##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act Of 1934
 For the quarterly period ended March 31, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
 Commission file no. 000-50990
 Tower Group, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3894120(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)120 Broadway, 31stFloor 
New York, NY
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial statementsConsolidated Balance Sheets  March 31, 2008 (unaudited)
and December 31, 2007
    
    
    1Consolidated Statements of Income and Comprehensive Net Income
Three months ended March 31, 2008 and 2007 (unaudited)
    
    
    2Consolidated Statements of Cash Flows
Three months ended March 31, 2008 and 2007 (unaudited)
    
    
    3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Tower Group, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)March 31,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2008
    
    2007AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$554,803 and $616,757)
    
    $
    529,557
    
    
    $
    606,488Equity securities, available-for-sale, at fair value (cost of $11,993 and $14,429)
    
    
    10,810
    
    
    
    12,580Total investments
    
    
    540,367
    
    
    
    619,068Cash and cash equivalents
    
    
    93,439
    
    
    
    77,679Receivable for securities
    
    
    68,312
    
    
    
    8,755Investment income receivable
    
    
    6,148
    
    
    
    6,546Agents balances receivable
    
    
    114,869
    
    
    
    122,763Reinsurance recoverable
    
    
    215,959
    
    
    
    207,828Prepaid reinsurance premiums
    
    
    130,041
    
    
    
    124,834Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    44,883
    
    
    
    39,271Deferred income taxes
    
    
    19,938
    
    
    
    22,802Intangible assets
    
    
    21,369
    
    
    
    21,670Goodwill
    
    
    18,962
    
    
    
    13,281Fixed assets, net of accumulated depreciation
    
    
    34,298
    
    
    
    32,337Investment in unconsolidated affiliate
    
    
    32,591
    
    
    
    32,615Other assets
    
    
    25,202
    
    
    
    25,162Total assets
    
    $
    1,366,378
    
    
    $
    1,354,611LiabilitiesLoss and loss adjustment expenses
    
    $
    505,705
    
    
    $
    501,183Unearned premium
    
    
    275,389
    
    
    
    272,774Reinsurance balances payable
    
    
    74,519
    
    
    
    58,740Payable to issuing carriers
    
    
    36,992
    
    
    
    42,855Funds held under reinsurance agreements
    
    
    32,841
    
    
    
    36,841Accounts payable and accrued expenses
    
    
    14,099
    
    
    
    14,205Other liabilities
    
    
    11,712
    
    
    
    17,590Subordinated debentures
    
    
    101,036
    
    
    
    101,036Total liabilities
    
    
    1,052,293
    
    
    
    1,045,224Stockholders EquityCommon stock ($0.01 par value; 40,000,000 shares authorized, 23,374,013 and
23,225,039 shares issued, and 23,326,346 and 23,185,173 shares outstanding)
    
    
    234
    
    
    
    232Treasury stock (47,667 and 39,866 shares)
    
    
    (674
    )
    
    
    (493
    )Paid-in-capital
    
    
    206,157
    
    
    
    205,435Accumulated other comprehensive net loss
    
    
    (17,865
    )
    
    
    (8,322
    )Retained earnings
    
    
    126,233
    
    
    
    112,535Total stockholders equity
    
    
    314,085
    
    
    
    309,387Total liabilities and stockholders equity
    
    $
    1,366,378
    
    
    $
    1,354,611
 See accompanying notes to the consolidated financial statements.
 1




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Tower Group, Inc.
 
 Consolidated Statements of Income and Comprehensive Income
 (Unaudited)
 Three Months EndedMarch 31,($ in thousands, except per share and share amounts)
    
    2008
    
    2007RevenuesNet premiums earned
    
    $
    68,430
    
    
    $
    60,383Ceding commission revenue
    
    
    20,654
    
    
    
    14,234Insurance services revenue
    
    
    9,660
    
    
    
    1,460Net investment income
    
    
    9,796
    
    
    
    7,955Net realized gains (losses) on investments
    
    
    1,374
    
    
    
    (17
    )Policy billing fees
    
    
    578
    
    
    
    302Total revenues
    
    
    110,492
    
    
    
    84,317ExpensesLoss and loss adjustment expenses
    
    
    37,297
    
    
    
    33,910Direct and ceding commission expense
    
    
    26,608
    
    
    
    18,635Other operating expenses
    
    
    21,666
    
    
    
    15,089Interest expense
    
    
    2,322
    
    
    
    2,084Total expenses
    
    
    87,893
    
    
    
    69,718Other IncomeEquity income in unconsolidated affiliate
    
    
    760
    
    
    
    689Gain from issuance of common stock by unconsolidated affiliate
    
    
    
    
    
    
    2,705Income before income taxes
    
    
    23,359
    
    
    
    17,993Income tax expense
    
    
    8,506
    
    
    
    6,365Net income
    
    $
    14,853
    
    
    $
    11,628Gross unrealized investment holding gains (losses) arising during period
    
    
    (12,524
    )
    
    
    546Equity in net unrealized gains in investment in unconsolidated affiliates
investment portfolio
    
    
    (784
    )
    
    
    55Less: reclassification adjustment for (gains) losses included in net income
    
    
    (1,374
    )
    
    
    17Income tax (expense) benefit related to items of other
comprehensive income
    
    
    5,139
    
    
    
    (216
    )Comprehensive net income
    
    $
    5,310
    
    
    $
    12,030Basic and diluted earnings per shareBasic
    
    $
    0.65
    
    
    $
    0.50Diluted
    
    $
    0.64
    
    
    $
    0.49Weighted Average Common Shares Outstanding:Basic
    
    
    22,995,511
    
    
    
    21,988,907Diluted
    
    
    23,187,773
    
    
    
    22,621,230Dividends declared and paid per common share:Common stock
    
    $
    0.050
    
    
    $
    0.025
 See accompanying notes to the consolidated financial statements.
 2




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Tower Group, Inc.
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Cash flows provided by (used in) operating activities:Net income
    
    $
    14,853
    
    
    $
    11,628Adjustments to reconcile net income to net cash provided by (used in) operations:Gain from IPO of common shares of unconsolidated affiliate
    
    
    
    
    
    
    (2,705
    )(Gain) loss on sale of investments
    
    
    (1,374
    )
    
    
    17Depreciation and amortization
    
    
    2,605
    
    
    
    1,552Amortization of restricted stock
    
    
    491
    
    
    
    289Deferred income taxes
    
    
    2,482
    
    
    
    (595
    )Excess tax benefits from share-based payment arrangements
    
    
    (51
    )
    
    
    (65
    )Changes in:Agents balances receivable
    
    
    7,895
    
    
    
    7,380Reinsurance recoverable
    
    
    (11,823
    )
    
    
    (17,713
    )Prepaid reinsurance premiums
    
    
    (5,207
    )
    
    
    (16,198
    )Deferred acquisition costs, net
    
    
    (5,612
    )
    
    
    4,785Federal and state income taxes recoverable/payable
    
    
    140
    
    
    
    4,790Equity in unconsolidated affiliate
    
    
    (760
    )
    
    
    (689
    )Other assets
    
    
    (179
    )
    
    
    (984
    )Loss and loss adjustment expenses
    
    
    4,522
    
    
    
    31,228Unearned premium
    
    
    2,615
    
    
    
    2,253Reinsurance balances payable
    
    
    15,779
    
    
    
    11,486Accounts payable and accrued expenses
    
    
    (10,970
    )
    
    
    (9,387
    )Funds held under reinsurance agreement
    
    
    (4,652
    )
    
    
    (3,659
    )Other
    
    
    12,445
    
    
    
    (3,037
    )Net cash flows provided by operations
    
    
    23,200
    
    
    
    20,376Cash flows provided by (used in) investing activities:Purchase of fixed assets
    
    
    (4,426
    )
    
    
    (3,342
    )Purchase  fixed-maturity securities
    
    
    (115,565
    )
    
    
    (75,203
    )Purchase  equity securities
    
    
    
    
    
    
    (2,570
    )Sale or maturity  fixed-maturity securities
    
    
    113,608
    
    
    
    35,991Sale  equity securities
    
    
    
    
    
    
    3,001Net cash flows used in investing activities
    
    
    (6,383
    )
    
    
    (42,123
    )Cash flows provided by (used in) financing activities:Equity offering and over allotment, net of issuance costs
    
    
    
    
    
    
    89,387Issuance of perpetual preferred stock, net of issuance costs
    
    
    
    
    
    
    20,619Purchase of common trust securities  statutory business trusts
    
    
    
    
    
    
    (619
    )Redemption of preferred stock
    
    
    
    
    
    
    (40,000
    )Exercise of stock options & warrants
    
    
    231
    
    
    
    93Excess tax benefits from share-based payment arrangements
    
    
    51
    
    
    
    65Stock repurchase
    
    
    (180
    )
    
    
    Dividends paid
    
    
    (1,159
    )
    
    
    (1,082
    )Net cash flows provided by (used in) financing activities
    
    
    (1,057
    )
    
    
    68,463Increase in cash and cash equivalents
    
    
    15,760
    
    
    
    46,716Cash and cash equivalents, beginning of period
    
    
    77,679
    
    
    
    100,598Cash and cash equivalents, end of period
    
    $
    93,439
    
    
    $
    147,314Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    5,139
    
    
    $
    1,077Cash paid for interest
    
    
    2,116
    
    
    
    1,426
 See accompanying notes to the consolidated financial statements.
 3




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Tower Group, Inc.
 
 Notes to Unaudited Interim Consolidated Financial Statements
 Note 1Nature of Business
   Insurance Segment:
 Insurance Services Segment:
 Note 2Accounting Policies and Basis of Presentation
 Basis of Presentation
   Accounting Pronouncements
  4




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5




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Note 3Acquisition of Preserver Group, Inc.
   Note 4Equity Offering
   Note 5Investment in Unconsolidated AffiliateCastlePoint
  March 31,
    
    December 31,($ in millions)
    
    2008
    
    2007Carrying value of equity investment, beginning of year
    
    $
    32.6
    
    
    $
    27.9Equity in net income of CastlePoint
    
    
    0.8
    
    
    
    2.4Gain from initial public offering of common stock of CastlePoint
    
    
    
    
    
    
    2.7Equity in net unrealized gain / (loss) of the CastlePoint investment portfolio
    
    
    (0.7
    )
    
    
    (0.1
    )Dividends received from CastlePoint
    
    
    (0.1
    )
    
    
    (0.3
    )Carrying value of equity investment, end of period
    
    $
    32.6
    
    
    $
    32.6
  6




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Affiliated Agreements with CastlePoint
  Master Agreement
  Reinsurance Agreements
   Ceded
    
    Ceded
    
    Ceding
    
    CedingPremiums
    
    Premiums
    
    Commissions
    
    Commission($ in thousands)
    
    Written
    
    Earned
    
    Received
    
    PercentageMarch 31, 2008Brokerage business
    
    $
    45,544
    
    
    $
    52,348
    
    
    $
    16,407
    
    
    
    36.0
    %Traditional program business
    
    
    2,524
    
    
    
    1,178
    
    
    
    819
    
    
    
    32.5
    %Specialty program business and insurance
risk-sharing business
    
    
    8,008
    
    
    
    3,265
    
    
    
    3,145
    
    
    
    39.3
    %Total
    
    $
    56,076
    
    
    $
    56,791
    
    
    $
    20,371
    
    
    
    36.3
    %March 31, 2007Brokerage business
    
    $
    49,817
    
    
    $
    32,209
    
    
    $
    16,938
    
    
    
    34.0
    %Traditional program business
    
    
    6
    
    
    
    164
    
    
    
    2
    
    
    
    30.0
    %Specialty program business and insurance
risk-sharing business
    
    
    1,258
    
    
    
    518
    
    
    
    377
    
    
    
    30.0
    %Total
    
    $
    51,081
    
    
    $
    32,891
    
    
    $
    17,317
    
    
    
    33.9
    %
  7




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##### Table of Contents



CastlePoint($ in thousands)
    
    CastlePoint
    
    InsuranceReceivable/(payable) due to/from
    
    Reinsurance
    
    CompanyShown in balance sheet:Assumed premium receivable
    
    $
    15
    
    
    $
    Reinsurance recoverable
    
    
    12,977
    
    
    
    429Reinsurance balances payable
    
    
    (52,489
    )
    
    
    (8,007
    )Payable to issuing carriers
    
    
    
    
    
    
    (34,414
    )Total
    
    $
    (39,497
    )
    
    $
    (41,992
    )
 8




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Program Management Agreement
  Management Agreement
  TICNY Service and Expense Sharing Agreements
  TRM Service and Expense Sharing Agreements
  Note 6Investments
  9




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Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    % ofAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    Fair($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    ValueMarch 31, 2008U.S. Treasury securities
    
    $
    25,879
    
    
    $
    856
    
    
    $
    (16
    )
    
    $
    
    
    
    $
    26,719
    
    
    
    5
    %U.S. Agency securities
    
    
    5,041
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    5,159
    
    
    
    1
    %Municipal bonds
    
    
    170,015
    
    
    
    2,299
    
    
    
    (680
    )
    
    
    
    
    
    
    171,634
    
    
    
    32
    %Corporate and other bonds
    
    
    157,565
    
    
    
    580
    
    
    
    (5,276
    )
    
    
    (2,046
    )
    
    
    150,823
    
    
    
    28
    %Commercial mortgage-backed securities
    
    
    49,203
    
    
    
    79
    
    
    
    (7,115
    )
    
    
    (2,965
    )
    
    
    39,202
    
    
    
    7
    %Residential mortgage-backed securities
    
    
    128,835
    
    
    
    1,796
    
    
    
    (3,082
    )
    
    
    (7,267
    )
    
    
    120,283
    
    
    
    22
    %Asset-backed securities
    
    
    18,265
    
    
    
    118
    
    
    
    (2,646
    )
    
    
    
    
    
    
    15,737
    
    
    
    3
    %Total
fixed-maturity
securities
    
    
    554,803
    
    
    
    5,846
    
    
    
    (18,816
    )
    
    
    (12,277
    )
    
    
    529,557
    
    
    
    98
    %Preferred stocks
    
    
    5,551
    
    
    
    
    
    
    
    (519
    )
    
    
    (664
    )
    
    
    4,368
    
    
    
    1
    %Common stocks
    
    
    6,442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,441
    
    
    
    1
    %Total
    
    $
    566,796
    
    
    $
    5,846
    
    
    $
    (19,334
    )
    
    $
    (12,941
    )
    
    $
    540,365
    
    
    
    100
    %December 31, 2007U.S. Treasury securities
    
    $
    25,837
    
    
    $
    827
    
    
    $
    
    
    
    $
    
    
    
    $
    26,664
    
    
    
    4
    %U.S. Agency securities
    
    
    19,709
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    19,871
    
    
    
    3
    %Municipal bonds
    
    
    155,296
    
    
    
    1,167
    
    
    
    (78
    )
    
    
    (24
    )
    
    
    156,361
    
    
    
    25
    %Corporate and other bonds
    
    
    201,501
    
    
    
    1,219
    
    
    
    (3,164
    )
    
    
    (817
    )
    
    
    198,739
    
    
    
    32
    %Commercial mortgage-backed securities
    
    
    49,475
    
    
    
    262
    
    
    
    (5,015
    )
    
    
    (162
    )
    
    
    44,560
    
    
    
    7
    %Residential mortgage-backed securities
    
    
    144,028
    
    
    
    1,083
    
    
    
    (2,511
    )
    
    
    (2,733
    )
    
    
    139,867
    
    
    
    23
    %Asset-backed securities
    
    
    20,911
    
    
    
    88
    
    
    
    (573
    )
    
    
    
    
    
    
    20,426
    
    
    
    3
    %Total
fixed-maturity
securities
    
    
    616,757
    
    
    
    4,808
    
    
    
    (11,341
    )
    
    
    (3,736
    )
    
    
    606,488
    
    
    
    98
    %Preferred stocks
    
    
    5,551
    
    
    
    
    
    
    
    (1,849
    )
    
    
    
    
    
    
    3,702
    
    
    
    1
    %Common stocks
    
    
    8,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,878
    
    
    
    1
    %Total
    
    $
    631,186
    
    
    $
    4,808
    
    
    $
    (13,190
    )
    
    $
    (3,736
    )
    
    $
    619,068
    
    
    
    100
    %
   Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Fixed-maturity securitiesGross realized gains
    
    $
    3,906
    
    
    $
    350Gross realized losses
    
    
    (96
    )
    
    
    (195
    )3,810
    
    
    
    155Equity securitiesGross realized gains
    
    
    
    
    
    
    171Gross realized losses
    
    
    
    
    
    
    (343
    )Impairment write-down
    
    
    (2,436
    )
    
    
    (2,436
    )
    
    
    (172
    )Net realized gains (losses)
    
    $
    1,374
    
    
    $
    (17
    )
 Impairment Review
  10




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Note 7Fair Value Measurements
   11




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Level 1 
    
    Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets. Included are those investments traded on an active
exchange, such as the NASDAQ Global Select Market.Level 2 
    
    Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset
or liability and market-corroborated inputs. Included are investments in U.S. Treasury
securities and obligations of U.S. government agencies, municipal bonds, corporate debt
securities, commercial mortgage and asset-backed securities and certain residential
mortgage-backed securities.Level 3 
    
    Inputs to the valuation methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Included are investments in certain illiquid
residential mortgage-backed securities.
  ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalFixed maturity investments
    
    $
    
    
    
    $
    518,851
    
    
    $
    10,707
    
    
    $
    529,558Equity investments
    
    
    1,500
    
    
    
    4,368
    
    
    
    
    
    
    
    5,8681,500
    
    
    
    523,219
    
    
    
    10,707
    
    
    
    535,426Other InvestmentsReal estate investment trusts
    
    
    4,942
    
    
    
    
    
    
    
    
    
    
    
    4,942Totals
    
    $
    6,442
    
    
    $
    523,219
    
    
    $
    10,707
    
    
    $
    540,367
   ($ in thousands)Beginning balance as of January 1, 2008
    
    $
    Total gains or losses (realized / unrealized)Included in earnings
    
    
    278Included in other comprehensive income
    
    
    (2,599
    )Purchases, issuances and settlements
    
    
    (441
    )Net transfers into (out of) Level 3
    
    
    13,469Ending balance as of March 31, 2008
    
    $
    10,707
 Note 8Goodwill
  12




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($ in thousands)Purchase PriceBase purchase price paid
    
    $
    68,250Preserver direct transaction costs, net of tax benefit
    
    
    (3,547
    )Total purchase price paid to Preserver
    
    
    64,703Direct transaction costs
    
    
    1,305Total purchase consideration
    
    
    66,008Allocation of Purchase PriceBook value of Preserver at date of acquisition
    
    
    7,106Preserver shareholder debt repayment
    
    
    30,754Estimated fair value adjustments
    
    
    9,186Estimated fair value of assets acquired
    
    
    47,046Goodwill as of March 31, 2008
    
    $
    18,962
   Note 9Dividends Declared
   Note 10Stock Based Compensation
 Restricted Stock Awards
  13




---



##### Table of Contents



WeightedAverageNumber of
    
    Grant DateShares
    
    Fair ValueOutstanding at December 31, 2007
    
    
    195,468
    
    
    $
    24.97Granted
    
    
    132,358
    
    
    $
    24.66Vested
    
    
    (26,418
    )
    
    $
    28.77Forfeited
    
    
    (442
    )
    
    $
    32.56Outstanding at March 31, 2008
    
    
    300,966
    
    
    $
    24.59
 Stock Options
  Note 11Income Taxes
    Note 12Earnings per Share
  14




---



##### Table of Contents



Income
    
    Shares
    
    Per Share($ in thousands, except share and per share amounts)
    
    (Numerator)
    
    (Denominator)
    
    AmountThree Months Ended March 31, 2008Net Income
    
    $
    14,853Basic earnings per share
    
    $
    14,853
    
    
    
    22,995,511
    
    
    $
    0.65Effect of dilutive securities:Stock options
    
    
    
    
    
    
    146,167Unvested restricted stock
    
    
    
    
    
    
    20,915Warrants
    
    
    
    
    
    
    25,179Diluted earnings per share
    
    $
    14,853
    
    
    
    23,187,772
    
    
    $
    0.64Three Months Ended March 31, 2007Net Income
    
    $
    11,628Less: Preferred stock dividends
    
    
    (298
    )Less: Preferred stock excess consideration
    
    
    (400
    )Basic earnings per share
    
    
    10,930
    
    
    
    21,988,907
    
    
    $
    0.50Effect of dilutive securities:Stock options
    
    
    
    
    
    
    197,218Unvested restricted stock
    
    
    
    
    
    
    59,924Warrants
    
    
    
    
    
    
    34,138Preferred shares
    
    
    
    
    
    
    341,043Preferred stock dividends
    
    
    298
    
    
    
    Diluted earnings per share
    
    $
    11,228
    
    
    
    22,621,230
    
    
    $
    0.49
 Note 13Changes in Estimates
   Note 14Segment Information
  15




---



##### Table of Contents



Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Insurance SegmentRevenuesNet premiums earned
    
    $
    68,430
    
    
    $
    60,383Ceding commission revenue
    
    
    20,654
    
    
    
    14,234Policy billing fees
    
    
    502
    
    
    
    302Total revenues
    
    
    89,586
    
    
    
    74,919ExpensesNet loss and loss adjustment expenses
    
    
    37,297
    
    
    
    33,910Underwriting expenses
    
    
    41,986
    
    
    
    32,537Total expenses
    
    
    79,283
    
    
    
    66,447Underwriting profit
    
    $
    10,303
    
    
    $
    8,472
 Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    8,164
    
    
    $
    488Claims administration revenue
    
    
    957
    
    
    
    565Other administration revenue
    
    
    371
    
    
    
    251Reinsurance intermediary fees
    
    
    168
    
    
    
    156Policy billing fees
    
    
    76
    
    
    
    Total revenues
    
    
    9,736
    
    
    
    1,460ExpensesDirect commission expense paid to producers
    
    
    3,371
    
    
    
    7Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    1,574
    
    
    
    257Claims expense reimbursement to TICNY
    
    
    957
    
    
    
    565Total expenses
    
    
    5,902
    
    
    
    829Insurance services pretax income
    
    $
    3,834
    
    
    $
    631
  16




---



##### Table of Contents



Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Insurance segment
    
    $
    89,586
    
    
    $
    74,919Insurance services segment
    
    
    9,736
    
    
    
    1,460Total segment revenues
    
    
    99,322
    
    
    
    76,379Net investment income
    
    
    9,796
    
    
    
    7,955Net realized gains (losses) on investments
    
    
    1,374
    
    
    
    (17
    )Consolidated revenues
    
    $
    110,492
    
    
    $
    84,317
  Three Months EndedMarch 31,($ in thousands)
    
    2008
    
    2007Insurance segment underwriting profit
    
    $
    10,303
    
    
    $
    8,472Insurance services segment pretax income
    
    
    3,834
    
    
    
    631Net investment income
    
    
    9,796
    
    
    
    7,955Net realized gains (losses) on investments
    
    
    1,374
    
    
    
    (17
    )Corporate expenses
    
    
    (386
    )
    
    
    (358
    )Interest expense
    
    
    (2,322
    )
    
    
    (2,084
    )Other Income*
    
    
    760
    
    
    
    3,394Income before taxes
    
    $
    23,359
    
    
    $
    17,993
 
 *
    
    See note on investment in unconsolidated affiliate-CastlePoint Note 15Subsequent Events
 Dividends
  Investments
  17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note on Forward-Looking Statements
   
    
    ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions;
 
    
    developments that may delay or limit our ability to enter new markets as quickly as we
anticipate;
 
    
    increased competition on the basis of pricing, capacity, coverage terms or other factors;
 
    
    greater frequency or severity of claims and loss activity, including as a result of natural
or man-made catastrophic events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
 
    
    the effects of acts of terrorism or war;
 
    
    developments in the worlds financial and capital markets that adversely affect the
performance of our investments;
 
    
    changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;
 
    
    changes in acceptance of our products and services, including new products and services;
 
    
    changes in the availability, cost or quality of reinsurance and failure of our reinsurers
to pay claims timely or at all;
 
    
    changes in the percentage of our premiums written that we cede to reinsurers;
 
    
    decreased demand for our insurance or reinsurance products;
 
    
    loss of the services of any of our executive officers or other key personnel;
 
    
    the effects of mergers, acquisitions and divestitures;
 
    
    changes in rating agency policies or practices;
 
    
    changes in legal theories of liability under our insurance policies;
 
    
    changes in accounting policies or practices; and
 
    
    changes in general economic conditions, including inflation, interest rates and other
factors.
  18




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##### Table of Contents



Consolidated Results of Operations
   Three Months Ended March 31, 2008% Total
    
    
    
    
    
    % Total($ in thousands)
    
    2008
    
    Revenue
    
    2007
    
    Revenue
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    135,137
    
    
    
    
    
    
    $
    108,627
    
    
    
    
    
    
    $
    26,510
    
    
    
    24.4
    %Less: Ceded premiums earned
    
    
    (66,707
    )
    
    
    
    
    
    
    (48,244
    )
    
    
    
    
    
    
    (18,463
    )
    
    
    38.3
    %Net premiums earned
    
    
    68,430
    
    
    
    61.9
    %
    
    
    60,383
    
    
    
    71.6
    %
    
    
    8,047
    
    
    
    13.3
    %Total commission and fee income
    
    
    30,892
    
    
    
    28.0
    %
    
    
    15,996
    
    
    
    19.0
    %
    
    
    14,896
    
    
    
    93.1
    %Net investment income
    
    
    9,796
    
    
    
    8.9
    %
    
    
    7,955
    
    
    
    9.4
    %
    
    
    1,841
    
    
    
    23.1
    %Net realized investment (losses) gains
    
    
    1,374
    
    
    
    1.2
    %
    
    
    (17
    )
    
    
    (0.0
    %)
    
    
    1,391
    
    
    NMTotal
    
    
    110,492
    
    
    
    100.0
    %
    
    
    84,317
    
    
    
    100.0
    %
    
    
    26,175
    
    
    
    31.0
    %ExpensesNet loss and loss adjustment expenses
    
    
    37,297
    
    
    
    
    
    
    
    33,910
    
    
    
    
    
    
    
    3,387
    
    
    
    10.0
    %Operating expenses
    
    
    48,274
    
    
    
    
    
    
    
    33,724
    
    
    
    
    
    
    
    14,550
    
    
    
    43.1
    %Interest expense
    
    
    2,322
    
    
    
    
    
    
    
    2,084
    
    
    
    
    
    
    
    238
    
    
    
    11.4
    %Total expenses
    
    
    87,893
    
    
    
    
    
    
    
    69,718
    
    
    
    
    
    
    
    18,175
    
    
    
    26.1
    %Equity in income of unconsolidated
affiliate
    
    
    760
    
    
    
    
    
    
    
    689
    
    
    
    
    
    
    
    71
    
    
    
    10.3
    %Gain from issuance of common stock
by unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    2,705
    
    
    
    
    
    
    
    (2,705
    )
    
    
    -100.0
    %Income before taxes
    
    
    23,359
    
    
    
    
    
    
    
    17,993
    
    
    
    
    
    
    
    5,366
    
    
    
    29.8
    %Federal and state income taxes
    
    
    8,506
    
    
    
    
    
    
    
    6,365
    
    
    
    
    
    
    
    2,141
    
    
    
    33.6
    %Net Income
    
    $
    14,853
    
    
    
    
    
    
    $
    11,628
    
    
    
    
    
    
    $
    3,225
    
    
    
    27.7
    %Key measureReturn on average equity
    
    
    19.1%(1)
    
    
    
    
    
    
    
    23.8
    %
 
 (1)
    
    Excluding net realized gains and losses on investments, return on average equity
would have decreased 1.0%. 19




---



##### Table of Contents



Consolidated Results of Operations Three Months Ended March 31, 2008 and 2007
 Total revenues .
 Premiums earned .
  CededDates
    
    Quota Share Reinsurance Agreement With
    
    AmountApril 6, 2006 - June 30, 2006 *
    
    CastlePoint Reinsurance
    
    30%July 1, 2006 - December 31, 2006
    
    CastlePoint Reinsurance
    
    40%January 1, 2007 - March 31, 2007
    
    CastlePoint Reinsurance
    
    49%April 1 2007, - June 30, 2007
    
    CastlePoint Reinsurance
    
    40%April 1 2007, - June 30, 2007
    
    CastlePoint Insurance Company
    
    9%July 1, 2007 - Deember 31, 2007
    
    CastlePoint Reinsurance
    
    40%January 1, 2008 - March 31, 2008
    
    CastlePoint Reinsurance
    
    40%
 
 *
    
    Multi year quota share agreements with CastlePoint Reinsurance began April 6, 2006. Commission and fee income .
 Net investment income and net realized gains (losses) .
  20




---



##### Table of Contents



Losses and loss adjustment expenses .
 Operating expenses .
 Interest expense .
 Income tax expense .
 Net income and return on average equity .
 21




---



##### Table of Contents



Insurance Segment Results of Operations
 Three Months Ended March 31, 2008($ in thousands)
    
    2008
    
    2007
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    135,137
    
    
    $
    108,627
    
    
    $
    26,510
    
    
    
    24.4
    %Less: ceded premiums earned
    
    
    (66,707
    )
    
    
    (48,244
    )
    
    
    (18,463
    )
    
    
    38.3
    %Net premiums earned
    
    
    68,430
    
    
    
    60,383
    
    
    
    8,047
    
    
    
    13.3
    %Ceding commission revenue
    
    
    20,654
    
    
    
    14,234
    
    
    
    6,420
    
    
    
    45.1
    %Policy billing fees
    
    
    502
    
    
    
    302
    
    
    
    200
    
    
    
    66.2
    %Total
    
    
    89,586
    
    
    
    74,919
    
    
    
    14,667
    
    
    
    19.6
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    67,131
    
    
    
    57,342
    
    
    
    9,789
    
    
    
    17.1
    %Less: ceded loss and loss adjustment expenses
    
    
    (29,834
    )
    
    
    (23,432
    )
    
    
    (6,402
    )
    
    
    27.3
    %Net loss and loss adjustment expenses
    
    
    37,297
    
    
    
    33,910
    
    
    
    3,387
    
    
    
    10.0
    %Underwriting expensesDirect commission expense
    
    
    23,238
    
    
    
    18,629
    
    
    
    4,609
    
    
    
    24.7
    %Other underwriting expenses
    
    
    18,748
    
    
    
    13,908
    
    
    
    4,840
    
    
    
    34.8
    %Total underwriting expenses
    
    
    41,986
    
    
    
    32,537
    
    
    
    9,449
    
    
    
    29.0
    %Underwriting profit
    
    $
    10,303
    
    
    $
    8,472
    
    
    $
    1,831
    
    
    
    21.6
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    135,113
    
    
    $
    110,880
    
    
    
    24,233
    
    
    
    21.9
    %Less: ceded premiums written
    
    
    (66,757
    )
    
    
    (62,848
    )
    
    
    (3,909
    )
    
    
    6.2
    %Net premiums written
    
    $
    68,356
    
    
    $
    48,032
    
    
    $
    20,324
    
    
    
    42.3
    %Loss RatiosGross
    
    
    49.7
    %
    
    
    52.8
    %Net
    
    
    54.5
    %
    
    
    56.2
    %Accident Year Loss RatiosGross
    
    
    50.5
    %
    
    
    53.1
    %Net
    
    
    54.5
    %
    
    
    56.2
    %Underwriting Expense RatiosGross
    
    
    30.7
    %
    
    
    29.7
    %Net
    
    
    30.4
    %
    
    
    29.8
    %Combined RatiosGross
    
    
    80.4
    %
    
    
    82.5
    %Net
    
    
    84.9
    %
    
    
    86.0
    %
 Insurance Segment Results of Operations Three Months Ended March 31, 2008 and 2007
 Gross premiums .
 22




---



##### Table of Contents



Ceded premiums .
  Net premiums .
 Ceding commission revenue.
 23




---



##### Table of Contents



Loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio
    Underwriting profit and combined ratio .
 24




---



##### Table of Contents



Insurance Services Segment Results of Operations
 Three Months Ended March 31, 2008($ in thousands)
    
    2008
    
    2007
    
    Change
    
    PercentRevenueDirect commission revenue from managing
general agency
    
    $
    8,164
    
    
    $
    488
    
    
    
    7,676
    
    
    NMClaims administration revenue
    
    
    957
    
    
    
    565
    
    
    
    392
    
    
    
    69.4
    %Other administration revenue (1)
    
    
    371
    
    
    
    251
    
    
    
    120
    
    
    
    47.7
    %Reinsurance intermediary fees (2)
    
    
    168
    
    
    
    156
    
    
    
    12
    
    
    
    7.7
    %Policy billing fees
    
    
    76
    
    
    
    
    
    
    
    76
    
    
    
    0.0
    %Total
    
    
    9,736
    
    
    
    1,460
    
    
    
    8,276
    
    
    
    566.8
    %ExpensesDirect commission expense paid to producers
    
    
    3,371
    
    
    
    7
    
    
    
    3,364
    
    
    NMOther insurance services expenses
    
    
    1,574
    
    
    
    257
    
    
    
    1,317
    
    
    
    512.3
    %Claims expense reimbursement to TICNY (3)
    
    
    957
    
    
    
    565
    
    
    
    392
    
    
    
    69.4
    %Total
    
    
    5,902
    
    
    
    829
    
    
    
    5,073
    
    
    
    611.9
    %Insurance services pre-tax income (loss)
    
    $
    3,834
    
    
    $
    631
    
    
    $
    3,203
    
    
    
    507.6
    %Premiums produced by TRM on behalf
of issuing companies
    
    $
    23,291
    
    
    $
    (55
    )
    
    
    23,346
    
    
    NM
 
 (1)
    
    Other administration revenue includes amounts reimbursed by CastlePoint Reinsurance
for services rendered pursuant to a service and expense sharing agreement.(2)
    
    Reinsurance intermediary fees include commissions earned for placement of
reinsurance on behalf of our insurance subsidiaries.(3)
    
    Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing
agreement. Insurance Services Segment Results of Operations Three Months Ended March 31, 2008 and 2007
 Total revenues.
 Direct commission expense .
 Other insurance services expenses .
 Claims expense reimbursement .
 25




---



##### Table of Contents



Pre-tax income .
 Liquidity and Capital Resources
 Cash flows .
        26




---



##### Table of Contents



Subordinated Debentures
  Investments
  Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    Aggregate
    
    Unrealized($ in thousands)
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesMarch 31, 2008U.S. Agency securities
    
    $
    8,333
    
    
    $
    (16
    )
    
    $
    
    
    
    $
    
    
    
    $
    8,333
    
    
    $
    (16
    )Municipal bonds
    
    
    37,892
    
    
    
    (680
    )
    
    
    
    
    
    
    
    
    
    
    37,892
    
    
    
    (680
    )Corporate and other bonds
    
    
    89,864
    
    
    
    (5,276
    )
    
    
    17,170
    
    
    
    (2,046
    )
    
    
    107,034
    
    
    
    (7,322
    )Commercial mortgage-backed securities
    
    
    24,043
    
    
    
    (7,115
    )
    
    
    9,628
    
    
    
    (2,965
    )
    
    
    33,670
    
    
    
    (10,080
    )Residential mortgage-backed securities
    
    
    20,264
    
    
    
    (3,082
    )
    
    
    15,259
    
    
    
    (7,267
    )
    
    
    35,523
    
    
    
    (10,348
    )Asset-backed securities
    
    
    11,906
    
    
    
    (2,646
    )
    
    
    
    
    
    
    
    
    
    
    11,906
    
    
    
    (2,646
    )Total
fixed-maturity
securities
    
    
    192,301
    
    
    
    (18,816
    )
    
    
    42,057
    
    
    
    (12,277
    )
    
    
    234,358
    
    
    
    (31,093
    )Preferred stocks
    
    
    3,033
    
    
    
    (519
    )
    
    
    1,336
    
    
    
    (664
    )
    
    
    4,369
    
    
    
    (1,183
    )Total
    
    $
    195,333
    
    
    $
    (19,334
    )
    
    $
    43,393
    
    
    $
    (12,941
    )
    
    $
    238,726
    
    
    $
    (32,276
    )December 31, 2007Municipal bonds
    
    $
    11,614
    
    
    $
    (78
    )
    
    $
    7,272
    
    
    $
    (24
    )
    
    $
    18,886
    
    
    $
    (102
    )Corporate and other bonds
    
    
    77,262
    
    
    
    (3,164
    )
    
    
    24,631
    
    
    
    (817
    )
    
    
    101,893
    
    
    
    (3,981
    )Commercial mortgage-backed
securities
    
    
    24,146
    
    
    
    (5,015
    )
    
    
    8,325
    
    
    
    (162
    )
    
    
    32,471
    
    
    
    (5,177
    )Residential mortgage-backed
securities
    
    
    17,263
    
    
    
    (2,511
    )
    
    
    46,196
    
    
    
    (2,733
    )
    
    
    63,459
    
    
    
    (5,244
    )Asset-backed securities
    
    
    2,898
    
    
    
    (573
    )
    
    
    
    
    
    
    
    
    
    
    2,898
    
    
    
    (573
    )Total fixed-maturity
securities
    
    
    133,183
    
    
    
    (11,341
    )
    
    
    86,424
    
    
    
    (3,736
    )
    
    
    219,607
    
    
    
    (15,077
    )Preferred stocks
    
    
    3,702
    
    
    
    (1,849
    )
    
    
    
    
    
    
    
    
    
    
    3,702
    
    
    
    (1,849
    )Total
    
    $
    136,885
    
    
    $
    (13,190
    )
    
    $
    86,424
    
    
    $
    (3,736
    )
    
    $
    223,309
    
    
    $
    (16,926
    )
  27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk
    Sensitivity Analysis
    28




---



##### Table of Contents



Estimated Increase
    
    Estimated Percentage(Decrease) in Fair Value
    
    Increase (decrease)Change in interest rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    
    (60,783
    )
    
    
    (12.8
    %)200 basis point rise
    
    
    (41,378
    )
    
    
    (8.7
    %)100 basis point rise
    
    
    (21,272
    )
    
    
    (4.5
    %)No change
    
    
    0
    
    
    
    0.0
    %50 basis point decline
    
    
    10,390
    
    
    
    2.2
    %100 basis point decline
    
    
    21,437
    
    
    
    4.5
    %
   
 Item 4. Controls and Procedures
  Changes in internal control over financial reporting
 Fair Value Measurements
 29




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of Shares
    
    Maximum Number (orTotal Number
    
    
    
    
    
    Purchased as Part of
    
    Approximate Dollarof Shares
    
    Average Price
    
    Publicly Announced Plans
    
    Value) of Shares that MayPeriod
    
    Purchased
    
    Paid per Share
    
    or Programs
    
    Yet Be Purchased UnderJanuary 1 - 31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    February 1 - 29,
2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 - 31, 2008
    
    
    7,359
    
    
    
    24.56
    
    
    
    
    
    
    
    Total
    
    
    7,359
    
    
    $
    24.56
    
    
    
    
    
    
    $
    
 
 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
 30




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##### Table of Contents



Signatures
  Tower Group, Inc.RegistrantDate:
May 12, 2008
    
    /s/ Michael H. LeeMichael H. LeeChairman of the Board,President and Chief Executive OfficerDate:
May 12, 2008
    
    /s/ Francis M. ColalucciFrancis M. ColalucciSenior Vice President,Chief Financial Officer and Treasurer
 31