    
    
    0.4
    
    
    
    9.3
    
    
    
    (8.9
    )
    
    
    (95.3
    %)
    
    
    3.6
    
    
    
    15.2
    
    
    
    (11.6
    )
    
    
    (76.1
    %)Insurance services pre-tax income (loss)
    
    $
    (0.6
    )
    
    $
    5.0
    
    
    $
    (5.6
    )
    
    
    (112.8
    %)
    
    $
    0.4
    
    
    $
    8.8
    
    
    $
    (8.4
    )
    
    
    (95.2
    %)Premiums produced by TRM on behalf
of issuing companies
    
    $
    0.5
    
    
    
    36.1
    
    
    $
    (35.6
    )
    
    
    (98.7
    %)
    
    $
    11.2
    
    
    $
    59.4
    
    
    $
    (48.2
    )
    
    
    (81.1
    %)
 Insurance Services Segment Results of Operations for Three and Six Months Ended June 30, 2009 and
2008
 Total revenues.
 43




---



##### Table of Contents



Direct commission expense .
 Other insurance services expenses .
 Claims expense reimbursement .
 Pre-tax income (loss) .
 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
    
    ValueJune 30, 2009U.S. Treasury securities
    
    $
    35,734
    
    
    $
    329
    
    
    $
    (105
    )
    
    $
    
    
    
    $
    35,957
    
    
    
    2.5
    %U.S. Agency securities
    
    
    17,122
    
    
    
    205
    
    
    
    (89
    )
    
    
    
    
    
    
    17,239
    
    
    
    1.2
    %Municipal bonds
    
    
    428,763
    
    
    
    7,566
    
    
    
    (2,392
    )
    
    
    (747
    )
    
    
    433,190
    
    
    
    30.3
    %Corporate and other bonds
    
    
    426,029
    
    
    
    11,073
    
    
    
    (2,059
    )
    
    
    (9,067
    )
    
    
    425,975
    
    
    
    29.8
    %Commercial, residential mortgage
and asset-backed securities
    
    
    519,508
    
    
    
    19,710
    
    
    
    (3,823
    )
    
    
    (26,145
    )
    
    
    509,251
    
    
    
    35.6
    %Total fixed maturity securities
    
    
    1,427,156
    
    
    
    38,882
    
    
    
    (8,468
    )
    
    
    (35,959
    )
    
    
    1,421,612
    
    
    
    99.5
    %Equity securities
    
    
    8,785
    
    
    
    142
    
    
    
    (109
    )
    
    
    (1,649
    )
    
    
    7,169
    
    
    
    0.5
    %Total
    
    $
    1,435,941
    
    
    $
    39,024
    
    
    $
    (8,577
    )
    
    $
    (37,607
    )
    
    $
    1,428,781
    
    
    
    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
    
    
    210,006
    
    
    
    932
    
    
    
    (13,948
    )
    
    
    (10,016
    )
    
    
    186,975
    
    
    
    34.6
    %Commercial, residential mortgage
and asset-backed securities
    
    
    164,885
    
    
    
    1,838
    
    
    
    (10,603
    )
    
    
    (20,290
    )
    
    
    135,830
    
    
    
    25.1
    %Total fixed maturity securities
    
    
    581,469
    
    
    
    6,197
    
    
    
    (27,037
    )
    
    
    (30,472
    )
    
    
    530,159
    
    
    
    98.0
    %Equity securities
    
    
    12,726
    
    
    
    5
    
    
    
    (60
    )
    
    
    (1,857
    )
    
    
    10,814
    
    
    
    2.0
    %Total
    
    $
    594,195
    
    
    $
    6,202
    
    
    $
    (27,096
    )
    
    $
    (32,329
    )
    
    $
    540,973
    
    
    
    100.0
    %
 44




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##### Table of Contents



Credit Rating of Fixed Maturity Securities
  June 30, 2009
    
    December 31, 2008Percentage of
    
    
    
    
    
    Percentage of($ in thousands)
    
    Fair Value
    
    Fair Value
    
    Fair Value
    
    Fair ValueRatingU.S. Treasury securities
    
    $
    35,957
    
    
    
    2.5
    %
    
    $
    27,006
    
    
    
    4.4
    %AAA
    
    
    632,779
    
    
    
    44.5
    %
    
    
    187,377
    
    
    
    47.2
    %AA
    
    
    279,946
    
    
    
    19.7
    %
    
    
    110,601
    
    
    
    11.9
    %A
    
    
    278,814
    
    
    
    19.6
    %
    
    
    113,651
    
    
    
    13.3
    %BBB
    
    
    117,743
    
    
    
    8.3
    %
    
    
    62,566
    
    
    
    12.8
    %Below BBB
    
    
    76,373
    
    
    
    5.4
    %
    
    
    28,958
    
    
    
    10.4
    %Total
    
    $
    1,421,612
    
    
    
    100.0
    %
    
    $
    530,159
    
    
    
    100.0
    %
 Fixed Maturity InvestmentsTime to Maturity
  June 30, 2009
    
    December 31, 2008Percentage of
    
    
    
    
    
    Percentage of($ in thousands)
    
    Fair Value
    
    Fair Value
    
    Fair Value
    
    Fair ValueRemaining Time to MaturityLess than one year
    
    $
    19,806
    
    
    
    1.4
    %
    
    $
    8,789
    
    
    
    2.1
    %One to five years
    
    
    291,172
    
    
    
    20.5
    %
    
    
    112,514
    
    
    
    19.4
    %Five to ten years
    
    
    320,696
    
    
    
    22.6
    %
    
    
    176,218
    
    
    
    31.0
    %More than 10 years
    
    
    280,687
    
    
    
    19.7
    %
    
    
    96,807
    
    
    
    13.7
    %Mortgage and asset-backed securities
    
    
    509,251
    
    
    
    35.8
    %
    
    
    135,831
    
    
    
    33.8
    %Total
    
    $
    1,421,612
    
    
    
    100.0
    %
    
    $
    530,159
    
    
    
    100.0
    %
 Fixed Maturity Investments with Third Party Guarantees
  With
    
    Without($ in thousands)
    
    Guarantee
    
    GuaranteeAAA
    
    $
    3,856
    
    
    $
    2,023AA
    
    
    122,899
    
    
    
    90,409A
    
    
    40,802
    
    
    
    57,518BBB
    
    
    
    
    
    
    513BB
    
    
    937
    
    
    
    937No underlying rating
    
    
    
    
    
    
    17,093Total
    
    $
    168,494
    
    
    $
    168,494
 45




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##### Table of Contents



Guaranteed
    
    Percent($ in thousands)
    
    Amount
    
    of TotalNational Public Finance Guarantee Corp.
    
    $
    66,637
    
    
    
    40
    %Financial Security Assurance
    
    
    52,348
    
    
    
    31
    %Ambac Financial Corp.
    
    
    18,090
    
    
    
    11
    %Berkshire Hathaway Assurance Corp.
    
    
    7,212
    
    
    
    4
    %Others
    
    
    24,207
    
    
    
    14
    %Total
    
    $
    168,494
    
    
    
    100
    %
 Fair Value Consideration
        46




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##### Table of Contents



Level 3 AssetsAssets
    
    
    
    
    
    As a PercentageCarried at
    
    
    
    
    
    of Total AssetsFair Value at
    
    Fair Value of
    
    Carried at($ in thousands)
    
    June 30, 2009
    
    Level 3 Assets
    
    Fair ValueFixed-maturity investments
    
    $
    1,421,612
    
    
    $
    22,912
    
    
    
    1.6
    %Equity investments
    
    
    7,169
    
    
    
    
    
    
    
    0.0
    %Total invesments available for sale
    
    
    1,428,781
    
    
    
    22,912
    
    
    
    1.6
    %Cash and cash equivalents
    
    
    152,795
    
    
    
    
    
    
    
    0.0
    %Total
    
    $
    1,581,576
    
    
    $
    22,912
    
    
    
    1.4
    %
 Unrealized Losses
    47




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##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    Total($ in thousands)
    
    No.
    
    Fair Value
    
    UnrealizedLosses
    
    No.
    
    Fair Value
    
    UnrealizedLosses
    
    No.
    
    AggregateFair Value
    
    UnrealizedLossesJune 30, 2009U.S. Treasury securities
    
    
    11
    
    
    $
    7,388
    
    
    $
    (105
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    11
    
    
    $
    7,388
    
    
    $
    (105
    )U.S. Agency securities
    
    
    5
    
    
    
    1,023
    
    
    
    (89
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    1,023
    
    
    
    (89
    )Municipal bonds
    
    
    114
    
    
    
    148,421
    
    
    
    (2,392
    )
    
    
    17
    
    
    
    12,576
    
    
    
    (747
    )
    
    
    131
    
    
    
    160,996
    
    
    
    (3,140
    )Corporate and other bondsFinance
    
    
    71
    
    
    
    31,679
    
    
    
    (929
    )
    
    
    46
    
    
    
    37,800
    
    
    
    (5,497
    )
    
    
    117
    
    
    
    69,479
    
    
    
    (6,426
    )Industrial
    
    
    207
    
    
    
    69,892
    
    
    
    (1,122
    )
    
    
    58
    
    
    
    33,652
    
    
    
    (3,384
    )
    
    
    265
    
    
    
    103,544
    
    
    
    (4,506
    )Utilities
    
    
    14
    
    
    
    3,465
    
    
    
    (8
    )
    
    
    5
    
    
    
    1,397
    
    
    
    (186
    )
    
    
    19
    
    
    
    4,862
    
    
    
    (194
    )Commercial mortgage-
backed securites
    
    
    34
    
    
    
    38,370
    
    
    
    (1,556
    )
    
    
    31
    
    
    
    23,269
    
    
    
    (18,619
    )
    
    
    65
    
    
    
    61,639
    
    
    
    (20,175
    )Residential mortgage-
backed securites
Agency backed
    
    
    3
    
    
    
    1,502
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1,502
    
    
    
    (3
    )Non-agency backed
    
    
    15
    
    
    
    5,168
    
    
    
    (1,845
    )
    
    
    25
    
    
    
    13,751
    
    
    
    (4,414
    )
    
    
    40
    
    
    
    18,919
    
    
    
    (6,260
    )Asset-backed securities
    
    
    9
    
    
    
    787
    
    
    
    (417
    )
    
    
    15
    
    
    
    5,498
    
    
    
    (3,111
    )
    
    
    24
    
    
    
    6,285
    
    
    
    (3,529
    )Total fixed maturity
securities
    
    
    483
    
    
    
    307,695
    
    
    
    (8,468
    )
    
    
    197
    
    
    
    127,943
    
    
    
    (35,959
    )
    
    
    680
    
    
    
    435,638
    
    
    
    (44,427
    )Preferred stocks
    
    
    2
    
    
    
    1,689
    
    
    
    (12
    )
    
    
    6
    
    
    
    3,902
    
    
    
    (1,649
    )
    
    
    8
    
    
    
    5,591
    
    
    
    (1,661
    )Common stocks
    
    
    4
    
    
    
    66
    
    
    
    (97
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    66
    
    
    
    (97
    )Total
    
    
    489
    
    
    $
    309,450
    
    
    $
    (8,577
    )
    
    
    203
    
    
    
    131,846
    
    
    
    (37,607
    )
    
    
    692
    
    
    $
    441,296
    
    
    $
    (46,184
    )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
    )
   48




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##### Table of Contents



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
    
    
    11
    
    
    $
    7,388
    
    
    $
    (105
    )
    
    
    (1
    %)
    
    
    100
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %U.S. Agency securities
    
    
    5
    
    
    
    1,023
    
    
    
    (89
    )
    
    
    (8
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    99
    %
    
    
    0
    %
    
    
    1
    %Municipal bonds
    
    
    131
    
    
    
    160,996
    
    
    
    (3,140
    )
    
    
    (2
    %)
    
    
    48
    %
    
    
    34
    %
    
    
    14
    %
    
    
    2
    %
    
    
    1
    %Corporate and other bonds
    
    
    401
    
    
    
    177,885
    
    
    
    (11,126
    )
    
    
    (6
    %)
    
    
    6
    %
    
    
    18
    %
    
    
    43
    %
    
    
    19
    %
    
    
    14
    %Commercial mortgage-backed securities
    
    
    65
    
    
    
    61,639
    
    
    
    (20,175
    )
    
    
    (25
    %)
    
    
    92
    %
    
    
    0
    %
    
    
    0
    %
    
    
    2
    %
    
    
    6
    %Residential mortgage-backed securities
    
    
    40
    
    
    
    18,919
    
    
    
    (6,260
    )
    
    
    (25
    %)
    
    
    24
    %
    
    
    10
    %
    
    
    6
    %
    
    
    10
    %
    
    
    50
    %Asset-backed securities
    
    
    24
    
    
    
    6,285
    
    
    
    (3,529
    )
    
    
    (36
    %)
    
    
    10
    %
    
    
    4
    %
    
    
    24
    %
    
    
    18
    %
    
    
    43
    %Equities
    
    
    12
    
    
    
    5,658
    
    
    
    (1,758
    )
    
    
    (24
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    100
    %
  Liquidity and Capital Resources
 Cash Flows
    Six Months EndedCash Flow Summary
    
    June 30,($ in thousands)
    
    2009
    
    2008Cash provided by (used in):Operating activities
    
    $
    82,956
    
    
    $
    18,922Investing activities
    
    
    (61,657
    )
    
    
    6,194Financing activities
    
    
    (4,757
    )
    
    
    (2,537
    )Net increase (decrease) in cash and cash equivalents
    
    
    16,542
    
    
    
    22,579Cash and cash equivalents, beginning of year
    
    
    136,253
    
    
    
    77,679Cash and cash equivalents, end of year
    
    $
    152,795
    
    
    $
    100,258
   49




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Subordinated Debentures
      50




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 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
    
    
    (181,500
    )
    
    
    (12.3
    %)200 basis point rise
    
    
    (123,211
    )
    
    
    (8.4
    %)100 basis point rise
    
    
    (62,774
    )
    
    
    (4.3
    %)As of June 30, 2009
    
    
    0
    
    
    
    0.0
    %100 basis point decline
    
    
    64,889
    
    
    
    4.4
    %
 51




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##### Table of Contents



Item 4. Controls and Procedures
  52




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##### Table of Contents



Changes in internal control over financial reporting
  53




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 inter alia inter alia
 
 Item 1A. Risk Factors
    Risks Relating to the Proposed Merger with Specialty Underwriters Alliance, Inc. (SUA)
 Failure to complete the merger may negatively impact Towers business, financial condition,
results of operations, prospects and stock price.
  
    
    SUA stockholders adoption of the merger agreement and approval of the merger;
    
    approvals by regulatory authorities;
    
    the absence of laws and regulatory actions by governmental authorities that impose terms,
conditions, obligations or restrictions upon Tower, SUA or their respective subsidiaries, that
would, individually or in the aggregate, reasonably be expected to have a regulatory material
adverse effect, as defined in the merger agreement; and
    
    other customary closing conditions.
  
    
    the current market price of Towers common stock may reflect a market assumption that the
merger will occur and a failure to complete the merger could result in a negative perception
of Tower by equity investors and a resulting decline in the respective market prices of
Towers common stock;
    
    Tower may be required to reimburse SUA for certain reasonable, out-of-pocket transaction
expenses, up to $1,000,000;
 54




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##### Table of Contents




    
    Tower is expected to incur substantial transaction costs in connection with the merger; and
    
    Tower would not realize any of the anticipated benefits of having completed the merger.
  The announcement and pendency of the merger could have an adverse effect on Towers stock
price, business, financial condition, results of operations or business prospects.
  
    
    employees may experience uncertainty regarding their future roles with the combined
company, which might adversely affect Towers ability to retain, recruit and motivate key
personnel;
    
    the attention of Tower management may be directed toward the completion of the merger and
transaction-related considerations and may be diverted from the day-to-day business operations
of the company, and matters related to the merger may require commitments of time and
resources that could otherwise have been devoted to other opportunities that might have been
beneficial to Tower; and
    
    third parties with business relationships with Tower may seek to terminate and/or
renegotiate their relationships with Tower as a result of the merger, whether pursuant to the
terms of their existing agreements with Tower or otherwise.
  Risk Factors Relating to Tower Following the Merger
 The parties must obtain governmental and other consents to complete the merger. If these
consents are delayed, not granted or granted with unacceptable conditions, it may jeopardize or
postpone the completion of the merger, result in additional expenditures of money and resources
and/or reduce the anticipated benefits of the merger.
  There may be unexpected delays in the consummation of the merger, which could impact Towers
ability to timely achieve cost savings associated with the merger.
  Combining Tower and SUA may be more difficult than expected.
  55




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##### Table of Contents



Adverse economic factors including recession, inflation, periods of high unemployment or lower
economic activity could result in the combined company selling fewer policies than expected and/or
an increase in premium defaults which, in turn, could affect the combined companys growth and
profitability.
  The loss of key personnel could have a material adverse effect on the combined companys
business, financial condition, results of operations and prospects.
  Future results of the combined company may differ materially from the financial forecasts
provided to SUAs financial advisor in connection with discussions concerning the merger.
  The market price of Tower common stock and Towers earnings per share may decline as a result
of the merger.
  Currently pending or future litigation or governmental proceedings could result in material
adverse consequences, including injunctions, judgments or settlements.
  56




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##### Table of Contents



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 ProgramsApril 1 - 30, 2009
    
    
    1,173
    
    
    $
    31.12
    
    
    
    
    
    
    $
    May 1 - 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1 - 3, 2009
    
    
    1,138
    
    
    $
    25.07
    
    
    
    
    
    
    
    Total
    
    
    2,311
    
    
    $
    28.14
    
    
    
    
    
    
    $
    
 
 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
 57




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Signatures
  Tower Group, Inc.RegistrantDate: August 6, 2009
    /s/ Michael H. LeeMichael H. LeeChairman of the Board,
President and Chief Executive OfficerDate: August 6, 2009
    /s/ Francis M. ColalucciFrancis M. ColalucciSenior Vice President,
Chief Financial Officer and Treasurer 58