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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
          For the quarterly period ended September 30, 2006


[ ]       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, 31st Floor
           New York, NY                                     10271
----------------------------------------    ------------------------------------
(Address of principal executive offices)                  (Zip Code)

                                 (212) 655-2000
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.         Yes [X]          No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ]  Accelerated filer [X]    Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act).
                                           Yes [ ]          No [X]


The aggregate market value of the registrant's common stock held by
non-affiliates on June 30, 2006 (based on the closing price on the Nasdaq
National Market) on such date was approximately $515,117,298.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 19,982,038 shares of common
stock, par value $0.01 per share, as of November 1, 2006.

<PAGE>

<TABLE>
<CAPTION>

                                      INDEX


                                                                                                     PAGE

<S>            <C>                                                                                   <C>
PART I       FINANCIAL INFORMATION

Item 1.      Financial statements

             Consolidated Balance Sheets - September 30, 2006 (unaudited) and December 31, 2005        1

             Consolidated Statements of Income and Comprehensive Net Income
                -- Three Months ended September 30, 2006 and 2005 (unaudited)                          2
                -- Nine Months ended September 30, 2006 and 2005 (unaudited)                           2

             Consolidated Statements of Cash Flows
                -- Three Months ended September 30, 2006 and 2005 (unaudited)                          3
                -- Nine Months ended September 30, 2006 and 2005 (unaudited)                           3

             Notes to Consolidated Financial Statements (unaudited)                                    4

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations    13

Item 3.      Quantitative and Qualitative Disclosures About Market Risk                               27

Item 4.      Controls and Procedures                                                                  28


PART II      OTHER INFORMATION

Item 6.      Exhibits                                                                                 29


SIGNATURES                                                                                            29

</TABLE>

<PAGE>


1.  Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

<TABLE>
<CAPTION>

                           Tower Group, Inc.
                      Consolidated Balance Sheets

                                                          (Unaudited)
                                                         September 30,   December 31,
                                                             2006           2005
                                                        -------------- ---------------
                                                      ($ in thousands, except par value
                                                              and share amounts)
Assets
<S>                                                             <C>             <C>
Fixed-maturity securities, available-for-sale, at fair
 value (amortized cost $402,668 in 2006 and $331,123 in
 2005)                                                       $401,032        $326,681
Equity securities, available-for-sale, at fair value
 (cost $42,676 in 2006 and $6,681 in 2005)                     42,646           5,934
Equity securities, at cost                                          -          24,558
Common trust securities - statutory business trusts,
 equity method                                                  2,045           1,426
                                                        -------------- ---------------
    Total investments                                         445,723         358,599
Cash and cash equivalents                                      40,533          38,760
Investment income receivable                                    4,123           3,337
Agents' balances receivable                                    55,245          46,004
Assumed premiums receivable                                     4,910           1,076
Ceding commission receivable                                        -           8,727
Reinsurance recoverable                                       108,515         104,811
Receivable - claims paid by agency                              3,633           2,309
Prepaid reinsurance premiums                                   79,102          43,319
Deferred acquisition costs net of deferred ceding
 commission revenue                                            34,783          29,192
Federal and state income taxes recoverable                      3,134             365
Deferred income taxes                                             242           3,204
Intangible assets                                               5,830           5,835
Fixed assets, net of accumulated depreciation                  23,912           7,920
Investment in unconsolidated affiliate                         27,436               -
Other assets                                                    4,342           3,999
                                                        -------------- ---------------
    Total Assets                                             $841,463        $657,457
                                                        ============== ===============
Liabilities
Loss and loss adjustment expenses                            $279,600        $198,724
Unearned premium                                              204,666         157,779
Reinsurance balances payable                                   24,851          19,200
Payable to issuing carriers                                     1,818           5,252
Funds held as agent                                             8,195           8,191
Funds held under reinsurance agreements                        57,024          59,042
Accounts payable and accrued expenses                          12,179          13,694
Deferred rent liability                                         6,040               -
Payable for securities                                            939               -
Other liabilities                                               3,580           2,867
Federal income taxes payable                                        -             460
Subordinated debentures                                        68,045          47,426
                                                        -------------- ---------------
   Total Liabilities                                          666,937         512,635
                                                        -------------- ---------------
Stockholders' Equity
Common stock ($0.01 par value per share; 40,000,000
 shares authorized; and 20,005,758 shares issued in 2006
 and 19,872,672 in 2005)                                          200             199
Paid-in-capital                                               112,824         111,066
Accumulated other comprehensive net income                     (1,108)         (3,352)
Retained earnings                                              62,789          37,019
Treasury stock (23,720 shares in 2006 and 17,881 in
 2005)                                                           (179)           (110)
                                                        -------------- ---------------
   Total Stockholders' Equity                                 174,526         144,822
                                                        -------------- ---------------
   Total Liabilities and Stockholders' Equity                $841,463        $657,457
                                                        ============== ===============

         See accompanying notes to the consolidated financial statements

</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>

                                Tower Group, Inc.
                      Consolidated Statements of Income and
                            Comprehensive Net Income
                                   (Unaudited)

                                                 Three Months Ended                 Nine Months Ended
                                                    September 30,                     September 30,
                                          --------------------------------- ---------------------------------
                                                2006             2005            2006              2005
                                          ---------------- ---------------- --------------- -----------------
                                                 ($ in thousands, except share and per share amounts)
Revenues
    <S>                                            <C>               <C>            <C>                <C>
   Net premiums earned                        $    52,366      $    45,324     $   168,908       $   112,933
   Ceding commission revenue                       13,171            6,845          30,550            18,021
   Insurance services revenue                       1,243            3,418           5,274            10,541
   Net investment income                            5,923            4,131          15,875            10,479
   Net realized gains (losses) on
    investments                                        32              (15)            (84)              214
   Policy billing fees                                286              234             830               671
                                          ---------------- ---------------- --------------- -----------------
     Total revenues                                73,021           59,937         221,353           152,859
                                          ---------------- ---------------- --------------- -----------------
Expenses
  Loss and loss adjustment expenses                30,392           26,512         105,026            66,587
  Direct commission expense                        15,309           11,277          43,654            30,738
  Other operating expenses                         13,127           12,068          38,718            30,265
  Interest expense                                  1,863            1,296           5,066             3,567
                                          ---------------- ---------------- --------------- -----------------
     Total expenses                                60,691           51,153         192,464           131,157
                                          ---------------- ---------------- --------------- -----------------
Other Income
  Equity income in unconsolidated
   affiliate                                          418                -             364                 -
  Gain from issuance of common stock by
   unconsolidated affiliate                             -                -           7,883                 -
  Warrant received from unconsolidated
   affiliate                                            -                -           4,605                 -
                                          ---------------- ---------------- --------------- -----------------
  Income before income taxes                       12,748            8,784          41,741            21,702
  Income tax expense                                4,292            3,076          14,490             7,512
                                          ---------------- ---------------- --------------- -----------------
     Net income                               $     8,456      $     5,708     $    27,251       $    14,190
                                          ================ ================ =============== =================

Comprehensive Net Income
  Net income                                  $     8,456      $     5,708     $    27,251       $    14,190
  Other comprehensive income:
     Gross unrealized investment holding
      gains (losses) arising during period          9,150           (4,765)          3,273            (4,424)
     Equity in net unrealized gains in
      investment in unconsolidated
      affiliate's investment portfolio                296                -             184                 -
     Less: reclassification adjustment for
      (gains) losses included in net income           (32)              15              84              (214)
                                          ---------------- ---------------- --------------- -----------------
                                                    9,414           (4,750)          3,541            (4,638)
     Income tax (expense) benefit related
      to items of other comprehensive
      income                                       (3,295)           1,669          (1,297)            1,630
                                          ---------------- ---------------- --------------- -----------------
     Total other comprehensive net income
      (loss)                                        6,119           (3,081)          2,244            (3,008)
                                          ---------------- ---------------- --------------- -----------------
        Comprehensive Net Income              $    14,575      $     2,627     $    29,495       $    11,182
                                          ================ ================ =============== =================

Earnings Per Share
  Basic earnings per common share             $      0.43      $      0.29     $      1.38       $      0.73
                                          ================ ================ =============== =================
  Diluted earnings per common share           $      0.42      $      0.28     $      1.36       $      0.71
                                          ================ ================ =============== =================

Weighted Average Common Shares
 Outstanding:
     Basic                                     19,776,188       19,575,728      19,734,365        19,550,722
     Diluted                                   20,074,058       20,161,873      20,032,256        20,119,280



         See accompanying notes to the consolidated financial statements

</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>

                                Tower Group, Inc.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

                                                                     Three Months Ended             Nine Months Ended
                                                                        September 30,                 September 30,
                                                                ----------------------------- -----------------------------
                                                                      2006           2005           2006           2005
                                                                -------------- -------------- -------------- --------------
                                                                                     ($ in thousands)
Cash flows from operating activities:
    <S>                                                                 <C>            <C>           <C>              <C>
 Net income                                                          $  8,456       $  5,708      $  27,251      $  14,190
 Adjustments to reconcile net income to net cash provided by
   (used in) operations:
   Gain on issuance of common shares by unconsolidated affiliate            -              -         (7,883)             -
   Warrant received from unconsolidated affiliate                           -              -         (4,605)             -
   Gain on sale of investments                                            (32)            15             84           (214)
   Depreciation                                                         1,273            642          3,236          1,814
   Amortization of intangible assets                                      110            112            316            334
   Amortization of bond premium or discount                               176            311            644            784
   Amortization of debt issuance costs                                     14              9             38             29
   Amortization of restricted stock                                       262            147            604            469
   Deferred income taxes                                                 2001            193          1,666         (1,352)
(Increase) decrease in assets:
   Investment income receivable                                           (66)          (491)          (786)        (1,259)
   Agents' balances receivable                                           (938)         3,818         (9,241)        (3,731)
   Assumed premiums receivable                                          2,073            (23)        (3,834)           120
   Ceding commissions receivable                                            -              -          8,727           (398)
   Reinsurance recoverable                                            (12,994)          (978)        (5,028)        (1,550)
   Prepaid reinsurance premiums                                        (5,653)        (1,895)       (35,783)       (12,704)
   Deferred acquisition costs, net                                     (1,928)        (2,306)        (5,591)        (8,980)
   Federal and state taxes recoverable                                 (3,229)             -         (3,229)             -
   Intangible assets                                                     (281)           (78)          (311)        (1,224)
   Equity in unconsolidated affiliate                                    (418)             -           (364)             -
   Excess tax benefits from share-based payment arrangements             (202)             -           (852)             -
   Other assets                                                         2,150            249           (381)            26
Increase (decrease) in liabilities:
   Loss and loss adjustment expenses                                   25,188         19,659         80,876         46,795
   Unearned premium                                                     4,948          7,962         46,887         55,708
   Reinsurance balances payable                                        (8,270)           594          5,651         15,628
   Payable to issuing carriers                                         (1,767)           224         (3,434)        (6,163)
   Accounts payable and accrued expenses                                  391          2,344           (802)        (1,608)
   Deferred rent liability                                              6,040              -          6,040              -
   Federal and state income taxes payable                              (3,236)        (2,999)             -            156
   Funds held under reinsurance agreements                             (2,768)         2,760         (2,014)           618
                                                                -------------- -------------- -------------- --------------
Net cash flows provided by operations                                  11,300         35,977         97,882         97,488
                                                                -------------- -------------- -------------- --------------
Cash flows used in investing activities:
Purchase of fixed assets                                              (14,158)        (1,110)       (19,228)        (3,530)
Investment in unconsolidated affiliate                                    128              -        (14,400)             -
Purchases of investments:
   Fixed-maturity securities                                          (52,711)       (50,678)      (124,685)      (125,538)
   Equity securities - at fair value                                  (35,362)          (617)       (35,995)       (30,588)
   Short-term investments - net                                            16              -             16              -
Sale of investments:
   Fixed-maturity securities                                           24,956          2,669         53,168         36,825
   Equity securities - at cost                                         24,558              -         24,558          1,972
                                                                -------------- -------------- -------------- --------------
Net cash flows used in investing activities                           (52,573)       (49,736)      (116,566)      (120,859)
                                                                -------------- -------------- -------------- --------------
Cash flows from financing activities:
 Proceeds from subordinated debentures                                      -              -         20,619              -
 Purchase of common trust securities - statutory business trusts            -              -           (619)             -
 Dividends paid                                                          (493)          (490)        (1,481)        (1,467)
 Share based compensation                                                 270            165          1,155            245
 Excess tax benefits from share-based payment arrangements                202              -            852              -
 Stock repurchase                                                          (2)             -            (69)             -
                                                                -------------- -------------- -------------- --------------
 Net cash flows provided by (used in) financing activities                (23)          (325)        20,457         (1,222)
                                                                -------------- -------------- -------------- --------------
 Increase (decrease) in cash and cash equivalents                     (41,296)       (14,084)         1,773        (24,593)
 Cash and cash equivalents, beginning of period                        81,829         44,692         38,760         55,201
                                                                -------------- -------------- -------------- --------------
 Cash and cash equivalents, end of period                            $ 40,533       $ 30,608      $  40,533      $  30,608
                                                                ============== ============== ============== ==============
Supplemental disclosures of cash flow information:
 Cash paid for income taxes                                          $  7,982       $  5,778      $  15,306      $   8,488
 Cash paid for interest                                              $  1,479       $    883      $   3,384      $   2,535

         See accompanying notes to the consolidated financial statements

</TABLE>

                                       3
<PAGE>

                                Tower Group, Inc.
             Notes to Consolidated Financial Statements (Unaudited)



Basis of Presentation

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-Q and, accordingly, do not
include the information and disclosures required by generally accepted
accounting principles ("GAAP") in the United States of America. These statements
should be read in conjunction with the consolidated financial statements as of
and for the year ended December 31, 2005 and notes thereto included in the
Company's Annual Report on Form 10-K filed on March 15, 2006. The accompanying
consolidated financial statements have not been audited by an independent
registered public accounting firm in accordance with standards of the Public
Company Accounting Oversight Board (United States), but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the Company's
financial position and results of operations. The results of operations for the
three months and nine months ended September 30, 2006 may not be indicative of
the results that may be expected for the year ending December 31, 2006. The
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries Tower Insurance Company of New York ("TICNY"), Tower
National Insurance Company ("TNIC"), Tower Risk Management Corporation ("TRM"),
Tower Indemnity Company of America ("TICA") and other entities required by GAAP.
All significant inter-company balances have been eliminated. Business segment
results are presented net of all material inter-segment transactions.

Investment in Unconsolidated Affiliate

     The Company has invested in an unconsolidated Bermuda holding company,
CastlePoint Holdings, Ltd. ("CastlePoint"), which the Company organized and
sponsored with an initial investment of $15.0 million on February 6, 2006. The
Company consolidated the activities of CastlePoint as a wholly owned subsidiary
during the first quarter of 2006 and recognized approximately $0.5 million of
non-recurring start-up costs. On April 4, 2006, CastlePoint raised $249.9
million, net of expenses, in a private placement offering of unissued shares,
which reduced the Company's investment ownership from 100% to 8.6%. The book
value per share of the Company's 2,555,000 shares of CastlePoint common stock
increased from $5.87 per share to $8.96 per share as a result of this offering.
The carrying value of the Company's investment in CastlePoint increased from
$15.0 million to $22.9 million. The Company has recorded this gain of $7.9
million in income before taxes in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 51 - Accounting for Sales of
Stock by a Subsidiary in the nine months ended September 30, 2006.

     On April 6, 2006, the Company received a warrant from CastlePoint to
purchase an additional 3.7% or 1,127,000 shares of common stock with a fair
value of approximately $4.6 million using a Black-Scholes option pricing model.
The warrant is exercisable in whole or in part at any time up to April 6, 2016,
and the exercise price is $10 per share. Shares acquired through the exercise of
the warrant may not be sold prior to April 9, 2009. The warrant was received in
exchange for sponsorship services, which included management, operational and
industry expertise to establish the CastlePoint organization and prepare for a
private placement offering. Accordingly, the Company recognized $4.6 million in
income before taxes in the nine months ending September 30, 2006 relating to
non-recurring sponsorship services. The warrant has been recorded as an equity
instrument at cost, which was determined to be the fair value of the warrant on
the date it was received and will be subject to impairment testing.

     The Company has determined that its ownership in CastlePoint qualifies as a
variable interest entity ("VIE") under the provisions of FIN 46-(R). The Company
has determined that its investment in CastlePoint does not meet the requirements
for consolidation because the Company is not the primary beneficiary of the VIE
as defined in FIN 46-(R). However, the Company has recorded its 8.6% investment
in CastlePoint using the equity method of accounting as the Company exercises
significant influence over CastlePoint. The Company and CastlePoint have the
same CEO. Through its two insurance subsidiaries, TICNY and TNIC, the Company
entered into three, multi-year quota share reinsurance agreements with


                                       4
<PAGE>


CastlePoint Reinsurance Company, Ltd. ("CastlePoint Reinsurance"), which were
effective April 4, 2006 and a service and expense sharing agreement whereby the
Company's staff provides CastlePoint administrative and underwriting services at
cost.

     At September 30, 2006, the Company's maximum exposure to a loss from its
investment in CastlePoint was approximately $27.4 million, which consists of its
equity ownership interest of approximately $22.8 million (after deducting
dividends received in the third quarter of 2006) and the fair value of the
warrant the Company received from CastlePoint of $4.6 million.

     The carrying value of the Company's equity investment in CastlePoint as of
September 30, 2006 is as follows in millions:

Initial investment in CastlePoint                             $   15.0

Consolidated net loss for the three months ended                  (0.5)
    March 31, 2006
Equity in net income of CastlePoint for the six months
    ended September 30, 2006                                       0.3
Gain from issuance of common stock by CastlePoint                  7.9
Equity in net unrealized gains of the CastlePoint
    investment portfolio                                           0.2
Dividends received from CastlePoint                               (0.1)
Value of warrant received                                          4.6
                                                           ----------------
Carrying value of equity investment in CastlePoint            $   27.4
                                                           ================

     A general dividend and a special dividend of $0.025 per share each were
declared and paid by CastlePoint in September 2006. The Company recorded its
$128,000 of CastlePoint dividends as a reduction to its investment in
CastlePoint.

     CastlePoint Reinsurance entered into three multi-year quota share
reinsurance agreements with the Company's insurance subsidiaries that will cede
to CastlePoint Reinsurance between 25% and 45%, subject to a periodic adjustment
by the Company, of premiums and losses on their brokerage insurance business
that the Company has historically written through its retail and wholesale
agents. The ceding commission for the brokerage business is fixed at 34% of
ceded written premiums. During the second quarter of 2006, the Company ceded 30%
of its brokerage insurance business to CastlePoint Reinsurance and ceded 40% of
its new and renewal brokerage insurance business written in the third quarter of
2006 to CastlePoint. The Company ceded 50% of its traditional program business
and 85% of its specialty program business written during the third quarter of
2006 to CastlePoint. Traditional program business written through program
underwriting agencies is comprised of classes of business that the Company has
historically written. The ceding commission rate for the traditional program
business is 30% and may be adjusted upward based upon the loss ratio. The ceding
commission for the specialty program business is 30%. During the nine months
ended September 30, 2006, the Company ceded $40.9 million of unearned premiums
as of April 1, 2006, which consisted of $19.2 million and $21.7 million of
unearned premiums retained by the Company on policies written in 2006 and 2005,
respectively, and $68.8 million on premiums written during the nine months ended
September 30, 2006. In addition, CastlePoint Reinsurance participates as a
reinsurer on the Company's catastrophe reinsurance program, effective July 1,
2006, and excess of loss reinsurance program effective, May 1, 2006. The Company
ceded excess of loss reinsurance and catastrophe premiums to CastlePoint
Reinsurance of $1.0 million and $1.4 million, respectively for the three months
and nine months ended September 30, 2006. Recoverables totaling $86.9 million
from CastlePoint Reinsurance, which is an unauthorized reinsurer, are
collateralized in a New York State Regulation 114 Compliant Trust account for
the benefit of the Company with a balance of $62.6 million as of September 30,
2006 with the remaining amount offset by ceded balances payable of $28.0
million.

     The Company's insurance companies entered into a service and expense
sharing agreement with CastlePoint, pursuant to which they will provide
insurance company services now offered by the Company, such as claims
adjustment, policy administration, technology solutions, underwriting, and risk
management services, to the U.S. domiciled insurance subsidiaries of
CastlePoint, as well as to companies appointed as managing general underwriters
by those companies. The Company charged CastlePoint $0.3 million for such


                                       5
<PAGE>


services in the third quarter of 2006 and $0.6 million for the nine months ended
September 30, 2006, which have been recorded as reductions to the Company's
operating expenses.

     Effective April 4, 2006, the Company novated business assumed from the
Accident Insurance Company ("AIC") by TICNY to CastlePoint Reinsurance. TICNY
recorded $0.1 million as ceded premiums written and earned and eliminated
liabilities of $0.1 million, which was recorded as a reduction to losses
incurred during the three months ending June 30, 2006.

     Purchase of Shell Company and Intangible Assets

     On June 28, 2006, the Company closed on its purchase of 100% of the
outstanding common stock of a shell insurance company, MIIX Insurance Company of
New York, which was renamed Tower Indemnity Company of America. The total cost
to acquire TICA was $8.6 million and included the purchase price, legal fees and
a broker fee. TICA has active state insurance licenses in New York and New
Jersey. The Company capitalized $0.3 million of the $8.6 million as an
intangible asset related to state licenses with an indefinite life subject to
annual impairment testing. See "Subsequent Events" for further discussion.

     Commutation and Novation with PXRE Reinsurance Company

     On June 29, 2006, to eliminate its exposure to uncollateralized reinsurance
recoverables from PXRE Reinsurance Company ("PXRE"), which had requested the
withdrawal of its financial strength and issuer rating from A.M.Best, the
Company concluded, through commutation agreements, PXRE's participation under
various reinsurance agreements with TICNY covering the 2001, 2002 and a portion
of the 2003 policy periods. Ceded loss and loss adjustment expense recoverables
of $20.5 million, ceded paid losses of $2.4 million and ceding commissions
receivable of $8.7 million, totaling $31.6 million of unsecured recoverables
were settled with a payment from PXRE of $26.7 million, which represents an
estimate of the present value of these recoverables. This resulted in a $4.8
million pre-tax charge, of which $1.6 million was recognized in loss and loss
adjustment expenses and $3.2 million was recognized as a reduction to ceding
commission income in the second quarter of 2006. In addition, on the same date,
novation agreements were executed with PXRE relating to other reinsurance
agreements covering business written in 2001, 2002 and 2003 by other insurance
companies and managed on their behalf by TRM, the Company's risk management
subsidiary. As a result of the novation, TICNY assumed loss reserves of $12.2
million for which it received as consideration $11.4 million in cash and other
assets and TRM recorded a reduction in commission liabilities for $0.2 million,
the total of which resulted in a $0.6 million pre-tax charge. As a result of the
commutation and novation agreements, which are effective as of June 29, 2006,
PXRE is discharged from future obligations under the reinsurance agreements.
There are no other agreements outstanding with PXRE.

Investments

     The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), which requires that fixed-maturity
securities and equity securities that have readily determined fair values be
segregated into categories based upon the Company's intention for those
securities. In accordance with SFAS 115, the Company has classified its
fixed-maturity and equity securities as available-for-sale. The Company may sell
its available-for-sale securities in response to changes in interest rates,
risk/reward characteristics, liquidity needs or other factors.

     Fixed-maturity securities and certain equity securities are reported at
their estimated fair values based on quoted market prices or a recognized
pricing service, with unrealized gains and losses, net of tax effects, reported
as a separate component of comprehensive income in stockholders' equity.
Realized gains and losses are determined on the specific identification method.

     During the third quarter of 2006, the Company reclassified its entire
balance of equity securities at cost to equity securities at fair value in
compliance with GAAP for insurance companies.

     On November 3, 2005, the FASB issued FSP FAS 115-1 and FAS 124-1,
"Other-Than-Temporary Impairment and Its Application to Certain Investments."
The guidance in this FSP addresses the determination of when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of an other than temporary
impairment and requires certain disclosures about unrealized losses that have


                                       6
<PAGE>


not been recognized as other-than-temporary impairments. The guidance in this
FSP applies to reporting periods beginning after December 15, 2005.

     Impairment of investment securities results in a charge to operations when
a market decline below cost is deemed to be other-than-temporary. As of
September 30, 2006, the Company reviewed its fixed-maturity and equity
securities portfolios to evaluate the necessity of recording impairment losses
for other-than-temporary declines in the fair value of investments in accordance
with the provisions of this FSP. The Company determined that it did not hold any
investments that would have been considered other- than-temporarily impaired.

Subordinated Debentures

     On March 31, 2006, the Company participated in a private placement of $20.0
million of fixed/floating rate capital securities (the "Trust Preferred
Securities") issued by Tower Group Statutory Trust V (the "Trust"), an
affiliated Delaware trust formed on March 29, 2006. The Trust Preferred
Securities mature in April 2036, are redeemable at the Company's option at par
beginning April 7, 2011, and require quarterly distributions of interest by the
Trust to the holder of the Trust Preferred Securities. Interest distributions
are initially at a fixed rate of 8.5625% for the first five years and will then
reset quarterly for changes in the three-month London Interbank Offered Rate
("LIBOR") plus 330 basis points. The Trust simultaneously issued 619 of the
Trust's common securities to the Company for a purchase price of $0.6 million,
which constitutes all of the issued and outstanding common securities of the
Trust. The Trust used the proceeds from the sale of the Trust Preferred
Securities and common securities to purchase for $20.6 million a Junior
Subordinated Debt Security due 2036 issued by the Company. The Company does not
consolidate interest in its statutory business trusts for which the Company
holds 100% of the common trust securities because the Company is not the primary
beneficiary of the trusts. The Company's investment in common trust securities
of the statutory business trust are reported in investments as equity
securities. The Company reports as a liability the outstanding subordinated
debentures owed to the statutory business trusts. The net proceeds were used to
pay the purchase price of TICA and for working capital purposes.

Fixed Assets

     During the third quarter of 2006, the Company relocated its New York City
Corporate Headquarters within the same building. The Company capitalized $14.2
million for the purchase of fixed assets that included $8.0 million for
leasehold improvements, $3.9 million for furniture & equipment and $2.2 million
for computer hardware and software. The landlord provided a $4.5 million
build-out allowance which partially financed the $8.0 million of leasehold
improvements. For the nine months of 2006, the Company capitalized $19.2 million
for the purchase of fixed assets. This included $9.5 million for leasehold
improvements, $5.1 million for furniture & equipment and $4.6 million for
computer hardware and software. The Company will amortize the leasehold
improvements over the remaining life of the lease which is approximately fifteen
years.

Dividends Declared

     Dividends declared by the Company on common stock for the three months
ended September 30, 2006 were $495,000 or $0.025 per share and were $489,000 for
the three months ended September 30, 2005 or $0.025 per share. For the nine
months ended September 30, 2006 dividends declared on common stock by the
Company were $1,481,000 or $0.075 per share and were $1,467,000 or $0.075 per
share for the nine months ended September 30, 2005.

Accounting Pronouncements

     In June 2006, FASB Interpretation ("FIN") No. 48, "Accounting for
Uncertainty in Income Taxes," was issued. This guidance clarifies what criteria
must be met prior to recognition of the financial statement benefit of a
position taken in a tax return. Additionally, it applies to the recognition and
measurement of income tax uncertainties resulting from a purchase business
combination. This guidance is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact FIN 48 will
have on its consolidated results of operations and financial position.


                                       7
<PAGE>


     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This new standard provides guidance for using fair value to measure assets and
liabilities. Under SFAS 157, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data
such as the reporting entity's own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS 157 are effective for financial statements
issued beginning November 15, 2007. The Company is currently reviewing this
statement to determine what if any effect it may have on its consolidated
results of operations and financial position.

     In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and other Postretirement Plans." The Company has no
defined benefit pension plan and therefore, SFAS 158 will have no effect on the
Company's results of operations or financial position.

     In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108 that
expresses the SEC staff's view that it is improper to allow immaterial,
incorrect assets or liabilities from prior years' errors to remain unadjusted on
the balance sheet as these balance sheet corrections could result in material
charges to the current year income statement. The Company has determined that
there is no effect on its results of operations or financial position for this
SAB.


Earnings Per Share

     The following table shows the computation of the Company's earnings per
share:

                                    Income           Shares         Per Share
                                  (Numerator)     (Denominator)       Amount
                                --------------- ----------------- --------------
                                  ($ in thousands, except shares and per share
                                                     amounts)
Three Months Ended
September 30, 2006
Net income                             $ 8,456
                                ---------------
Basic earnings per share                 8,456     19,776,188          $    0.43
                                --------------- -------------- =================
Effect of dilutive securities:
  Stock options                              -        195,798
  Unvested restricted stock                  -         69,286
  Warrants                                   -         32,786
                                --------------- --------------
Diluted earnings per share             $ 8,456     20,074,058          $    0.42
                                =============== ============== =================
Three Months Ended
September 30, 2005
Net income                             $ 5,708
                                ---------------
Basic earnings per share                 5,708     19,575,728          $    0.29
                                --------------- -------------- =================
Effect of dilutive securities:
  Stock options                              -        317,178
  Unvested restricted stock                  -        184,353
  Warrants                                   -         84,614
                                --------------- --------------
Diluted earnings per share             $ 5,708     20,161,873          $    0.28
                                =============== ============== =================
Nine Months Ended
September 30, 2006
Net income                             $27,251
                                --------------- --------------
Basic earnings per share                27,251     19,734,365          $    1.38
                                --------------- -------------- =================
Effect of dilutive securities
  Stock options                              -        204,087
  Unvested restricted stock                  -         62,799
  Warrants                                   -         31,005
                                --------------- --------------
Diluted earnings per share             $27,251     20,032,256          $    1.36
                                =============== ============== =================
Nine Months Ended
September 30, 2005
Net income                             $14,190
                                --------------- --------------
Basic earnings per share                14,190     19,550,722          $    0.73
                                --------------- -------------- =================
Effect of dilutive securities:
  Stock options                              -        300,225
  Unvested restricted stock                  -        199,760
  Warrants                                   -         68,573
                                --------------- --------------
Diluted earnings per share             $14,190     20,119,280          $    0.71
                                =============== ============== =================


                                       8
<PAGE>

     As of September 30, 2006 the Company adjusted the calculation of weighted
average diluted shares relating to stock options and unvested shares that
increased the assumed proceeds used in applying the treasury stock method as a
result of adopting FASB 123R "Share Based Payment". This adjustment resulted in
an immaterial reduction in the effect of dilutive securities and an immaterial
increase in the diluted earnings per share for the first two quarters of 2006.
The effect of the adjustment is $0.01 and has been reflected in diluted earnings
per share for the nine months ended September 30, 2006.

Equity Compensation Plans

     The Company adopted the provision of SFAS 123-R effective January 1, 2006
and has elected the modified prospective application method and is expensing all
unvested stock options outstanding as of January 1, 2006. The compensation
expense is recognized over the requisite service period that has not been
rendered and is based upon the original grant date fair value of the award as
calculated for recognition of the pro forma disclosure under SFAS 123 R.
Compensation expense net of tax recorded related to stock options was $14,000
for the three months ended September 30, 2006 and $48,718 for the nine months
ended September 30, 2006. These amounts have been included in reported net
income for the third quarter and nine months ended September 30, 2006.

     The remaining total compensation cost related to non vested stock option
and restricted stock awards not yet recognized in the income statement was
$3,113,000 of which $260,000 was for stock options and $2,853,000 was for
restricted stock as of September 30, 2006. The weighted average period over
which this compensation cost is expected to be recognized is 3.6 years.

     Per the requirements of SFAS 123-R, the balance of unearned compensation -
restricted stock in stockholders' equity has been reclassified to
paid-in-capital as of December 31, 2005.

     During the third quarter of 2006, the Company issued 10,599 new common
shares as the result of employee stock option exercises and issued 38,553 new
common shares as the result of restricted stock grants. During the third quarter
of 2005, the Company issued 19,250 new common shares as the result of employee
stock option exercises and issued no new common shares as the result of
restricted stock grants.

     For the nine months ended September 30, 2006, the Company issued 58,067 new
common shares as the result of employee stock option exercises and issued 75,019
new common shares as the result of restricted stock grants. During the nine
months ended September 30, 2005, the Company issued 29,170 new common shares as
the result of employee stock option exercises and issued 11,248 new common
shares as the result of restricted stock grants.

     The Company incurred restricted stock expense of $170,000 net of tax for
the three months ended September 30, 2006 which has been included in reported
net income for the third quarter of 2006. For the three months ended September
30, 2005, the Company incurred restricted stock expense of $95,000 net of tax
that was included in reported net income for the third quarter of 2005. For the
nine months ended September 30, 2006 and 2005, the Company incurred restricted
stock expense of $393,000 and $305,000, respectively, net of tax that was
included in reported net income.

     Prior to the adoption of SFAS 123-R, the Company followed the intrinsic
value method in accordance with APB 25 to account for employee stock options and
accordingly recognized no compensation expense for the stock option grants. In
accordance with SFAS 123-R, the Company adopted the provisions of the statement
on January 1, 2006 using the modified prospective application method. Under this
method, prior periods are not restated. Had compensation cost for share-based
plans been determined consistent with SFAS 123-R, the Company's net earnings and
earnings per share for the three months and nine months ended September 30, 2005
would have been the following pro-forma amounts:


                                       9
<PAGE>

                                          Three Months Ended Nine Months Ended
                                             September 30,     September 30,
                                          ------------------ -----------------
                                                2005               2005
                                          ------------------ -----------------
                                          ($ in thousands, except shares and
                                                   per share amounts)

Net income                                           $5,708           $14,190
Deduct total stock-based employee
 compensation expense determined under
 fair value based method for all awards,
 net of related tax effects                             (15)              (46)
                                          ------------------ -----------------
Net income, pro-forma                                $5,693           $14,144

Earnings Per Share
Basic - as reported                                   $0.29             $0.73
                                          ================== =================
Basic - pro-forma                                     $0.29             $0.72
                                          ================== =================
Diluted - as reported                                 $0.28             $0.71
                                          ================== =================
Diluted - pro-forma                                   $0.28             $0.70
                                          ================== =================
Weighted-Average Common Shares Outstanding
Basic                                            19,575,728        19,550,722
Diluted                                          20,161,873        20,119,280


Changes in Estimates

     TICNY and TNIC recorded favorable development in net losses from prior
accident years of $616,000 and $1,298,000 in the third quarter of 2006 and in
the nine months ended September 30, 2006, respectively, compared to favorable
development in the third quarter of 2005 and nine months ended September 30,
2005 of $222,000 and $315,000, respectively. TICNY's changes in estimated
sliding scale commission resulted in an increase in ceding commission revenue of
$245,000 and $1,046,000 in the third quarter of 2006 and for the nine months
ended September 30, 2006, respectively as compared to an increase in commission
revenue of $7,000 in the third quarter of 2005 and a reduction in ceding
commission revenue for prior years of $712,000 for the nine months ended
September 30, 2005. TRM's changes in estimated sliding scale commission was an
increase in direct commission revenue of $393,000 and $180,000 in the third
quarter of 2006 and in the nine months ended September 30, 2006, respectively,
compared to an increase in direct commission revenue of $110,000 and $487,000 in
the third quarter of 2005 and in the nine months ended September 30, 2005,
respectively.

Segment Information

     The Company manages its operations through three business segments:
insurance (commercial and personal lines underwriting), reinsurance and
insurance services (managing general agency, claims administration and
reinsurance intermediary operations).

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as described in the Company's
most recently filed Form 10-K. The Company evaluates segment performance based
on segment profit, which excludes investment income, realized gains and losses,
interest expense, income taxes and incidental corporate expenses. The Company
does not allocate assets to segments because assets, which consist primarily of
investments, are considered in total by management for decision-making purposes.

     Business Segment results are as follows:

<TABLE>
<CAPTION>

                                     Three Months Ended                Nine Months Ended
                                        September 30,                    September 30,
                               -------------------------------- --------------------------------
                                       2006            2005           2006             2005
                               ---------------- --------------- --------------- ----------------
Insurance Segment Information                          ($ in thousands)
Revenues
   <S>                                    <C>             <C>           <C>              <C>
Net premiums earned                    $49,796         $44,940        $152,356         $111,767
Ceding commission revenue               13,171           6,845          30,550           18,021
Policy billing fees                        286             227             825              653
                               ---------------- --------------- --------------- ----------------
  Total revenues                        63,253          52,012         183,731          130,441
                               ---------------- --------------- --------------- ----------------
</TABLE>

                                       10
<PAGE>

<TABLE>
<CAPTION>

                                     Three Months Ended                Nine Months Ended
                                        September 30,                    September 30,
                               -------------------------------- --------------------------------
                                       2006            2005           2006             2005
                               ---------------- --------------- --------------- ----------------


Expenses
   <S>                                   <C>            <C>               <C>             <C>
Net loss and loss adjustment
 expenses                               28,853          26,293          89,895           65,870
Underwriting expenses                   25,688          20,309          73,263           51,671
                               ---------------- --------------- --------------- ----------------
  Total expenses                        54,541          46,602         163,158          117,541
                               ---------------- --------------- --------------- ----------------
Underwriting profit                    $ 8,712         $ 5,410        $ 20,573         $ 12,900
                               ================ =============== =============== ================

Reinsurance Segment
Revenues
Net premiums earned                    $ 2,569         $   384        $ 16,552         $  1,166
                               ---------------- --------------- --------------- ----------------
  Total revenues                         2,569             384          16,552            1,166
                               ---------------- --------------- --------------- ----------------

Expenses
Net loss and loss adjustment
 expenses                                1,538             219          15,131              717
Underwriting expenses                    1,235              52           2,354              136
                               ---------------- --------------- --------------- ----------------
  Total expenses                         2,773             271          17,485              853
                               ---------------- --------------- --------------- ----------------
Underwriting (loss) profit             $  (204)        $   113        $   (933)        $    313
                               ================ =============== =============== ================

Insurance Services Segment
Revenues
Direct commission revenue from
 managing general agency               $   380         $ 2,022        $  2,291         $  6,713
Claims administration revenue              688           1,137           2,572            3,287
Reinsurance intermediary fees              176             259             411              541
Policy billing fees                          -               7               5               18
                               ---------------- --------------- --------------- ----------------
  Total revenues                         1,244           3,425           5,279           10,559
                               ---------------- --------------- --------------- ----------------

Expenses
Direct commissions expense paid
 to producers                              211           1,143           1,545            3,528
Other insurance services
 expenses                                  193             472             735            1,412
Claims expense reimbursement to
 TICNY                                     687           1,135           2,556            3,276
                               ---------------- --------------- --------------- ----------------
  Total expenses                         1,091           2,750           4,836            8,216
                               ---------------- --------------- --------------- ----------------
Insurance services pre-tax
 income                                $   153         $   675        $    443         $  2,343
                               ================ =============== =============== ================

</TABLE>

     Underwriting expenses in the insurance segment are net of expense
reimbursements by the insurance services segment pursuant to an expense sharing
agreement between TRM and TICNY. In accordance with the terms of this agreement,
TRM reimburses TICNY for a portion of TICNY's underwriting and other expenses
resulting from TRM's use of TICNY's personnel, facilities and equipment in
underwriting insurance on behalf of TRM's issuing companies. The reimbursement
for underwriting and other expenses is calculated as a minimum reimbursement of
5% of the premiums produced by TRM and is adjustable according to the terms of
the agreement based on the number of policies in force and additional expenses
that may be incurred by TRM. The amount of this reimbursement was $0.2 million
and $0.5 million for the three months ended September 30, 2006 and September 30,
2005, respectively, and $0.7 million and $1.4 million for the nine months ended
September 30, 2006 and September 30, 2005, respectively. TRM also reimburses
TICNY, at cost, for claims administration expenses pursuant to the terms of this
expense sharing agreement. Claims expenses reimbursed by TRM were $0.7 million
and $1.1 million for the three months ended September 30, 2006 and September 30,
2005, respectively, and $2.6 million and $3.3 million for the nine months ended
September 30, 2006 and September 30, 2005, respectively.

     In addition, underwriting expenses in the insurance segment are net of
expense reimbursements by CastlePoint pursuant to a service and expense sharing
agreement entered into in April 2006 between CastlePoint, the Company and its
subsidiaries. In accordance with the terms of this agreement, CastlePoint
reimburses the Company for services rendered on a cost basis. During the three


                                       11
<PAGE>


months and nine months ended September 30, 2006, the amount of CastlePoint's
reimbursement was $0.3 million and $0.6 million, respectively and have been
reflected as reductions to the Company's operating expenses.

     The following table reconciles revenue by segment to consolidated revenue:

<TABLE>
<CAPTION>

                                      Three Months Ended               Nine Months Ended,
                                        September 30,                     September 30,
                               -------------------------------- ---------------------------------
                                      2006             2005           2006              2005
                               --------------- ---------------- --------------- -----------------
                                                        ($ in thousands)
       <S>                              <C>               <C>            <C>               <C>
Insurance segment                     $63,253          $52,012        $183,731          $130,441

Reinsurance segment                     2,569              384          16,552             1,166

Insurance services segment              1,244            3,425           5,279            10,559
                               --------------- ---------------- --------------- -----------------

Total segment revenue                  67,066           55,821         205,562           142,166

Investment income                       5,923            4,131          15,875            10,479

Realized capital gains/(losses)            32              (15)            (84)              214
                               --------------- ---------------- --------------- -----------------

Consolidated revenues                 $73,021          $59,937        $221,353          $152,859
                               =============== ================ =============== =================

</TABLE>

     The following table reconciles the results of the Company's individual
segments to consolidated income before taxes:

<TABLE>
<CAPTION>
                                                      Three Months Ended                 Nine Months Ended,
                                                         September 30,                      September 30,
                                              ----------------------------------- ---------------------------------
                                                    2006               2005             2006           2005
                                              ---------------- ------------------ ---------------- ----------------
                                                                        ($ in thousands)
   <S>                                                  <C>                 <C>             <C>             <C>
Insurance segment underwriting profit                 $ 8,712            $ 5,410          $20,573          $12,900

Reinsurance segment underwriting (loss) profit           (204)               113             (933)             313
                                              ---------------- ------------------ ---------------------------------

Total underwriting profit                               8,508              5,523           19,640           13,213

Insurance services segment pre-tax income                 153                675              443            2,343

Net investment income                                   5,923              4,131           15,875           10,479

Net realized investment gains/(losses)                     32                (15)             (84)             214

Corporate expenses                                       (423)              (234)          (1,919)            (980)

Other income                                              418                  -           12,852                -

Interest expense                                       (1,863)            (1,296)          (5,066)          (3,567)
                                              ---------------- ------------------ ---------------- ----------------

Income before taxes                                   $12,748            $ 8,784          $41,741          $21,702
                                              ================ ================== ================ ================

</TABLE>


Subsequent Events

     On October 26, 2006 the Company's Board of Directors approved a quarterly
dividend of $0.025 per share payable December 27, 2006 to stockholders of record
as of December 15, 2006.

     On October 30, 2006 the Company executed an agreement to sell all of the
issued and outstanding common shares of Tower Indemnity Company of America
("TICA"), a New York property and casualty insurance company, to CastlePoint
Management Corp., a subsidiary of CastlePoint Holdings, Ltd. The purchase price
is an amount equal to TICA's aggregate statutory surplus as of the closing date
plus $350,000 for additional legal and other costs. As of September 30, 2006
TICA's statutory surplus was $8.4 million. The Company entered into this sale to
facilitate its pooling arrangement with CastlePoint. The Company does not expect
to recognize any gain or loss on this sale. TICA is a shell insurance company
and has no net liabilities for insurance losses.


                                       12
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Note on Forward-Looking Statements

     Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-Q
may include forward-looking statements that reflect our current views with
respect to future events and financial performance. These statements include
forward-looking statements both with respect to us specifically and the
insurance sector in general. Statements that include the words "expect,"
"intend," "plan," "believe," "project," "estimate," "may," "should,"
"anticipate," "will," "annualized" and similar statements of a future or
forward-looking nature identify forward-looking statements for purposes of the
Federal securities laws or otherwise.

     All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those indicated in these
statements. We believe that these factors include, but are not limited to, the
following:
     o    ineffectiveness or obsolescence of our business strategy due to
          changes in current or future market conditions;
     o    developments that may delay or limit our ability to enter new markets
          as quickly as we anticipate;
     o    increased competition on the basis of pricing, capacity, coverage
          terms or other factors;
     o    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;
     o    the effects of acts of terrorism or war;
     o    developments in the world's financial and capital markets that
          adversely affect the performance of our investments;
     o    changes in regulations or laws applicable to us, our subsidiaries,
          brokers or customers;
     o    acceptance of our products and services, including new products and
          services;
     o    changes in the availability, cost or quality of reinsurance and
          failure of our reinsurers to pay claims timely or at all;
     o    changes in the percentage of our premiums written that we cede to
          reinsurers;
     o    decreased demand for our insurance or reinsurance products;
     o    loss of the services of any of our executive officers or other key
          personnel;
     o    the effects of mergers, acquisitions and divestitures;
     o    changes in rating agency policies or practices;
     o    changes in legal theories of liability under our insurance policies;
     o    changes in accounting policies or practices; and
     o    changes in general economic conditions, including inflation, interest
          rates and other factors.

The foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with the other cautionary statements that are
included in this Form 10-Q. We undertake no obligation to publicly update or
review any forward-looking statement, whether as a result of new information,
future developments or otherwise.

Consolidated Results of Operations
<TABLE>
<CAPTION>
                                           Three Months Ended               Nine Months Ended
                                              September 30,                   September 30,
                                     ------------------------------- -------------------------------
                                             2006            2005            2006            2005
                                     --------------- --------------- --------------- ---------------
                                                            ($ in thousands)
Revenues
Earned premiums
<S>                                           <C>              <C>            <C>             <C>
Gross premiums earned                      $ 92,528        $ 64,859        $264,711        $165,787
Less: ceded premiums earned                 (40,162)        (19,535)        (95,803)        (52,854)
                                     --------------- --------------- --------------- ---------------
Net premiums earned                          52,366          45,324         168,908         112,933
                                     --------------- --------------- --------------- ---------------
Total commission and fee income              14,700          10,497          36,654          29,233
Net investment income                         5,923           4,131          15,875          10,479
Net realized investment gains                    32             (15)            (84)            214
                                     --------------- --------------- --------------- ---------------
Total revenues                               73,021          59,937         221,353         152,859
                                     --------------- --------------- --------------- ---------------
Expenses
Net loss and loss adjustment expenses        30,392          26,512         105,026          66,587
Operating expenses                           28,436          23,345          82,372          61,003
Interest expenses                             1,863           1,296           5,066           3,567
                                     --------------- --------------- --------------- ---------------
Total expenses                               60,691          51,153         192,464         131,157
                                     --------------- --------------- --------------- ---------------
Other Income
Equity income in unconsolidated
 affiliate                                      418               -             364               -
Gain from issuance common stock by
 unconsolidated affiliate                         -               -           7,883               -
Warrant received from unconsolidated
 affiliate                                        -               -           4,605               -
                                     --------------- --------------- --------------- ---------------
Income before taxes                          12,748           8,784          41,741          21,702
Federal and state income taxes                4,292           3,076          14,490           7,512
                                     --------------- --------------- --------------- ---------------
Net Income                                 $  8,456        $  5,708        $ 27,251        $ 14,190
                                     =============== =============== =============== ===============
Key Measures
Return on Average Equity                       20.2%           16.5%           22.8%           14.1%
                                     =============== =============== =============== ===============
</TABLE>
                                       13
<PAGE>


Consolidated Results of Operations Three Months Ended September 30, 2006 and
2005

     Total revenues. Total revenues increased by 21.8% to $73.0 million for the
three months ended September 30, 2006 compared to $59.9 million for the same
period in 2005. The increase is primarily due to the increase in net premiums
earned, total commission and fee income and net investment income. Net premiums
earned represented 71.7% of total revenues for the three months ended September
30, 2006 compared to 75.6% for the same period in 2005. Net investment income,
excluding realized capital gains, represented 8.1% and 6.9% of total revenues
for the three months ended September 30, 2006 and 2005, respectively. In
addition, total commission and fee income increased for the three months ended
September 30, 2006 to $14.7 million, or 20.1% of total revenue, compared to
$10.5 million, or 17.5% of total revenue, for the same period in 2005.

     Premiums earned. Net premiums earned increased by 15.5% to $52.4 million
for the three months ended September 30, 2006 compared to $45.3 million for the
same period in 2005. The increase in net premiums earned was due to the overall
increase in gross premiums written through September 30, 2006 which resulted
from increases in our homeowners and commercial multi-peril and other liability
lines, partially offset by increased quota share and catastrophe reinsurance
during the third quarter of 2006. During the third quarter of 2006 under quota
share reinsurance agreements we ceded to CastlePoint Reinsurance approximately
40% of our brokerage business, 50% of our traditional program business and 85%
of our specialty program business. This is compared to a 25% quota share ceding
percentage in the three months ended September 30, 2005. In addition, ceded
premiums earned increased in the third quarter of 2006 as a result of ceding
unearned premiums to CastlePoint as of April 1, 2006 which related to business
written in 2005 and that we had previously retained. Catastrophe premiums
increased approximately $3.0 million in the third quarter of 2006 as compared to
the same period last year.

     Commission and fee income. Total commission and fee income increased by
40.0% to $14.7 million in the third quarter of 2006 compared to $10.5 million in
the third quarter of 2005. This was due to the increase in the ceding commission
revenue earned as a result of the increase in ceded premiums earned as discussed
above. This increase was offset in part by a reduction in fee income in our
Insurance Services Segment as more policies previously produced in that segment
were written in our Insurance Segment. For the three months ended September 30,
2006 the change in estimated sliding scale commission rate for commissions
earned in prior periods in both the Insurance Segment and the Insurance Services
Segment resulted in a net increase of $0.6 million of commission and fee income
compared to a $0.1 million increase in the same period of 2005.


                                       14
<PAGE>


     Net investment income and realized gains. Net investment income increased
by 43.4% to $5.9 million for the three months ended September 30, 2006 compared
to $4.1 million in the same period in 2005. This growth resulted from an
increase in invested assets to $443.7 million as of September 30, 2006 compared
to $357.2 million as of September 30, 2005, excluding our investments in
statutory business trusts underlying our trust preferred securities. The
increase in invested assets in the third quarter of 2006 resulted from net cash
flow provided by operations of $11.3 million. On a tax equivalent basis, the
yield was 5.6% as of September 30, 2006 and 5.1% as of September 30, 2005.

     Net realized capital gains were $32,000 for the three months ended
September 30, 2006 compared to net realized capital loss of $15,000 for the same
period in 2005. There was no impact on net realized gains attributable to
adjustments for other than temporary impairment of securities held during the
three months ending September 30, 2006 or during the same period in 2005.

     Loss and loss adjustment expenses. Gross loss and loss adjustment expenses
and the gross loss ratio for the Insurance and Reinsurance Segments combined for
the three months ended September 30, 2006 were $49.1 million and 53.1%,
respectively, compared to $36.3 million and 56.0%, respectively, for the same
period in 2005. The net loss ratio decreased to 58.0% in the third quarter of
2006 compared to 58.5% in the same period last year. The decrease in the gross
and net loss ratios in the third quarter of 2006 compared to the same period in
2005 was primarily due to lower than expected loss emergence for the property
lines for the current accident year that resulted in lower loss ratios for the
third quarter of 2006 compared to the same period in 2005. However, the decrease
in the net loss ratio was offset in part by the increase in the catastrophe
reinsurance premiums ceded. See "Insurance Segment Results of Operations" and
"Reinsurance Segment Results of Operations" for further discussion.

     Operating expenses. Operating expenses increased by 21.8% to $28.4 million
for the three months ended September 30, 2006 from $23.3 million for the same
period in 2005. The increase was due primarily to the increase in underwriting
expenses resulting from the growth in premiums earned.

     Interest expense. Our interest expense increased for the three months ended
September 30, 2006 to $1.9 million compared to $1.3 million for the same period
in 2005. The increase resulted from $0.5 million of interest expense from the
$20.6 million of subordinated debentures issued on March 31, 2006 and $0.1
million resulting from an increase in interest rates on the floating rate
portions of our subordinated debentures.

     Other income. We recorded $0.4 million of income representing our 8.6%
equity in CastlePoint's net income for the three months ended September 30,
2006. See -- "Notes to Consolidated Financial Statements --Investments in
Unconsolidated Affiliate" elsewhere in this report for further details.

     Income tax expense. Our income tax expense was $4.3 million for the three
months ended September 30, 2006 compared to $3.1 million for the same period in
2005. The increase was due primarily to the increase in income before income
taxes. The effective income tax rate was 33.7% for the three months ending
September 30, 2006 compared to 35.0% for the same period in 2005 due to a prior
year federal tax benefit recorded in the third quarter of 2006.

     Net income and return on average equity. Our net income and annualized
return on average equity was $8.5 million and 20.2%, respectively, for the three
months ended September 30, 2006 compared to $5.7 million and 16.5%,
respectively, for the same period in 2005. For the third quarter of 2006, the
return was calculated by dividing annualized net income of $33.8 million by an
average stockholders' equity of $167.2 million. For the third quarter of 2005,
the return was calculated by dividing annualized net income of $22.8 million by
an average stockholders' equity of $138.7 million.

Consolidated Results of Operations Nine Months Ended September 30, 2006 and 2005

     During the nine months ended September 30, 2006 a number of significant
events affected the consolidated results of operations. We executed commutation
and novation agreements between us and PXRE in order to eliminate our exposure
to uncollateralized reinsurance recoverables from PXRE. We recorded a net charge
as a result of these agreements of $5.5 million. In addition, we realized gains
on our investment in CastlePoint as result of the sale of unissued CastlePoint
shares in a private offering, which resulted in a $7.9 million gain. We also
received a warrant to purchase additional CastlePoint shares which was valued at
$4.6 million resulting in additional income for that amount in exchange for
sponsorship services, which included management, organizational and industry


                                       15
<PAGE>


expertise. Lastly, we entered into three multi-year quota share reinsurance
agreements and a service and expense agreement with CastlePoint and completed
our acquisition of MIIX Insurance Company of New York which we renamed Tower
Indemnity Company of America. Since we did not place quota share reinsurance in
the first quarter of 2006, pending the formation of CastlePoint Reinsurance, we
ceded $40.9 million of unearned premiums to CastlePoint Reinsurance as of April
1, 2006.

     Total revenues. Total revenues increased by 44.8% to $221.4 million for the
nine months ended September 30, 2006 compared to $152.9 million for the same
period in 2005. The increase is primarily due to the increase in net premiums
earned, total commission and fee income, net investment income and net realized
investment gains. Net premiums earned represented 76.3% of total revenues for
the nine months ended September 30, 2006 compared to 73.9% for the same period
in 2005. Net investment income, excluding realized capital losses, represented
7.2% and 6.9% of total revenues for the nine months ended September 30, 2006 and
2005, respectively. In addition, total commission and fee income increased to
$36.7 million, or 16.6% of total revenue, for the nine months ended September
30, 2006 compared to $29.2 million, or 19.1% of total revenue for the same
period in 2005.

     Premiums earned. Net premiums earned increased by 49.6% to $168.9 million
for the nine months ended September 30, 2006 compared to $112.9 million for the
same period in 2005. The increase in net premiums earned was due to the overall
increase in gross premiums written through September 30, 2006 especially in our
homeowner and commercial multi peril and other liability lines, as well as the
novation agreements with PXRE. The novation agreements added $11.4 million to
gross and net premiums earned in the nine months ended September 30, 2006.

     Since we did not place quota share reinsurance in the first quarter of
2006, pending the formation of CastlePoint Reinsurance, we ceded $40.9 million
of unearned premiums as of April 1, 2006 and $68.8 million of premiums written
on policies that began on April 1, 2006 through the period ending September 30,
2006. The second and third quarter cessions to CastlePoint reflected a 30% and
40% quota share ceding percentage for the brokerage business, respectively. We
also ceded smaller amounts through the traditional program business and
specialty program business of 50% and 85%, respectively. This is compared to a
25% quota share ceding percentage in the nine months ended September 30, 2005.
Also, ceded premiums earned increased in the nine months ended September 30,
2006 as a result of ceding unearned premiums to CastlePoint as of April 1, 2006
which related to business written in 2005 and that we had previously retained.

     Commission and fee income. Total commission and fee income increased by
25.4% to $36.7 million in the nine months ended September 30, 2006 compared to
$29.2 million in the same period of 2005.This was due to the increase in the
ceding commission revenue earned as a result of the increase in ceded premiums
earned as discussed above. This increase was offset in part by a reduction in
fee income in our Insurance Services Segment as more policies previously
produced in that segment were written in our Insurance Segment. Additionally, as
a result of the commutation agreements with PXRE, we recorded a charge of $3.2
million to ceding commissions representing the difference between the carried
amount of commissions due from PXRE and the amount received at an estimated
present value. For the nine months ended September 30, 2006 the change in
estimated sliding scale commission rate for commissions earned in prior periods
in both the Insurance Segment and the Insurance Services Segment resulted in a
net increase of $1.2 million of commission and fee income compared to a
reduction of $0.2 million for the same period of 2005.

     Net investment income and realized gains. Net investment income increased
by 51.5% to $15.9 million for the nine months ended September 30, 2006 compared
to $10.5 million for the same period in 2005. This resulted from an increase in
invested assets to $443.7 million as of September 30, 2006 compared to $357.2
million as of September 30, 2005, excluding our investments in statutory
business trusts underlying our trust preferred securities. Net cash flow
provided by operations, including $37.0 million of cash received from PXRE
resulting from the commutation and novation transactions, contributed to the
$86.6 million increase in invested assets during the nine months ended September
30, 2006. On a tax equivalent basis, the yield was 5.6% as of September 30, 2006
and 5.1% as of September 30, 2005.

     Net realized capital losses were $0.1 million in the nine months ended
September 30, 2006 compared to net realized capital gains of $0.2 million for
the same period in 2005. There was no impact on net realized losses attributable
to adjustments for other-than-temporary impairment of securities held during the
nine months ended September 30, 2006 or during the same period in 2005.


                                       16
<PAGE>


     Loss and loss adjustment expenses. Gross loss and loss adjustment expenses
and the gross loss ratio for the insurance and reinsurance segments combined for
the nine months ended September 30, 2006 were $151.0 million and 57.0%,
respectively, compared to $93.8 million and 56.6%, respectively, for the same
period in 2005. The net loss ratio for the combined segments was 62.2% for the
nine months ended September 30, 2006 as compared to 59.0% in the same period of
2005. The net loss ratio for the nine months ended September 30, 2006 reflected
a $1.6 million charge resulting from the commutation agreements with PXRE. In
addition to the commutation agreements with PXRE, we executed novation
agreements with PXRE relating to other reinsurance agreements covering business
written in 2001, 2002 and 2003. These agreements were written by other insurance
companies and managed on their behalf by TRM. The Company assumed loss
liabilities of $12.2 million and received consideration of $11.4 million as a
result of the novation agreements with PXRE. Since novation transactions are
recorded by including the consideration received as premiums written and earned
and the liabilities assumed as losses incurred, the gross and net loss ratios
were also affected. Both of the PXRE transactions added 2.2 and 4.3 percentage
points to the gross and net loss ratios, respectively.

     Operating expenses. Operating expenses increased by 35.0% to $82.4 million
for the nine months ended September 30, 2006 from $61.0 million for the same
period in 2005. The increase was due primarily to the increase in underwriting
expenses resulting from the growth in premiums earned. Operating expenses for
the nine months ending September 30, 2006 also include organizational and start
up costs of approximately $0.5 million related to our sponsorship of CastlePoint
which was a wholly owned subsidiary during the first quarter of 2006.

     Interest expense. Our interest expense increased for the nine months ended
September 30, 2006 to $5.1 million compared to $3.6 million for the same period
in 2005. The increase resulted from $0.9 million of interest expense from the
$20.6 million of subordinated debentures issued on March 31, 2006, $0.4 million
resulting from an increase in interest rates on the floating rate portions of
our subordinated debentures and $0.2 million as a result of crediting reinsurers
on funds withheld in segregated trusts as collateral for reinsurance
recoverables.

     Other Income. We recorded a gain of $7.9 million resulting from the sale of
CastlePoint's unissued shares and other income of $4.6 million from a warrant
that we received from CastlePoint for our sponsorship and formation activities.
We also recorded $0.4 million income representing our 8.6% equity in
CastlePoint's net income for the nine months ended September 30, 2006. See --
"Notes to Consolidated Financial Statements --Investments in Unconsolidated
Affiliate" elsewhere in this report for further details regarding gains and
losses recorded on these transactions.

     Income tax expense. Our income tax expense was $14.5 million for the nine
months ended September 30, 2006 compared to $7.5 million for the same period in
2005. The increased income tax expense was due primarily to the increase in
income before income taxes. The effective income tax rate was 34.7% for the nine
months ending September 30, 2006 compared to 34.6% for the same period in 2005.

     Net income and return on average equity. Our net income and annualized
return on average equity was $27.3 million and 22.8%, respectively, for the nine
months ended September 30, 2006 compared to $14.2 million and 14.1%,
respectively, for the same period in 2005. For the nine months ended September
30, 2006, the return was calculated by dividing annualized net income of $36.3
million by an average stockholders' equity of $159.6 million. The net effects of
the commutation and novation transactions, as well as the gains recorded on the
CastlePoint investment and warrant added $4.1 million to our net income and 3.2
percentage points to our annualized return on average equity for the nine months
ended September 30, 2006. For the nine months ended September 30, 2005, the
return was calculated by dividing annualized net income of $18.9 million by an
average stockholders' equity of $134.7 million.


                                       17
<PAGE>

<TABLE>
<CAPTION>

Insurance Segment Results of Operations

                                                     Three Months Ended            Nine Months Ended
                                                       September 30,                 September 30,
                                                ---------------------------- ------------------------------
                                                      2006           2005           2006            2005
                                                ------------- -------------- -------------- ---------------
                                                                     ($ in thousands)
Revenues
Earned premiums
     <S>                                                <C>            <C>          <C>              <C>
   Gross premiums earned                            $ 89,910       $ 64,441      $ 248,066        $164,520
   Less: ceded premiums earned                       (40,114)       (19,501)       (95,710)        (52,753)
                                                ------------- -------------- -------------- ---------------
   Net premiums earned                                49,796         44,940        152,356         111,767
Ceding commission revenue                             13,171          6,845         30,550          18,021
Policy billing fees                                      286            227            825             653
                                                ------------- -------------- -------------- ---------------
Total                                                 63,253         52,012        183,731         130,441

Expenses
Loss and loss adjustment expenses
   Gross loss and loss adjustment expenses            47,551         36,166        136,044          93,675
   Less: ceded loss and loss adjustment expenses     (18,698)        (9,873)       (46,149)        (27,805)
                                                ------------- -------------- -------------- ---------------
   Net loss and loss adjustment expenses              28,853         26,293         89,895          65,870
Underwriting expenses
   Direct commission expense                          14,204         10,131         40,444          27,194
   Other underwriting expenses                        11,484         10,178         32,819          24,477
                                                ------------- -------------- -------------- ---------------
Total underwriting expenses                           25,688         20,309         73,263          51,671
                                                ------------- -------------- -------------- ---------------
Underwriting Profit                                 $  8,712       $  5,410      $  20,573        $ 12,900
                                                ============= ============== ============== ===============
Key Measures
Premiums written
   Gross premiums written                           $ 98,523       $ 72,483      $ 289,779        $220,419
   Less: ceded premiums written                      (48,071)       (21,397)      (131,507)        (65,453)
                                                ------------- -------------- -------------- ---------------
   Net premiums written                             $ 50,452       $ 51,086      $ 158,272        $154,966
                                                ============= ============== ============== ===============
Loss Ratios
Gross                                                   52.9%          56.1%          54.8%           56.9%
Net                                                     57.9%          58.5%          59.0%           58.9%
Accident Year Loss Ratio
Gross                                                   53.5%          56.5%          55.2%           57.2%
Net                                                     59.1%          59.0%          58.8%           59.2%
Underwriting Expense Ratios
Gross                                                   28.3%          31.2%          29.2%           31.0%
Net                                                     24.6%          29.5%          27.5%           29.5%
Combined Ratios
Gross                                                   81.2%          87.3%          84.0%           87.9%
Net                                                     82.5%          88.0%          86.5%           88.4%

</TABLE>

Insurance Segment Results of Operations Three Months Ended September 30, 2006
and 2005

     Gross premiums. Gross premiums written increased by 35.9% to $98.5 million
for the three months ended September 30, 2006 compared to $72.5 million for the
same period in 2005 due principally to increases in our homeowners and
commercial multi peril, as well as other liability lines. Gross premiums earned
increased by 39.5% to $89.9 million for the three months ended September 30,
2006 compared to $64.4 million for the same period in 2005. The number of
policies in force increased by 19.1% as of September 30, 2006 compared to
September 30, 2005. Additionally, during the third quarter of 2006, premium
increases on renewed business averaged 9.4% in personal lines and 4.5% in
commercial lines. The retention rate during the third quarter of 2006 was 91%
for personal lines and 85% for commercial lines. New business written during the
third quarter of 2006 through former OneBeacon producers that we appointed in
connection with the 2004 renewal rights transaction amounted to $3.3 million
compared to $3.8 million in the same period of 2005.

     Ceded premiums. Ceded premiums written increased by 124.7% to $48.1 million
for the three months ended September 30, 2006 compared to $21.4 million for the
same period in 2005. This increase was greater than the increase in gross
premiums written for the following reasons. Consistent with our business plan as
previously discussed in prior periods, in April 2006, we entered into three
multi-year quota share reinsurance agreements with CastlePoint Reinsurance. For
the three months ended September 30, 2006, we ceded $38.8 million of premiums
written to CastlePoint Reinsurance. During this period our principal quota share
reinsurance transaction with CastlePoint Reinsurance was on our brokerage
business for which we ceded approximately 40% as compared to a 25% quota share
ceding percentage in the three months ended September 30, 2005.

     Ceded premiums earned increased during the third quarter of 2006 as a
result of the aforementioned increase in the ceded quota share percentage and an
additional $5.6 million as a result of the second quarter portfolio of unearned
premiums that was ceded to CastlePoint Reinsurance which related to business
written in 2005 and that we had previously retained. Ceded premiums earned
during the third quarter also increased as a result of the increased catastrophe
reinsurance premiums of $3.9 million as compared to $1.0 million for the same
period last year.


                                       18
<PAGE>


     Net premiums. Net premiums written decreased by 1.2% to $50.5 million for
the three months ended September 30, 2006 compared to $51.1 million for the same
period in 2005. This decrease was due to our decision to increase the brokerage
business quota share ceding percentage to 40% as compared to 25% in the same
period in 2005. Notwithstanding the slight decrease in net premiums written, net
premiums earned increased by 10.8% to $49.8 million in the three months ended
September 30, 2006 compared to $44.9 million in the same period in 2005 driven
primarily by the increase in gross premiums earned and lower quota share ceding
percentages in effect during the previous quarters in which the third quarter
earned premiums were written. The increase in net premiums earned was partially
offset by $3.0 million related to the increase in catastrophe reinsurance
premiums referred to above under ceded premiums.

     Ceding commission revenue. Ceding commission revenue increased by 92.4% to
$13.2 million for the three months ended September 30, 2006 compared to $6.8
million for the same period in 2005 largely due to the 105.7% increase in ceded
premiums earned described above. This increase was reduced, in part, by a lower
quota share ceding commission rate of 34% as compared to a ceding commission
rate of 38% in the three months ended September 30, 2005. In addition, ceding
commission income was increased by $0.2 million resulting from a decrease in the
ceded loss ratio on a prior year quota share treaty recognized in the third
quarter of 2006 compared to a small increase in the same period last year.

     Loss and loss adjustment expenses and loss ratio. Gross and net loss and
loss adjustment expenses were $47.6 million and $28.9 million, respectively, for
the three months ended September 30, 2006 compared with $36.2 million and $26.3
million, respectively, for the same period in 2005. Our gross loss ratio was
52.9% for the three months ended September 30, 2006 as compared with 56.1% for
the same period in 2005. The net loss ratio was 57.9% for the three months ended
September 30, 2006 compared to 58.5% for the same period last year. The decrease
in the gross and net loss ratios in the third quarter of 2006 compared to the
same period in 2005 was primarily due to lower than expected loss emergence for
the property lines for the current accident year that resulted in lower loss
ratios for property lines for the third quarter of 2006 compared to the same
period in 2005. However the decrease in the net loss ratio was offset, in part,
by the increase in the catastrophe reinsurance premiums ceded. We ceded
catastrophe reinsurance premiums equal to 7.2% of net earned premiums during the
three months ended September 30, 2006 as compared to 2.2% in the same period in
2005. There was favorable development of $0.6 million on a net basis in the
third quarter of 2006 compared to favorable development of $0.2 million in the
same period of 2005.

     Loss and loss adjustment expenses are net of reimbursements for loss and
loss adjustment expenses made by TRM pursuant to the expense sharing arrangement
between TICNY and TRM. See -"Insurance Services Segment Results of Operations"
for the amounts of loss and loss adjustment expense reimbursements.

     Underwriting expenses and underwriting expense ratio. Underwriting
expenses, which include direct commission expenses and other underwriting
expenses, were $25.7 million for the three months ended September 30, 2006 as
compared with $20.3 million for the same period in 2005. Our gross expense ratio
was 28.3% for the three months ended September 30, 2006 as compared with 31.2%
for the same period in 2005.

     The commission portion of the gross expense ratio, which expresses direct
commission expense paid to our producers as a percentage of gross premiums
earned was 15.8% for the three months ended September 30, 2006, compared to
15.7% for the same period in 2005.

     The underwriting expense portion of the gross expense ratio was 12.5% for
the three months ended September 30, 2006 as compared to 15.4% for the same
period in 2005. Although underwriting expenses increased due to the growth in
premium volume, the gross underwriting expense ratio declined as gross premiums
earned increased more rapidly than underwriting expenses.

     The net underwriting expense ratio, which reflects the benefit of ceding
commission revenue which lowers the gross expense ratio, was 24.6% for the three
months ended September 30, 2006 as compared to 29.5% for the same period in
2005. This was due to the lower gross expense ratio and the increased effects of
ceding commission on lowering the gross expense ratio.

     Underwriting profit and combined ratio. The underwriting profit, which
reflects our underwriting results on a net basis after the effects of
reinsurance, was $8.7 million in the third quarter of 2006 and $5.4 million in
the same period in 2005. The gross combined ratio was 81.2% for the three months
ended September 30, 2006 as compared with 87.3% for the same period in 2005. The


                                       19
<PAGE>


decrease in the gross combined ratio in the third quarter of 2006 resulted
primarily from a decrease in both the gross loss ratio and the gross
underwriting expense ratio. The net combined ratio was 82.5% for the three
months ended September 30, 2006 as compared to 88.0% for the same period in
2005. The decrease in the net combined ratio resulted from a decrease in both
the net loss ratio and net underwriting expense ratio, as explained above.



Insurance Segment Results of Operations Nine Months Ended September 30, 2006 and
2005

     Gross premiums. Gross premiums written increased by 31.5% to $289.8 million
for the nine months ended September 30, 2006 compared to $220.4 million for the
same period in 2005. Gross premiums earned increased by 50.8% to $248.1 million
for the nine months ended September 30, 2006 compared to $164.5 million for the
same period in 2005. Gross premiums earned was affected by the increase in gross
premiums written in 2005. The increase in gross premiums earned was due to the
overall increase in gross premiums written through September 30, 2006 especially
in our homeowners and commercial multi peril and other liability lines. The
number of policies in force increased by 19.1% as of September 30, 2006 compared
to September 30, 2005. Additionally, during the first nine months of 2006,
premium increases on renewed business averaged 8.3% in personal lines and 4.2%
in commercial lines. The retention rate was 88% for personal lines and 81% for
commercial lines during the nine months ended September 30, 2006. New business
written during the first nine months of 2006 through former OneBeacon producers
that we appointed in connection with the 2004 renewal rights transaction
amounted to $15.4 million compared to $12.4 million in the same period of 2005.

     Ceded premiums. Ceded premiums written increased by 100.9% to $131.5
million for the nine months ended September 30, 2006 compared to $65.5 million
for the same period in 2005. This increase was greater than the increase in
gross premiums written for the following reasons. In April 2006, we entered into
three multi-year quota share reinsurance agreements with CastlePoint
Reinsurance. Since we did not place quota share reinsurance in the first quarter
of 2006, we ceded to CastlePoint Reinsurance $40.9 million of unearned premiums
as of April 1, 2006. In addition, we ceded $68.8 million of premiums written on
policies that began on April 1, 2006 through the period ending September 30,
2006. Consistent with our business plans and targeted net premiums written
levels, the second and third quarter cessions to CastlePoint Reinsurance
reflected a 30% and 40% quota share ceding percentage for the brokerage
business, respectively, as compared to a 25% quota share ceding percentage in
the nine months ended September 30, 2005.

     Ceded premiums earned increased 81.4% during the first nine months of 2006
as compared to the same period in 2005 as a result of the increase in gross
premiums earned and these changes in quota share ceding percentages, as well as
an additional $15.4 million of ceded premiums earned as a result of the April 1,
2006 portfolio of unearned premiums that was ceded to CastlePoint Reinsurance
which related to business written in 2005 that we had previously retained.

     Net premiums. Net premiums written increased by 2.1% to $158.3 million for
the nine months ended September 30, 2006 compared to $155.0 million for the same
period in 2005 notwithstanding the 31.5% increase in gross premiums written.
This was due to the increased ceded premiums written as described above.

     Net premiums earned increased by 36.3% to $152.4 million in the nine months
ended September 30, 2006 compared to $111.8 million in the same period in 2005
as a result of the 50.8% increase in gross premiums earned offset by the 81.4%
increase in ceded premiums earned discussed above

     Ceding commission revenue. Ceding commission revenue increased by 69.5% to
$30.6 million for the nine months ended September 30, 2006 compared to $18.0
million for the same period in 2005 due to the 81.4% increase in ceded premiums
earned offset, in part, by a lower quota share ceding commission rate of 34% as
compared to a ceding commission rate of 41% in the nine months ended September
30, 2005. Also,, as a result of the commutation agreements with PXRE, we
recorded a charge of $3.2 million to ceding commission revenue. Ceding
commission revenue increased $1.0 million in the nine months ended September 30,
2006 as a result of an improvement in the ceded loss ratios on prior years'
quota share treaties compared to a decrease of $0.7 million in the same period
in 2005.

     Loss and loss adjustment expenses and loss ratio. Gross and net losses and
loss adjustment expenses were $136.0 million and $89.9 million, respectively,
for the nine months ended September 30, 2006 compared with $93.7 million and


                                       20
<PAGE>


$65.9 million, respectively, for the same period in 2005. Our gross loss ratio
was 54.8% for the nine months ended September 30, 2006 as compared with 56.9%
for the same period in 2005. The net loss ratio was 59% for the nine months
ended September 30, 2006 and reflected the $1.6 million charge resulting from
the commutation agreement with PXRE referred to previously. The effect of the
commutation added 1.0 percentage point to the net loss ratio in the nine months
ended September 30, 2006 as compared to 58.9% in the same period of 2005. The
decrease in the gross and net loss ratios, excluding the impact of PXRE, for the
nine months ended September 30, 2006 compared to the same period in 2005 was
primarily due to lower than expected loss emergence for the property lines for
the current accident year that resulted in lower loss ratios for property lines
for the nine months of 2006 compared to the same period in 2005. However the
decrease in the net loss ratio, excluding the impact of PXRE, was offset, in
part, by the increase in the catastrophe reinsurance premiums ceded. We ceded
catastrophe reinsurance premiums equal to 4.0% of net premiums earned during the
nine months ended September 30, 2006 as compared to 2.8% in the same period in
2005. During the first nine months of 2006, prior accident years loss reserves
developed favorably to the extent of $1.2 million which excludes the $1.6
million loss related to the commutation with PXRE. There was favorable
development from prior years' loss reserves on a net basis of approximately
$331,000 in the first nine months of 2005.

     Loss and loss adjustment expenses are net of reimbursements for loss and
loss adjustment expensed made by TRM pursuant to the expense sharing arrangement
between TICNY and TRM. See "Insurance Service Segment Results of Operations" for
the amounts of loss and loss adjustment expense reimbursements.

     Underwriting expenses and underwriting expense ratio. Underwriting
expenses, which include direct commission expenses and other underwriting
expenses, were $73.3 million for the nine months ended September 30, 2006 as
compared with $51.7 million for the same period in 2005. Our gross expense ratio
was 29.2% for the nine months ended September 30, 2006 as compared with 31.0%
for the same period in 2005.

     The commission portion of the gross expense ratio, which expresses direct
commission expense paid to our producers as a percentage of gross premiums
earned, was 16.3% for the nine months ended September 30, 2006, compared to
16.5% for the same period in 2005. The lower ratio was attributable primarily to
an increase in the number of larger policies that carry a lower commission rate.

     The underwriting expense portion of the gross expense ratio was 12.9% for
the nine months ended September 30, 2006 as compared to 14.5% for the same
period in 2005. Although underwriting expenses increased due to the growth in
premium volume, the gross ratio declined as gross premiums earned increased more
rapidly than underwriting expenses.

     The net underwriting expense ratio was 27.5% for the nine months ended
September 30, 2006 as compared to 29.5% for the same period in 2005. The net
expense ratio, which reflects ceding commission revenue, was affected by the
reduction in ceding commissions of $3.2 million resulting from the commutations
with PXRE which added 2.1 percentage points to the net expense ratio. The net
expense ratio for the nine months ended September 30, 2006 also included the
benefit of additional ceding commission revenue recognized during the nine
months due to the additional ceded premiums earned to CastlePoint Reinsurance as
of April 1, 2006.

     Underwriting profit and combined ratio. The underwriting profit, which
reflects our underwriting results on a net basis after the effects of
reinsurance, was $20.6 million in the first nine months of 2005 and $12.9
million in the same period in 2005. The gross combined ratio was 84.0% for the
nine months ended September 30, 2006 as compared with 87.9% for the same period
in 2005. The decrease in the gross combined ratio in the first nine months of
2006 resulted primarily from a decrease in both the gross loss ratio and gross
underwriting expense ratio. The net combined ratio was 86.5% for the nine months
ended September 30, 2006 as compared to 88.4% for the same period in 2005. The
decrease in the net combined ratio resulted from a decrease in the net
underwriting expense ratio described above. The effects of the commutations
reduced underwriting profits by $4.8 million and added 3.1 percentage points to
the net combined ratio.


                                       21
<PAGE>

<TABLE>
<CAPTION>

Reinsurance Segment Results of Operations

                                              Three Months Ended           Nine Months Ended
                                                 September 30,               September 30,
                                          --------------------------- ---------------------------
                                                2006          2005        2006           2005
                                          ------------- ------------- ------------ --------------
                                                             ($ in thousands)
Revenues
Premiums earned
      <S>                                          <C>           <C>         <C>            <C>
   Gross premiums earned                        $2,617         $ 418      $16,645         $1,267
   Less: ceded premiums earned                     (48)          (34)         (93)          (101)
                                          ------------- ------------- ------------ --------------
   Net premiums earned                           2,569           384       16,552          1,166
                                          ------------- ------------- ------------ --------------
Expenses
Loss and loss adjustment expenses
   Gross loss and loss adjustment expenses       1,549           167       14,930            153
   Ceded loss and loss adjustment expenses         (11)           52          201            564
                                          ------------- ------------- ------------ --------------
   Net loss and loss adjustment expenses         1,538           219       15,131            717
Underwriting expenses
   Ceding commission expense                       895             4        1,665             17
   Other underwriting expenses                     340            48          689            119
                                          ------------- ------------- ------------ --------------
Total underwriting expenses                      1,235            52        2,354            136
                                          ------------- ------------- ------------ --------------
Underwriting (Loss) Profit                      $ (204)        $ 113      $  (933)        $  313
                                          ============= ============= ============ ==============
Key Measures
Premiums written
   Gross premiums written                       $1,287         $ 338      $21,818         $1,076
   Less: ceded premiums written                    (79)          (33)         (79)          (105)
                                          ------------- ------------- ------------ --------------
   Net premiums written                         $1,208         $ 305      $21,739         $  971
                                          ============= ============= ============ ==============
Loss Ratios
Gross                                             59.2%         40.0%        89.7%          12.1%
Net                                               59.9%         57.0%        91.4%          61.5%
Accident Year Loss Ratios
Gross                                             59.3%         55.0%        91.3%          55.2%
Net                                               60.4%         59.9%        91.8%          60.0%
Underwriting Expense Ratios
Gross                                             47.2%         12.6%        14.1%          10.8%
Net                                               48.1%         13.7%        14.2%          11.7%
Combined Ratios
Gross                                            106.4%         52.5%       103.8%          22.8%
Net                                              107.9%         70.7%       105.6%          73.2%

</TABLE>


Reinsurance Segment Results of Operations Three Months Ended September 30, 2006
and 2005

     Gross premiums. Gross premiums written, which were premiums assumed on
business produced by TRM on behalf of its issuing companies in the Insurance
Services Segment, increased to $1.3 million for the three months ended September
30, 2006 as compared to $0.3 million for the same period in 2005. In 2006 we
decided to assume substantially all of the premiums placed through the Insurance
Services Segment compared to 2005 when we assumed premiums only on an excess of
loss basis. Gross premiums earned increased to $2.6 million from $0.4 million in
the third quarter of 2005 as a result of an increase in gross premiums written
in prior periods.

     Net premiums. Net premiums written increased to $1.2 million for the three
months ended September 30, 2006 as compared to $0.3 million for the same period
in 2005. The increase in net premiums written was due to our decision to assume
as gross premiums written substantially all of the premiums placed through the
Insurance Services Segment. Net premiums earned increased to $2.6 million for
the three months ended September 30, 2006 as compared to $0.4 million for the
same period of 2005 as a result of the increase in gross premiums earned.

     Loss and loss adjustment expenses and loss ratio. Gross loss and loss
adjustment expenses were $1.5 million for the three months ended September 30,
2006 as compared to $0.2 million for the same period in 2005. Net losses were
$1.5 million for the three months ended September 30, 2006 as compared to $0.2
million for the same period in 2005. The gross and net loss ratios were 59.2%
and 59.9%, respectively for the three months ended September 30, 2006 as
compared to 40.0% and 57.0%, respectively, in the same period in 2005. The gross
loss ratio was 40.0% for the three months ended September 30, 2005 was reduced
by 15.0 percentage points due to favorable prior year loss reserve development.


                                       22
<PAGE>


     Underwriting expenses and underwriting expense ratio. Underwriting expenses
for the reinsurance segment are comprised of ceding commission expense paid to
TRM's issuing companies and other third-party reinsurers to acquire premiums and
this segment's allocated share of other underwriting expenses. Gross
underwriting expenses increased for the three months ended September 30, 2006 to
$1.2 million compared to $52,000 in the same period in 2005. These increases
resulted from a 34% ceding commission paid to an issuing carrier. In 2005, this
segment assumed premiums on an excess of loss basis, which did not incur a
commission payment. Additionally, the increase in gross premiums written
resulted in an increase in the allocated share of other underwriting expenses to
this segment. The gross and net underwriting expense ratios were 47.2% and 48.1%
for the three months ended September 30, 2006 compared to 12.6% and 13.7%,
respectively, for the same period in 2005.

     Underwriting profit (loss) and combined ratio. The underwriting loss from
assumed reinsurance for the third quarter of 2006 was $0.2 million compared to
an underwriting profit of $0.1 million for the third quarter of 2005. The net
combined ratio was 107.9% for the third quarter of 2006 compared to 70.7% for
the third quarter of 2005. The higher net combined ratio for the third quarter
of 2006 was a result of the increased net underwriting expense ratio as
explained above.

     The gross combined ratio increased to 106.4% for the third quarter of 2006
compared to 52.5% for the third quarter of 2005 due to an increase in the gross
loss ratio and gross underwriting expense ratios in the third quarter of 2006
compared to the same period last year.

Reinsurance Segment Results of Operations Nine Months Ended September 30, 2006
and 2005

     Gross premiums. Gross premiums written increased to $21.8 million for the
nine months ended September 30, 2006 as compared to $1.1 million for the same
period in 2005. This increase was due to our having entered into novation
agreements with PXRE in June 2006 which increased assumed premiums written by
$11.4 million and our decision to assume substantially all of the premiums
placed through the Insurance Services Segment. Gross premiums earned increased
to $16.6 million for the nine months ended September 30, 2006 from $1.3 million
in the nine months ended September 30, 2005 due to the significant increase in
gross premiums written and the novation agreements with PXRE.

     Net premiums. Net premiums written increased to $21.7 million for the nine
months ended September 30, 2006 as compared to $1.0 million for the same period
in 2005. The increase in net premiums written was due to an increase in gross
premiums as discussed above. Net premiums earned increased to $16.6 million for
the nine months ended September 30, 2006 as compared to $1.2 million for the
same period of 2005 as a result of the increase in gross premiums earned, which
included the premiums arising from the novation agreements with PXRE.

     Loss and loss adjustment expenses and loss ratio. Gross loss and loss
adjustment expenses were $14.9 million for the nine months ended September 30,
2006 as compared to $0.2 million for the same period in 2005. Net losses were
$15.1 million for the nine months ended September 30, 2006 as compared to $0.7
million for the same period in 2005. Both gross and net losses for the nine
months ended September 30, 2006 were increased by $12.2 million as a result of
the novation agreements with PXRE. The gross and net loss ratios were 89.7% and
91.4%, respectively, for the nine months ended September 30, 2006 as compared to
12.1% and 61.5%, respectively, in the same period in 2005. The gross loss ratio
was 12.1 % in the first nine months of 2005 due to a favorable prior year loss
reserve development of $0.5 million which fully offset gross accident year
losses. The effect of the novation agreements added 37.5 percentage points and
34.4 percentage points to the gross and net loss ratio, respectively, for the
nine months ending September 30, 2006.

     Underwriting expenses and underwriting expense ratio. Gross underwriting
expenses increased for the nine months ended September 30, 2006 to $2.4 million
as compared to $0.1 million for the same period in 2005. Our net underwriting
expense ratio increased to 14.2% for the nine months ended September 30, 2006
from 11.7% for the same period in 2005. These increases resulted from a 34%
commissions paid to an issuing carrier. In 2005, this segment assumed premiums
on an excess of loss basis which did not incur a commission payment.
Additionally, the increase in gross premiums written resulted in an increase in
the allocated share of other underwriting expenses to this segment. The gross
and net underwriting expense ratios were 14.1% and 14.2%, respectively, for the
nine months ended September 30, 2006 compared to 10.8% and 11.7%, respectively,
for the same period last year. The PXRE novation added $11.4 million of


                                       23
<PAGE>


additional gross and net premiums earned. The effects of the PXRE novation
reduced the gross and net underwriting expense ratios by 31.1 percentage points
and 31.8 percentage points, respectively, for the nine months ended September
30, 2006.

     Underwriting (loss) profit and combined ratio. The underwriting loss from
assumed reinsurance for the nine months ended September 30, 2006 was $0.9
million compared to underwriting profit of $0.3 million for the same period of
2005 and includes the charge of $0.8 million resulting from the novation
agreements with PXRE. The net combined ratio was 105.6% for the nine months
ended September 30, 2006 compared to 73.2% for the same period of 2005. The
higher net combined ratio for the first nine months of 2006 was the result of
the increased net loss ratio as explained above.

     The gross combined ratio increased to 103.8% for the nine months ended
September 30, 2006 compared to 22.8% for the same period of 2005 due to the
increase in the gross loss ratio and the other underwriting expense ratio. The
effects of the novation agreements added 6.5 percentage points and 2.5
percentage points to the gross and net combined ratios for the nine months ended
September 30, 2006.

<TABLE>
<CAPTION>

Insurance Services Segment Results of Operations

                                                           Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                       --------------------------- ---------------------------
                                                              2006        2005          2006          2005
                                                       ------------- ------------- ------------- -------------
                                                                          ($ in thousands)
Revenues
<S>                                                             <C>          <C>           <C>          <C>
Direct commission revenue from managing general agency       $  380        $2,022       $ 2,291       $ 6,713
Claims administration revenue                                   688         1,137         2,572         3,287
Reinsurance intermediary fees(1)                                176           259           411           541
Policy billing fees                                               -             7             5            18
                                                       ------------- ------------- ------------- -------------
Total Revenues                                                1,244         3,425         5,279        10,559
                                                       ------------- ------------- ------------- -------------
Expenses
Direct commissions expense paid to producers                    211         1,143         1,545         3,528
Other insurance services expenses(2)                            193           472           735         1,412
Claims expense reimbursement to TICNY                           687         1,135         2,556         3,276
                                                       ------------- ------------- ------------- -------------
Total Expenses                                                1,091         2,750         4,836         8,216
                                                       ------------- ------------- ------------- -------------
Insurance Services Pre-tax Income                            $  153        $  675       $   443       $ 2,343
                                                       ============= ============= ============= =============
Premium produced by TRM on behalf of issuing companies       $1,408        $8,013       $10,270       $24,888
                                                       ============= ============= ============= =============

     (1)The reinsurance intermediary fees include commissions earned for
     placement of reinsurance on behalf of TICNY.

     (2)Consists of underwriting expenses reimbursed to TICNY pursuant to an
     expense sharing agreement.

</TABLE>

Insurance Services Segment Results of Operations Three Months Ended September
30, 2006 and 2005

     Total revenues. Total revenues for the insurance services segment were $1.2
million for the three months ended September 30, 2006 as compared with $3.4
million for the same period in 2005. The principal components of total revenues
for our insurance services segment are direct commission revenue, claims
administration revenue and reinsurance intermediary fees. The decrease in total
revenues was primarily due to direct commission revenue that decreased by 81.2%
to $0.4 million for the third quarter of 2006 compared to $2.0 million for the
third quarter of 2005. Claims administration revenues decreased by 39.5% to $0.7
million in the third quarter of 2006 compared to $1.1 million in the same period
of last year as a result of fewer hours associated with claims handled for
issuing carriers. Reinsurance intermediary fees revenue decreased by 32.0% to
$0.2 million for the third quarter of 2006 as compared to $0.3 million for the
third quarter of 2005 in which reinsurance intermediary fees were increased as a
result of an adjustment to a prior year reinsurance contract.

     Direct commission revenue is dependent upon the premiums and losses on
business produced by TRM on behalf of its issuing companies. For the third
quarter of 2006, direct commission revenues decreased by 81.2% to $0.4 million
compared to $2.0 million for the third quarter of 2005 as a result of the
decrease in premiums produced by TRM as more policies were renewed in the
Insurance Segment. Premiums produced by TRM decreased by 82.4% to $1.4 million
in the third quarter of 2006 as compared to $8.0 million in the same period of
2005. There was an increase in commission revenue of $0.4 million the third


                                       24
<PAGE>


quarter of 2006 as a result of favorable loss development on the premiums
produced in prior years compared to an increase of $0.1 million in the same
period of last year.

     Direct commission expense. TRM's direct commission expense rate was 15.0%
for the third quarter of 2006 compared to 14.3% for the third quarter of 2005 as
the majority of premiums in 2006 are on smaller policies that typically carry a
higher commission rate as compared to the third quarter of 2005 in which there
were larger proportions of policies with larger premiums and lower commission
rates.

     Other insurance services expenses. The amount of reimbursement for
underwriting expenses by TRM to TICNY in the third quarter of 2006 was $0.2
million as compared to $0.5 million in the third quarter of 2005. The decrease
resulted from the decrease in premiums produced.

     Claims expense reimbursement. The amount of reimbursement by TRM for claims
administration pursuant to the terms of the expense sharing agreement with TICNY
in the third quarter of 2006 was $0.7 million as compared to $1.1 million in the
third quarter of 2005 due to a decrease in the number of claims handled.

     Pre-tax income. Pre-tax income in the third quarter of 2006 decreased by
77.3% to $0.2 million as compared to $0.7 million in the third quarter of 2005.
The decrease was due to the decrease in premiums produced offset partially by a
favorable adjustment in direct commission revenue of $0.4 million in the three
months ended September 30, 2006 as compared to a favorable adjustment in direct
commission income of $0.1 million resulting from favorable loss development on
premiums produced in prior periods for the three months ended September 30,
2005.

Insurance Services Segment Results of Operations Nine Months Ended September 30,
2006 and 2005

     Total revenues. Total revenues for the insurance services segment were $5.3
million for the nine months ended September 30, 2006 as compared with $10.6
million for the same period in 2005. The decrease in total revenues was due to
direct commission revenue that decreased by 65.9% to $2.3 million for the first
nine months of 2006 compared to $6.7 million for the same period of 2005 and
reinsurance intermediary fees that decreased by 24.0% to $0.4 million in the
nine months ended September 30, 2006 compared to $0.5 million in the same period
of last year in which reinsurance intermediary fees were increased as a result
of an adjustment to a prior year reinsurance contract. Claims administration
revenue decreased by 21.8% to $2.6 million for the nine months ended September
30, 2006 as compared to $3.3 million for the same period last year as a result
of fewer hours associated with claims handled for issuing carriers. As a result
of the PXRE novation, TRM increased its direct commission revenue by $0.2
million.

     For the first nine months of 2006, direct commission revenues decreased as
compared to last year as a result of the 58.7% decrease in premiums produced by
TRM to $10.3 million from $24.9 million as more policies were renewed in the
Insurance Segment. In addition there was an increase in commission revenue of
$0.2 million the nine months ended September 30, 2006 as a result of favorable
loss development on the premiums produced in prior years compared to additional
commission income of $0.5 million resulting from favorable loss development on
premiums produced in prior periods for the nine months ended September 30, 2005.
As a result of the PXRE novation, TRM recognized $0.2 million of direct
commission revenue.

     Direct commission expense. TRM's direct commission expense rate was 15.0%
for the first nine months of 2006 compared to 14.2% for the same period last
year as the majority of premiums in 2006 are on smaller policies that typically
carry a higher commission rate as compared to 2005 in which there were larger
proportions of policies with larger premiums and lower commission rates.

     Other insurance services expenses. The amount of reimbursement for
underwriting expenses by TRM to TICNY in the first nine months of 2006 was $0.7
million as compared to $1.4 million in the same period last year, as a result of
the decrease in premiums produced.

     Claims expense reimbursement. The amount of reimbursement by TRM for claims
administration pursuant to the terms of the expense sharing agreement with TICNY
in the first nine months of 2006 was $2.6 million as compared to $3.3 million in
the same period last year due to a decrease in the number of claims handled.


                                       25
<PAGE>


     Pre-tax income. Pre-tax income in the first nine months of 2006 decreased
by 81.1% to $0.4 million as compared to $2.3 million in the same period last
year. The decrease was due to the decrease in premiums produced offset partially
by a favorable adjustment in direct commission revenue of $0.2 million in the
nine months ended September 30, 2006 as compared to a favorable adjustment in
direct commission income of $0.5 million resulting from favorable loss
development on premiums produced in prior periods for the three and nine months
ended September 30, 2005.

Liquidity and Capital Resources

     Cash flows. Cash flow needs at the holding company level are primarily for
dividends to our stockholders and interest payments on our $68.0 million of
subordinated debentures underlying our trust preferred securities.

     For the three months ended September 30, 2006, net cash provided by
operating activities was $11.3 million. Net cash provided by operations was
$36.0 million for the same period in 2005. The lower net cash provided by
operating activities was due to an increase in collected premiums as a result of
the growth in gross premiums written, offset by the payment of $21.5 million to
CastlePoint Reinsurance for the remaining April 1, 2006 ceded unearned premiums
and the third quarter quota share reinsurance as well as an increase in premiums
paid for catastrophe coverage.

     For the nine months ended September 30, 2006, net cash provided by
operating activities was $97.9 million compared to $97.5 million for the same
period last year. The increase in net cash provided by operations for the nine
months ended September 30, 2006 resulted primarily from an increase in collected
premiums as a result of the growth in gross premiums written and the commutation
and novation agreements executed during the second quarter of 2006, offset by
the partial payment of $41.8 million for the April 1, 2006 ceded unearned
premiums and the quota share reinsurance ceded to CastlePoint Reinsurance in the
nine months ended September 30, 2006 as well as an increase in premiums paid for
catastrophe coverage.

     For the three months and nine months ended September 30, 2006, we had $52.6
million and $116.6 million, respectively, of net cash flows used in investing
activities that were funded from operating cash flow. During the third quarter
of 2006, the Company capitalized $14.2 million for the purchase of fixed assets.
The Company relocated its New York City Corporate Headquarters within the same
building. The Company capitalized $8.0 million for leasehold improvements, $3.9
million for furniture & equipment and $2.2 million for computer hardware and
software in the third quarter of 2006. The landlord provided a $4.5 million
build-out allowance which partly financed the $8.0 million of leasehold
improvements as of September 30, 2006. During the nine months of 2006, the
Company capitalized $19.2 million for the purchase of fixed assets. This
included $9.5 million for leasehold improvements, $5.1 million for furniture &
equipment and $4.6 million for computer hardware and software. In addition,
there were an increases in the mortgage-backed, corporate bond sectors and
equity investments in the three months ended September 30, 2006.

     The net cash flows provided by financing activities for the nine months
ended September 30, 2006 was $20.5 million and included the net proceeds from
the issuance of $20.0 million in subordinated debentures on March 31, 2006,
compared to $0.3 million and $1.2 million of net cash flows used in financing
activity for the three and nine months ended September 30, 2005, respectively.

     The operating subsidiaries' primary sources of cash are net premiums
received, commission and fee income, net investment income and proceeds from the
sale and redemption of both equity and fixed-maturity investments. Cash is used
to pay claims, commissions and operating expenses, to purchase investments and
fixed assets and to pay dividends to the holding company. TICNY and TNIC are
subject to significant regulatory restrictions limiting their ability to declare
and pay dividends. As of September 30, 2006, the maximum amount of distributions
that TICNY could pay to its parent without approval of the New York State
Insurance Department was $11.3 million. TNIC may not pay more than 10% of its
capital stock in dividends per year in accordance with the Massachusetts
Insurance Code. As of September 30, 2006, the maximum amount of distributions
that TNIC could pay to its parent without approval of the Massachusetts
Commissioner of Insurance was $0.3 million.


                                       26
<PAGE>


Subordinated Debentures

     On March 31, 2006, we participated in a private placement of $20.0 million
of fixed/floating rate capital securities (the "Trust Preferred Securities")
issued by Tower Group Statutory Trust V (the "Trust"), an affiliated Delaware
trust formed on March 29, 2006. The Trust Preferred Securities mature in April
2036, are redeemable at our option at par beginning April 7, 2011, and require
quarterly distributions of interest by the Trust to the holder of the Trust
Preferred Securities. Interest distributions are initially at a fixed rate of
8.5625% for the first five years and will then reset quarterly for changes in
the three-month London Interbank Offered Rate ("LIBOR") rate plus 330 basis
points. The Trust simultaneously issued 619 of the Trust's common securities to
us for a purchase price of $0.6 million, which constitutes all of the issued and
outstanding common securities of the Trust. The Trust used the proceeds from the
sale of the Trust Preferred Securities and common securities to purchase for
$20.6 million a Junior Subordinated Debt Security due 2036 issued by us.

Investments

     The aggregate fair value of our invested assets as of September 30, 2006
was $ 443.7 million; excluding our investment in common trust
securities-statutory business trusts. Our fixed maturity securities as of this
date had a fair value of $401.0 million and an amortized cost of $402.7 million.
The equity securities carried at fair value were $42.6 million with a cost of
$42.7 million as of September 30, 2006. Equity securities carried at cost were
reclassified to equity securities at fair value as of September 30, 2006 in
accordance with GAAP for insurance companies.

     On November 3, 2005, the FASB issued FSP FAS 115-1 and FAS 124-1,
"Other-Than-Temporary Impairment and Its Application to Certain Investments."
The guidance in this FSP addresses the determination of when an investment is
considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of other than temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance in this FSP applies
to reporting periods beginning after December 15, 2005.

     Impairment of investment securities results in a charge to operations when
a market decline below cost is deemed to be other-than-temporary. As of
September 30, 2006, we reviewed our fixed-maturity and equity securities
portfolios to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments in accordance
with the provisions of this FSP. We determined that we did not hold any
investments that would have been considered other than temporarily impaired.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Market risk relates to changes in the value of financial instruments that
arise from adverse movements in factors such as interest rates and equity
prices. We are exposed mainly to changes in interest rates that affect the fair
value of our investment in securities.

Sensitivity Analysis

     Sensitivity analysis is a measurement of potential loss in future earnings,
fair values or cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other market rates or
prices over a selected time. In our sensitivity analysis model, we select a
hypothetical change in market rates that reflects what we believe are reasonably
possible near-term changes in those rates. The term "near-term" means a period
of time going forward up to one year from the date of the consolidated financial
statements. Actual results may differ from the hypothetical change in market
rates assumed in this disclosure, especially since this sensitivity analysis
does not reflect the results of any action that we may take to mitigate such
hypothetical losses in fair value.

     In this sensitivity analysis model, we use fair values to measure our
potential loss. The sensitivity analysis model includes fixed maturities and
short-term investments.

     For invested assets, we use modified duration modeling to calculate changes
in fair values. Durations on invested assets are adjusted for call, put and
interest rate reset features. Durations on tax-exempt securities are adjusted


                                       27
<PAGE>

for the fact that the yield on such securities is less sensitive to changes in
interest rates compared to Treasury securities. Invested asset portfolio
durations are calculated on a market value weighted basis, including accrued
investment income, using holdings as of September 30, 2006.

     The following table summarizes the estimated change in fair value on our
fixed maturity portfolio including short-term investments based on specific
changes in interest rates as of September 30, 2006:

                                   Estimated Increase
                                   (Decrease) in Fair   Estimated Percentage
                                         Value          Increase (Decrease)
Change in Interest Rate            ($ in thousands)        in Fair Value
--------------------------------- --------------------- ---------------------
300 basis point rise                         ($ 50,029)               (12.5%)
200 basis rise                                 (33,815)                (8.4%)
100 basis rise                                 (17,055)                (4.3%)
As of September 30, 2006                             0                   0.0%
50 basis point decline                           8,290                   2.1%
100 basis point decline                         16,243                   4.1%

     The sensitivity analysis model used by us produces a predicted pre-tax loss
in fair value of market-sensitive instruments of $17.1 million or 4.3% based on
a 100 basis point increase in interest rates as of September 30, 2006. This loss
amount only reflects the impact of an interest rate increase on the fair value
of our fixed maturities, which constituted approximately 90.0% of our total
invested assets as of September 30, 2006.

     As of September 30, 2006 we had a total of $23.7 million of outstanding
floating rate debt all of which were outstanding subordinated debentures
underlying our trust securities issued by our wholly owned statutory business
trusts carrying an interest rate that is determined by reference to market
interest rates. If interest rates increase, the amount of interest payable by us
would also increase.


Item 4.  Controls and Procedures

     Our management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Securities
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
to provide reasonable assurance that material information relating to us and our
consolidated subsidiaries required to be disclosed in our reports filed with or
submitted to the Securities and Exchange Commission under the Securities
Exchange Act is made known to such officers by others within these entities,
particularly during the period this quarterly report was prepared, in order to
allow timely decisions regarding required disclosure.

     There have not been any changes in our internal control over financial
reporting during the three months ended September 30, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


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<PAGE>


2. Part II - OTHER INFORMATION

Item 6.  Exhibits


   31.1   Chief Executive Officer - Certification pursuant to Sarbanes-Oxley Act
          of 2002 Section 302

   31.2   Chief Financial Officer - Certification pursuant to Sarbanes-Oxley Act
          of 2002 Section 302

   32     Chief Executive Officer and Chief Financial Officer - Certification
          pursuant to Sarbanes-Oxley Act of 2002 Section 906

     Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                                   Tower Group, Inc.
                                         ---------------------------------------
                                                      Registrant



  Date:       November 3, 2006             /s/     Michael H. Lee
        ---------------------------      ---------------------------------------
                                                   Michael H. Lee
                                                 Chairman of the Board,
                                         President and Chief Executive Officer





  Date:       November 3, 2006             /s/    Francis M. Colalucci
        ---------------------------      ---------------------------------------
                                                  Francis M. Colalucci
                                                  Senior Vice President,
                                           Chief Financial Officer and Treasurer




                                       29