##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2008
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file no. 000-50990
 Tower Group, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3894120(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)120 Broadway,
31stFloorNew York, NY
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000
 (Registrants telephone number, including area code
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




---



##### 



INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial statementsConsolidated Balance Sheets  June 30, 2008 (unaudited)
and December 31, 2007
    
    
    1Consolidated Statements of Income and Comprehensive IncomeThree months ended June 30, 2008 and 2007 (unaudited)
    
    
    2Six months ended June 30, 2008 and 2007 (unaudited)
    
    
    2Consolidated Statements of Cash FlowsThree months ended June 30, 2008 and 2007 (unaudited)
    
    
    3Six months ended June 30, 2008 and 2007 (unaudited)
    
    
   3Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATIONS




---



##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Tower Group, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)June 30,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2008
    
    2007AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$605,900 and $616,757)
    
    $
    579,163
    
    
    $
    606,488Equity securities, available-for-sale, at fair value (cost of $7,050 and $14,429)
    
    
    5,778
    
    
    
    12,580Total investments
    
    
    584,941
    
    
    
    619,068Cash and cash equivalents
    
    
    100,258
    
    
    
    77,679Investment income receivable
    
    
    6,993
    
    
    
    6,546Agents balances receivable
    
    
    122,797
    
    
    
    122,763Reinsurance recoverable
    
    
    231,304
    
    
    
    207,828Prepaid reinsurance premiums
    
    
    142,295
    
    
    
    124,834Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    47,502
    
    
    
    39,271Deferred income taxes
    
    
    21,548
    
    
    
    22,802Intangible assets
    
    
    21,067
    
    
    
    21,670Goodwill
    
    
    18,962
    
    
    
    13,281Fixed assets, net of accumulated depreciation
    
    
    36,290
    
    
    
    32,337Investment in unconsolidated affiliate
    
    
    32,838
    
    
    
    32,615Other assets
    
    
    40,236
    
    
    
    33,917Total assets
    
    $
    1,407,031
    
    
    $
    1,354,611LiabilitiesLoss and loss adjustment expenses
    
    $
    519,578
    
    
    $
    501,183Unearned premium
    
    
    299,778
    
    
    
    272,774Reinsurance balances payable
    
    
    80,417
    
    
    
    58,740Payable to issuing carriers
    
    
    27,121
    
    
    
    42,855Funds held under reinsurance agreements
    
    
    30,368
    
    
    
    36,841Accounts payable, accrued liabilities and other liabilities
    
    
    26,568
    
    
    
    31,795Subordinated debentures
    
    
    101,036
    
    
    
    101,036Total liabilities
    
    
    1,084,866
    
    
    
    1,045,224Stockholders EquityCommon stock ($0.01 par value; 40,000,000 shares authorized, 23,379,981 and
23,225,039 shares issued, and 23,316,833 and 23,185,173 shares outstanding)
    
    
    234
    
    
    
    232Treasury stock (63,148 and 39,866 shares)
    
    
    (1,039
    )
    
    
    (493
    )Paid-in-capital
    
    
    206,817
    
    
    
    205,435Accumulated other comprehensive net loss
    
    
    (19,102
    )
    
    
    (8,322
    )Retained earnings
    
    
    135,255
    
    
    
    112,535Total stockholders equity
    
    
    322,165
    
    
    
    309,387Total liabilities and stockholders equity
    
    $
    1,407,031
    
    
    $
    1,354,611
 See accompanying notes to the consolidated financial statements.
 1




---



##### Table of Contents



Tower
Group, Inc.
 
 Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 Three Months Ended
    
    Six Months Ended($ in thousands, except
    
    June 30,
    
    June 30,per share and share amounts)
    
    2008
    
    2007
    
    2008
    
    2007RevenuesNet premiums earned
    
    $
    70,114
    
    
    $
    74,035
    
    
    $
    138,544
    
    
    $
    134,418Ceding commission revenue
    
    
    21,491
    
    
    
    17,032
    
    
    
    42,145
    
    
    
    31,266Insurance services revenue
    
    
    14,242
    
    
    
    1,639
    
    
    
    23,902
    
    
    
    3,099Net investment income
    
    
    8,366
    
    
    
    9,446
    
    
    
    18,162
    
    
    
    17,401Net realized gains (losses) on investments
    
    
    (7,970
    )
    
    
    89
    
    
    
    (6,596
    )
    
    
    72Policy billing fees
    
    
    555
    
    
    
    543
    
    
    
    1,133
    
    
    
    845Total revenues
    
    
    106,798
    
    
    
    102,784
    
    
    
    217,290
    
    
    
    187,101ExpensesLoss and loss adjustment expenses
    
    
    36,923
    
    
    
    40,611
    
    
    
    74,219
    
    
    
    74,521Direct and ceding commission expense
    
    
    30,026
    
    
    
    21,808
    
    
    
    56,634
    
    
    
    40,443Other operating expenses
    
    
    22,193
    
    
    
    19,432
    
    
    
    43,858
    
    
    
    34,521Interest expense
    
    
    2,161
    
    
    
    2,446
    
    
    
    4,484
    
    
    
    4,530Total expenses
    
    
    91,303
    
    
    
    84,297
    
    
    
    179,195
    
    
    
    154,015Other IncomeEquity income in unconsolidated affiliate
    
    
    762
    
    
    
    734
    
    
    
    1,522
    
    
    
    1,423Gain from issuance of common stock by unconsolidated
affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,705Income before income taxes
    
    
    16,257
    
    
    
    19,221
    
    
    
    39,617
    
    
    
    37,214Income tax expense
    
    
    6,088
    
    
    
    6,842
    
    
    
    14,595
    
    
    
    13,207Net income
    
    $
    10,169
    
    
    $
    12,379
    
    
    
    25,022
    
    
    $
    24,007Gross unrealized investment holding gains (losses)
arising during period
    
    
    (9,550
    )
    
    
    (11,575
    )
    
    
    (22,074
    )
    
    
    (11,029
    )Equity in net unrealized gains (losses) in investment in
unconsolidated affiliates investment portfolio
    
    
    (324
    )
    
    
    (477
    )
    
    
    (1,107
    )
    
    
    (422
    )Less:
reclassification adjustment for (gains) losses included in net income
    
    
    7,970
    
    
    
    (89
    )
    
    
    6,596
    
    
    
    (72
    )Income tax benefit (expense) related to items of other
comprehensive income
    
    
    666
    
    
    
    4,249
    
    
    
    5,805
    
    
    
    4,033Comprehensive net income
    
    $
    8,931
    
    
    $
    4,487
    
    
    
    14,242
    
    
    $
    16,517Basic and diluted earnings per shareBasic
    
    $
    0.44
    
    
    $
    0.54
    
    
    
    1.09
    
    
    $
    1.04Diluted
    
    $
    0.44
    
    
    $
    0.53
    
    
    
    1.08
    
    
    $
    1.03Weighted average common shares outstanding:Basic
    
    
    23,040,952
    
    
    
    22,895,783
    
    
    
    23,018,275
    
    
    
    22,442,345Diluted
    
    
    23,266,868
    
    
    
    23,169,573
    
    
    
    23,239,227
    
    
    
    22,729,005Dividends declared and paid per common share:Common stock
    
    $
    0.05
    
    
    $
    0.025
    
    
    
    0.10
    
    
    $
    0.05
 See accompanying notes to the consolidated financial statements.
 2




---



##### Table of Contents



Tower
Group, Inc.
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Cash flows provided by (used in) operating activities:Net income
    
    $
    10,169
    
    
    $
    12,379
    
    
    $
    25,022
    
    
    $
    24,007Adjustments to reconcile net income to net cash provided by
(used in) operations:Gain from IPO of common shares of unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,705
    )(Gain) loss on sale of investments
    
    
    7,970
    
    
    
    (89
    )
    
    
    6,596
    
    
    
    (72
    )Depreciation and amortization
    
    
    3,055
    
    
    
    2,409
    
    
    
    5,659
    
    
    
    3,961Amortization of restricted stock
    
    
    662
    
    
    
    712
    
    
    
    1,153
    
    
    
    1,001Deferred income taxes
    
    
    (871
    )
    
    
    71
    
    
    
    1,611
    
    
    
    (503
    )Excess tax benefits from share-based payment arrangements
    
    
    (29
    )
    
    
    (894
    )
    
    
    (80
    )
    
    
    (959
    )(Increase) decrease in assets:Investment income receivable
    
    
    (446
    )
    
    
    (421
    )
    
    
    (446
    )
    
    
    (441
    )Agents balances receivable
    
    
    (7,929
    )
    
    
    (10,713
    )
    
    
    (34
    )
    
    
    (3,333
    )Reinsurance recoverable
    
    
    (11,653
    )
    
    
    (13,826
    )
    
    
    (23,476
    )
    
    
    (31,539
    )Prepaid reinsurance premiums
    
    
    (12,254
    )
    
    
    (21,881
    )
    
    
    (17,461
    )
    
    
    (38,079
    )Deferred acquisition costs, net
    
    
    (2,620
    )
    
    
    4,862
    
    
    
    (8,231
    )
    
    
    9,647Equity in unconsolidated affiliate
    
    
    (763
    )
    
    
    (734
    )
    
    
    (1,523
    )
    
    
    (1,423
    )Other assets
    
    
    (7,072
    )
    
    
    (6,601
    )
    
    
    (6,307
    )
    
    
    (6,119
    )Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    13,873
    
    
    
    20,793
    
    
    
    18,395
    
    
    
    52,021Unearned premium
    
    
    24,389
    
    
    
    18,018
    
    
    
    27,004
    
    
    
    20,271Reinsurance balances payable
    
    
    5,898
    
    
    
    6,203
    
    
    
    21,677
    
    
    
    17,689Payable to issuing carriers
    
    
    (9,870
    )
    
    
    5,919
    
    
    
    (15,733
    )
    
    
    5,257Accounts payable and accrued expenses
    
    
    (2,527
    )
    
    
    (959
    )
    
    
    (7,634
    )
    
    
    (10,848
    )Funds held under reinsurance agreement
    
    
    (2,763
    )
    
    
    (5,335
    )
    
    
    (7,415
    )
    
    
    (8,994
    )Other
    
    
    (2,742
    )
    
    
    203
    
    
    
    145
    
    
    
    1,653Net cash flows provided by operations
    
    
    4,477
    
    
    
    10,116
    
    
    
    18,922
    
    
    
    30,492Cash flows provided by (used in) investing activities:Acquisition of Preserver Group Inc.
    
    
    
    
    
    
    (66,233
    )
    
    
    
    
    
    
    (66,233
    )Preserver transaction costs
    
    
    
    
    
    
    (4,729
    )
    
    
    
    
    
    
    (4,729
    )Purchase of fixed assets
    
    
    (4,583
    )
    
    
    (3,210
    )
    
    
    (9,009
    )
    
    
    (6,552
    )Purchase - fixed-maturity securities
    
    
    (102,682
    )
    
    
    (60,109
    )
    
    
    (218,247
    )
    
    
    (135,312
    )Purchase - equity securities
    
    
    
    
    
    
    (11,317
    )
    
    
    
    
    
    
    (13,887
    )Sale or
maturity - fixed-maturity securities
    
    
    106,020
    
    
    
    34,527
    
    
    
    228,384
    
    
    
    70,518Sale-equity securities
    
    
    5,067
    
    
    
    775
    
    
    
    5,066
    
    
    
    3,776Net cash flows provided by (used in) investing activities
    
    
    3,822
    
    
    
    (110,296
    )
    
    
    6,194
    
    
    
    (152,419
    )Cash flows provided by (used in) financing activities:Equity offering and over allotment, net of issuance costs
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    89,366Purchase of
common trust securities-statutory business trusts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (619
    )Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,619Exercise of stock options & warrants
    
    
    1
    
    
    
    917
    
    
    
    231
    
    
    
    1,010Excess tax benefits from share-based payment arrangements
    
    
    29
    
    
    
    894
    
    
    
    80
    
    
    
    959Treasury
stock acquired-net employee share-based compensation
    
    
    (365
    )
    
    
    55
    
    
    
    (545
    )
    
    
    55Dividends paid
    
    
    (1,145
    )
    
    
    (573
    )
    
    
    (2,303
    )
    
    
    (1,655
    )Net cash flows provided by (used in) financing activities
    
    
    (1,480
    )
    
    
    1,272
    
    
    
    (2,537
    )
    
    
    69,735Increase in cash and cash equivalents
    
    
    6,819
    
    
    
    (98,908
    )
    
    
    22,579
    
    
    
    (52,192
    )Cash and cash equivalents, beginning of period
    
    
    93,439
    
    
    
    163,877
    
    
    
    77,679
    
    
    
    117,161Cash and cash equivalents, end of period
    
    $
    100,258
    
    
    $
    64,969
    
    
    $
    100,258
    
    
    $
    64,969Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    11,754
    
    
    $
    14,095
    
    
    $
    16,893
    
    
    $
    15,172Cash paid for interest
    
    
    1,932
    
    
    
    2,366
    
    
    
    4,048
    
    
    
    3,792
 See accompanying notes to the consolidated financial statements.
 3




---



##### Table of Contents



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




---



##### Table of Contents



The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 5




---



##### Table of Contents



Note 3Acquisition of Preserver Group, Inc.
   Note 4Equity Offering
   Note 5Other Assets
  June 30,
    
    December 31,($ in thousands)
    
    2008
    
    2007Assumed premiums receivable
    
    $
    1,496
    
    
    $
    1,299Ceding commission receivable
    
    
    3,429
    
    
    
    3,852Receivable
- claims paid by agency
    
    
    5,800
    
    
    
    2,726Federal and state taxes recoverable
    
    
    3,700
    
    
    
    125Investment in statutory business trusts, equity method
    
    
    3,036
    
    
    
    3,036Receivable for securities
    
    
    3,475
    
    
    
    8,755Prepaids, deposits and advances
    
    
    4,453
    
    
    
    3,694Deferred merger and acquisition expenses
    
    
    3,280
    
    
    
    677Miscellaneous receivables
    
    
    8,236
    
    
    
    6,223Other
    
    
    3,331
    
    
    
    3,530Other assets
    
    $
    40,236
    
    
    $
    33,917
 Note 6Investment in Unconsolidated AffiliateCastlePoint
  June 30,
    
    December 31,($ in millions)
    
    2008
    
    2007Carrying value of equity investment, beginning of year
    
    $
    32.6
    
    
    $
    27.9Equity in net income of CastlePoint
    
    
    1.5
    
    
    
    2.4Gain from initial public offering of common stock of CastlePoint
    
    
    0.0
    
    
    
    2.7Equity in net unrealized gain / (loss) of the CastlePoint investment portfolio
    
    
    (1.1
    )
    
    
    (0.1
    )Dividends received from CastlePoint
    
    
    (0.2
    )
    
    
    (0.3
    )Carrying value of equity investment, end of period
    
    $
    32.8
    
    
    $
    32.6
 6




---



##### Table of Contents



Affiliated Agreements with CastlePoint
  Master Agreement
  Reinsurance Agreements
  7




---



##### Table of Contents



Ceding
    
    CedingCeded Premiums
    
    Ceded Premiums
    
    Commissions
    
    Commission($ in thousands)
    
    Written
    
    Earned
    
    Received
    
    PercentageSix Months Ending June 30, 2008Brokerage business
    
    $
    87,954
    
    
    $
    99,321
    
    
    $
    31,798
    
    
    
    36.2
    %Traditional program business
    
    
    4,287
    
    
    
    2,792
    
    
    
    1,405
    
    
    
    32.8
    %Specialty
program business and insurance risk-sharing business
    
    
    22,387
    
    
    
    8,889
    
    
    
    8,420
    
    
    
    37.6
    %Total
    
    $
    114,628
    
    
    $
    111,002
    
    
    $
    41,623
    
    
    
    36.3
    %Six Months Ending June 30, 2007Brokerage business
    
    $
    118,285
    
    
    $
    75,668
    
    
    $
    40,490
    
    
    
    34.2
    %Traditional program business
    
    
    0
    
    
    
    315
    
    
    
    0
    
    
    
    30.0
    %Specialty
program business and insurance risk-sharing business
    
    
    2,052
    
    
    
    1,248
    
    
    
    616
    
    
    
    30.0
    %Total
    
    $
    120,337
    
    
    $
    77,231
    
    
    $
    41,106
    
    
    
    34.2
    %Three Months Ending June 30, 2008Brokerage business
    
    $
    42,410
    
    
    $
    46,973
    
    
    $
    15,391
    
    
    
    36.3
    %Traditional program business
    
    
    1,763
    
    
    
    1,614
    
    
    
    586
    
    
    
    33.2
    %Specialty
program business and insurance risk-sharing business
    
    
    14,380
    
    
    
    5,624
    
    
    
    5,275
    
    
    
    36.7
    %Total
    
    $
    58,553
    
    
    $
    54,211
    
    
    $
    21,252
    
    
    
    36.3
    %Three Months Ending June 30, 2007Brokerage business
    
    $
    68,468
    
    
    $
    43,459
    
    
    $
    23,552
    
    
    
    34.4
    %Traditional program business
    
    
    (6
    )
    
    
    151
    
    
    
    (2
    )
    
    
    30.0
    %Specialty
program business and insurance risk-sharing business
    
    
    794
    
    
    
    731
    
    
    
    239
    
    
    
    30.0
    %Total
    
    $
    69,256
    
    
    $
    44,341
    
    
    $
    23,789
    
    
    
    34.3
    %
 8




---



##### Table of Contents



CastlePoint($ in thousands)
    
    CastlePoint
    
    InsuranceReceivable/(payable) due to/from
    
    Reinsurance
    
    CompanyShown in balance sheet:June 30, 2008Assumed premium receivable
    
    $
    29
    
    
    $
    Reinsurance recoverable
    
    
    12,850
    
    
    
    1,354Reinsurance balances payable
    
    
    (63,403
    )
    
    
    (361
    )Payable to issuing carriers
    
    
    
    
    
    
    (24,760
    )Total
    
    $
    (50,522
    )
    
    $
    (23,767
    )December 31, 2007Assumed premium receivable
    
    $
    5
    
    
    $
    Reinsurance recoverable
    
    
    8,998
    
    
    
    470Reinsurance balances payable
    
    
    (43,158
    )
    
    
    (5,531
    )Payable to issuing carriers
    
    
    
    
    
    
    (41,664
    )Total
    
    $
    (34,155
    )
    
    $
    (46,725
    )
 9




---



##### Table of Contents



Program Management Agreement
  Management Agreement
  TICNY Service and Expense Sharing Agreements
  TRM Service and Expense Sharing Agreement
  Note 7Investments
  10




---



##### Table of Contents



Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    % ofAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    Fair($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    ValueJune 30, 2008U.S. Treasury securities
    
    $
    26,145
    
    
    $
    466
    
    
    $
    (35
    )
    
    $
    (125
    )
    
    $
    26,452
    
    
    
    5
    %U.S. Agency securities
    
    
    7,796
    
    
    
    110
    
    
    
    (4
    )
    
    
    
    
    
    
    7,902
    
    
    
    1
    %Municipal bonds
    
    
    180,301
    
    
    
    629
    
    
    
    (1,545
    )
    
    
    
    
    
    
    179,384
    
    
    
    31
    %Corporate and other bonds
    
    
    213,087
    
    
    
    118
    
    
    
    (4,861
    )
    
    
    (4,441
    )
    
    
    203,903
    
    
    
    35
    %Commercial
mortgage-backed securities
    
    
    51,149
    
    
    
    44
    
    
    
    (2,959
    )
    
    
    (7,880
    )
    
    
    40,354
    
    
    
    7
    %Residential mortgage-backed securities
    
    
    112,583
    
    
    
    787
    
    
    
    (1,230
    )
    
    
    (3,066
    )
    
    
    109,074
    
    
    
    19
    %Asset-backed securities
    
    
    14,839
    
    
    
    90
    
    
    
    (2,828
    )
    
    
    (7
    )
    
    
    12,094
    
    
    
    2
    %Total fixed-maturity securities
    
    
    605,900
    
    
    
    2,244
    
    
    
    (13,462
    )
    
    
    (15,518
    )
    
    
    579,163
    
    
    
    99
    %Preferred stocks
    
    
    5,550
    
    
    
    
    
    
    
    (97
    )
    
    
    (1,147
    )
    
    
    4,306
    
    
    
    1
    %Common stocks
    
    
    1,500
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    1,472
    
    
    
    0
    %Total
    
    $
    612,950
    
    
    $
    2,244
    
    
    $
    (13,588
    )
    
    $
    (16,665
    )
    
    $
    584,941
    
    
    
    100
    %December 31, 2007U.S. Treasury securities
    
    $
    25,837
    
    
    $
    827
    
    
    $
    
    
    
    $
    
    
    
    $
    26,664
    
    
    
    4
    %U.S. Agency securities
    
    
    19,709
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    19,871
    
    
    
    3
    %Municipal bonds
    
    
    155,296
    
    
    
    1,167
    
    
    
    (78
    )
    
    
    (24
    )
    
    
    156,361
    
    
    
    25
    %Corporate and other bonds
    
    
    201,501
    
    
    
    1,219
    
    
    
    (3,164
    )
    
    
    (817
    )
    
    
    198,739
    
    
    
    32
    %Commercial
mortgage-backed securities
    
    
    49,475
    
    
    
    262
    
    
    
    (5,015
    )
    
    
    (162
    )
    
    
    44,560
    
    
    
    7
    %Residential mortgage-backed securities
    
    
    144,028
    
    
    
    1,083
    
    
    
    (2,511
    )
    
    
    (2,733
    )
    
    
    139,867
    
    
    
    23
    %Asset-backed securities
    
    
    20,911
    
    
    
    88
    
    
    
    (573
    )
    
    
    
    
    
    
    20,426
    
    
    
    3
    %Total fixed-maturity securities
    
    
    616,757
    
    
    
    4,808
    
    
    
    (11,341
    )
    
    
    (3,736
    )
    
    
    606,488
    
    
    
    98
    %Preferred stocks
    
    
    5,551
    
    
    
    
    
    
    
    (1,849
    )
    
    
    
    
    
    
    3,702
    
    
    
    1
    %Common stocks
    
    
    8,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,878
    
    
    
    1
    %Total
    
    $
    631,186
    
    
    $
    4,808
    
    
    $
    (13,190
    )
    
    $
    (3,736
    )
    
    $
    619,068
    
    
    
    100
    %
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Fixed - maturity securitiesGross realized gains
    
    $
    526
    
    
    $
    115
    
    
    $
    4,432
    
    
    $
    465Gross realized losses
    
    
    (272
    )
    
    
    (196
    )
    
    
    (368
    )
    
    
    (391
    )254
    
    
    
    (81
    )
    
    
    4,064
    
    
    
    74Equity securitiesGross realized gains
    
    
    144
    
    
    
    170
    
    
    
    144
    
    
    
    341Gross realized losses
    
    
    (75
    )
    
    
    
    
    
    
    (75
    )
    
    
    (343
    )69
    
    
    
    170
    
    
    
    69
    
    
    
    (2
    )Impairment write-down
    
    
    (8,293
    )
    
    
    
    
    
    
    (10,729
    )
    
    
    Net realized gains/losses
    
    $
    (7,970
    )
    
    $
    89
    
    
    $
    (6,596
    )
    
    $
    72
 Impairment Review
 11




---



##### Table of Contents



Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets
      Note 8Fair Value Measurements
   12




---



##### Table of Contents



Level 1
 Level 2
 Level 3
  ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalFixed-maturity investments
    
    $
    
    
    
    $
    570,243
    
    
    $
    8,904
    
    
    $
    579,147Equity investments
    
    
    1,472
    
    
    
    4,307
    
    
    
    
    
    
    
    5,778Totals
    
    $
    1,472
    
    
    $
    574,550
    
    
    $
    8,904
    
    
    $
    584,926
 13




---



##### Table of Contents



For the Three Months EndedMarch 31,
    
    June 30,($ in thousands)
    
    2008
    
    2008
    
    TotalBeginning balance
    
    $
    
    
    
    $
    10,707
    
    
    $
    Total gains or losses (realized / unrealized)Included in net income
    
    
    278
    
    
    
    (6,740
    )
    
    
    (6,462
    )Included in other comprehensive income (loss)
    
    
    (2,599
    )
    
    
    4,957
    
    
    
    2,358Purchases, issuances and settlements
    
    
    (441
    )
    
    
    (20
    )
    
    
    (461
    )Net transfers into (out of) Level 3
    
    
    13,469
    
    
    
    
    
    
    
    13,469Ending balance
    
    $
    10,707
    
    
    $
    8,904
    
    
    $
    8,904
 Note 9Goodwill
   ($ in thousands)Purchase PriceBase purchase price paid
    
    $
    68,250Preserver direct transaction costs, net of tax benefit
    
    
    (3,547
    )Total purchase price paid to Preserver
    
    
    64,703Direct transaction costs
    
    
    1,305Total purchase consideration
    
    
    66,008Allocation of Purchase PriceBook value of Preserver at date of acquisition
    
    
    7,106Preserver shareholder debt repayment
    
    
    30,754Estimated fair value adjustments
    
    
    9,186Estimated fair value of assets acquired
    
    
    47,046Goodwill as of June 30, 2008
    
    $
    18,962
 14




---



##### Table of Contents



Note 10Other Liabilities
 Other liabilities consist of the following:
 June 30,
    
    December 31,($ in thousands)
    
    2008
    
    2007Accounts payable and accrued expenses
    
    $
    4,846
    
    
    $
    14,205Funds held as agent
    
    
    3,831
    
    
    
    4,772Deferred rent liability
    
    
    7,203
    
    
    
    7,386Payable for securities
    
    
    3,911
    
    
    
    561Other
    
    
    6,777
    
    
    
    4,872Other liabilities
    
    $
    26,568
    
    
    $
    31,796
 Note 11Dividends Declared
   Note 12Stock Based Compensation
 Restricted Stock Awards
   WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueOutstanding at December 31, 2007
    
    
    195,468
    
    
    $
    24.97Granted
    
    
    138,326
    
    
    $
    24.75Vested
    
    
    (71,641
    )
    
    $
    20.72Forfeited
    
    
    (518
    )
    
    $
    29.03Outstanding at June 30, 2008
    
    
    261,635
    
    
    $
    26.01
 15




---



##### Table of Contents



Stock Options
  Note 13Income Taxes
    Note 14Earnings per Share
  Income
    
    Shares
    
    Per Share($ in thousands, except share and per share amounts)
    
    (Numerator)
    
    (Denominator)
    
    AmountThree Months Ended June 30, 2008Net Income
    
    $
    10,169Basic earnings per share
    
    $
    10,169
    
    
    
    23,040,952
    
    
    $
    0.44Effect of dilutive securities:Stock options
    
    
    
    
    
    
    136,620Unvested restricted stock and restricted stock units
    
    
    
    
    
    
    65,172Warrants
    
    
    
    
    
    
    24,124Diluted earnings per share
    
    $
    10,169
    
    
    
    23,266,868
    
    
    $
    0.44Three Months Ended June 30, 2007Net Income
    
    $
    12,379Basic earnings per share
    
    
    12,379
    
    
    
    22,895,783
    
    
    $
    0.54Effect of dilutive securities:Stock options
    
    
    
    
    
    
    188,731Unvested restricted stock
    
    
    
    
    
    
    54,975Warrants
    
    
    
    
    
    
    30,084Diluted earnings per share
    
    $
    12,379
    
    
    
    23,169,573
    
    
    $
    0.53
 16




---



##### Table of Contents



Income
    
    Shares
    
    Per Share($ in thousands, except share and per share amounts)
    
    (Numerator)
    
    (Denominator)
    
    AmountSix Months Ended June 30, 2008Net Income
    
    $
    25,022Basic earnings per share
    
    $
    25,022
    
    
    
    23,018,275
    
    
    $
    1.09Effect of dilutive securities:Stock options
    
    
    
    
    
    
    141,399Unvested restricted stock and restricted stock units
    
    
    
    
    
    
    54,878Warrants
    
    
    
    
    
    
    24,675Diluted earnings per share
    
    $
    25,022
    
    
    
    23,239,227
    
    
    $
    1.08Six Months Ended June 30, 2007Net Income
    
    $
    24,007Less: Preferred stock dividends
    
    
    (298
    )Less: Preferred stock excess consideration
    
    
    (400
    )Basic earnings per share
    
    
    23,309
    
    
    
    22,442,345
    
    
    $
    1.04Effect of dilutive securities:Stock options
    
    
    
    
    
    
    193,029Unvested restricted stock
    
    
    
    
    
    
    61,528Warrants
    
    
    
    
    
    
    32,103Diluted earnings per share
    
    $
    23,309
    
    
    
    22,729,005
    
    
    $
    1.03
 Note 15Changes in Estimates
  17




---



##### Table of Contents



Note 16Segment Information
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Insurance SegmentRevenuesNet premiums earned
    
    $
    70,114
    
    
    $
    74,035
    
    
    $
    138,544
    
    
    $
    134,418Ceding commission revenue
    
    
    21,491
    
    
    
    17,032
    
    
    
    42,145
    
    
    
    31,266Policy billing fees
    
    
    459
    
    
    
    543
    
    
    
    961
    
    
    
    845Total revenues
    
    
    92,064
    
    
    
    91,610
    
    
    
    181,650
    
    
    
    166,529ExpensesNet loss and loss adjustment expenses
    
    
    36,923
    
    
    
    40,611
    
    
    
    74,219
    
    
    
    74,521Underwriting expenses
    
    
    42,259
    
    
    
    39,972
    
    
    
    84,249
    
    
    
    72,509Total expenses
    
    
    79,182
    
    
    
    80,583
    
    
    
    158,468
    
    
    
    147,030Underwriting profit
    
    $
    12,882
    
    
    $
    11,027
    
    
    $
    23,181
    
    
    $
    19,499Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    11,796
    
    
    $
    572
    
    
    $
    20,067
    
    
    $
    1,060Claims administration revenue
    
    
    1,013
    
    
    
    535
    
    
    
    1,970
    
    
    
    1,100Other administration revenue
    
    
    1,209
    
    
    
    347
    
    
    
    1,580
    
    
    
    598Reinsurance intermediary fees
    
    
    224
    
    
    
    185
    
    
    
    285
    
    
    
    341Policy billing fees
    
    
    96
    
    
    
    
    
    
    
    172
    
    
    
    Total revenues
    
    
    14,338
    
    
    
    1,639
    
    
    
    24,074
    
    
    
    3,099ExpensesDirect commission expense paid to producers
    
    
    5,154
    
    
    
    144
    
    
    
    8,525
    
    
    
    151Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    3,171
    
    
    
    358
    
    
    
    4,745
    
    
    
    615Claims expense reimbursement to TICNY
    
    
    1,013
    
    
    
    533
    
    
    
    1,970
    
    
    
    1,098Total expenses
    
    
    9,338
    
    
    
    1,035
    
    
    
    15,240
    
    
    
    1,864Insurance services pretax income
    
    $
    5,000
    
    
    $
    604
    
    
    $
    8,834
    
    
    $
    1,235
 18




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Insurance segment
    
    $
    92,064
    
    
    $
    91,610
    
    
    $
    181,650
    
    
    $
    166,529Insurance services segment
    
    
    14,338
    
    
    
    1,639
    
    
    
    24,074
    
    
    
    3,099Total segment revenues
    
    
    106,402
    
    
    
    93,249
    
    
    
    205,724
    
    
    
    169,628Net investment income
    
    
    8,366
    
    
    
    9,446
    
    
    
    18,162
    
    
    
    17,401Net realized gains (losses) on investments
    
    
    (7,970
    )
    
    
    89
    
    
    
    (6,596
    )
    
    
    72Consolidated revenues
    
    $
    106,798
    
    
    $
    102,784
    
    
    $
    217,290
    
    
    $
    187,101
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Insurance segment underwriting profit
    
    $
    12,882
    
    
    $
    11,027
    
    
    $
    23,181
    
    
    $
    19,499Insurance services segment pretax income
    
    
    5,000
    
    
    
    604
    
    
    
    8,834
    
    
    
    1,235Net investment income
    
    
    8,366
    
    
    
    9,446
    
    
    
    18,162
    
    
    
    17,401Net realized gains (losses) on investments
    
    
    (7,970
    )
    
    
    89
    
    
    
    (6,596
    )
    
    
    72Corporate expenses
    
    
    (622
    )
    
    
    (233
    )
    
    
    (1,003
    )
    
    
    (591
    )Interest expense
    
    
    (2,161
    )
    
    
    (2,446
    )
    
    
    (4,484
    )
    
    
    (4,530
    )Other Income*
    
    
    762
    
    
    
    734
    
    
    
    1,523
    
    
    
    4,128Income before taxes
    
    $
    16,257
    
    
    $
    19,221
    
    
    $
    39,617
    
    
    $
    37,214
 *
    
    See note on investment in unconsolidated affiliate-CastlePoint Note 17Subsequent Events
 Dividends
  Acquisition
  19




---



##### Table of Contents



Ratings Announcement
  20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note on Forward-Looking Statements
   
    
    ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions;
    
    developments that may delay or limit our ability to enter new markets as quickly as we
anticipate;
    
    increased competition on the basis of pricing, capacity, coverage terms or other factors;
    
    greater frequency or severity of claims and loss activity, including as a result of natural
or man-made catastrophic events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
    
    the effects of acts of terrorism or war;
    
    developments in the worlds financial and capital markets that adversely affect the
performance of our investments;
    
    changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;
    
    changes in acceptance of our products and services, including new products and services;
    
    changes in the availability, cost or quality of reinsurance and failure of our reinsurers
to pay claims timely or at all;
    
    changes in the percentage of our premiums written that we cede to reinsurers;
    
    decreased demand for our insurance or reinsurance products;
    
    loss of the services of any of our executive officers or other key personnel;
    
    the effects of mergers, acquisitions and divestitures;
    
    changes in rating agency policies or practices;
    
    changes in legal theories of liability under our insurance policies;
    
    changes in accounting policies or practices;
    
    changes in general economic conditions, including inflation, interest rates and other
factors;
    
    the ability to obtain governmental approvals or rulings on or regarding the proposed merger with CastlePoint on the proposed
terms and schedule;
    
    the failure of the shareholders of CastlePoint or the
stockholders of Tower to approve the amalgamation or the failure to satisfy the closing conditions to the
transaction;
    
    the risk that the businesses will not be integrated
successfully or that such integration may be more difficult, time-consuming or costly than expected;
    
    the risk that the revenue opportunities, cost savings and other anticipated
synergies from the merger may not be fully realized or may take
longer to realize than expected;
    
    disruption from the amalgamation making it difficult to maintain relationship with customers, employees,
brokers and managing general agents; and
    
    the risk that the U.S. or Bermuda tax authorities may view the tax treatment of merger and/or the other transactions contemplated by the merger agreement differently from CastlePoint and Towers tax advisor; costs relating to the transaction.
 21




---



##### Table of Contents



Consolidated Results of Operations
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2008
    
    2007
    
    Change
    
    Percent
    
    2008
    
    2007
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    138.6
    
    
    $
    130.6
    
    
    $
    8.0
    
    
    
    6.1
    %
    
    $
    273.8
    
    
    $
    239.2
    
    
    $
    34.5
    
    
    
    14.4
    %Less: Ceded premiums earned
    
    
    68.5
    
    
    
    (56.6
    )
    
    
    (11.9
    )
    
    
    21.1
    %
    
    
    (135.3
    )
    
    
    (104.8
    )
    
    
    (30.4
    )
    
    
    29.0
    %Net premiums earned
    
    
    70.1
    
    
    
    74.0
    
    
    
    (3.9
    )
    
    
    -5.3
    %
    
    
    138.5
    
    
    
    134.4
    
    
    
    4.1
    
    
    
    3.1
    %Total commission and fee income
    
    
    36.3
    
    
    
    19.2
    
    
    
    17.1
    
    
    
    88.9
    %
    
    
    67.2
    
    
    
    35.2
    
    
    
    32.0
    
    
    
    90.8
    %Net investment income
    
    
    8.4
    
    
    
    9.4
    
    
    
    (1.1
    )
    
    
    -11.4
    %
    
    
    18.2
    
    
    
    17.4
    
    
    
    0.8
    
    
    
    4.4
    %Net realized investment (losses) gains
    
    
    (8.0
    )
    
    
    0.1
    
    
    
    (8.1
    )
    
    
    0.0
    %
    
    
    (6.6
    )
    
    
    0.1
    
    
    
    (6.7
    )
    
    
    0.0
    %Total
    
    
    106.8
    
    
    
    102.8
    
    
    
    4.0
    
    
    
    3.9
    %
    
    
    217.3
    
    
    
    187.1
    
    
    
    30.2
    
    
    
    16.1
    %ExpensesNet loss and loss adjustment expenses
    
    
    36.9
    
    
    
    40.6
    
    
    
    (3.7
    )
    
    
    -9.1
    %
    
    
    74.2
    
    
    
    74.5
    
    
    
    (0.3
    )
    
    
    -0.4
    %Operating expenses
    
    
    52.2
    
    
    
    41.2
    
    
    
    11.0
    
    
    
    26.6
    %
    
    
    100.5
    
    
    
    75.0
    
    
    
    25.5
    
    
    
    34.1
    %Interest expense
    
    
    2.2
    
    
    
    2.4
    
    
    
    (0.3
    )
    
    
    -11.6
    %
    
    
    4.5
    
    
    
    4.5
    
    
    
    
    
    
    
    -1.0
    %Total expenses
    
    
    91.3
    
    
    
    84.3
    
    
    
    7.0
    
    
    
    8.3
    %
    
    
    179.2
    
    
    
    154.0
    
    
    
    25.2
    
    
    
    16.3
    %Equity in income of unconsolidated affiliate
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.0
    
    
    
    3.9
    %
    
    
    1.5
    
    
    
    1.4
    
    
    
    0.1
    
    
    
    7.0
    %Gain from issuance of common stockby unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    2.7
    
    
    
    (2.7
    )
    
    
    -100.0
    %Income before taxes
    
    
    16.3
    
    
    
    19.2
    
    
    
    (3.0
    )
    
    
    -15.4
    %
    
    
    39.6
    
    
    
    37.2
    
    
    
    2.4
    
    
    
    6.5
    %Federal and state income taxes
    
    
    6.1
    
    
    
    6.8
    
    
    
    (0.8
    )
    
    
    -11.0
    %
    
    
    14.6
    
    
    
    13.2
    
    
    
    1.4
    
    
    
    10.5
    %Net Income
    
    $
    10.2
    
    
    $
    12.4
    
    
    $
    (2.2
    )
    
    
    -17.9
    %
    
    $
    25.0
    
    
    $
    24.0
    
    
    $
    1.0
    
    
    
    4.2
    %Key MeasuresPercent of total revenues:Net premiums earned
    
    
    65.7
    %
    
    
    72.0
    %
    
    
    
    
    
    
    
    
    
    
    63.8
    %
    
    
    71.8
    %Commission and fee income
    
    
    34.0
    %
    
    
    18.7
    %
    
    
    
    
    
    
    
    
    
    
    30.9
    %
    
    
    18.8
    %Net investment income
    
    
    7.8
    %
    
    
    9.2
    %
    
    
    
    
    
    
    
    
    
    
    8.4
    %
    
    
    9.3
    %Net realized investment gains (losses)
    
    
    -7.5
    %
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    -3.0
    %
    
    
    0.0
    %Return on average equity
    
    
    12.8
    %
    
    
    17.2
    %
    
    
    
    
    
    
    
    
    
    
    15.9
    %
    
    
    21.7
    %
 (1)
    
    Excluding net realized losses on investments, return on average equity would have increased
6.5% for the second quarter of 2008 and 2.7% for the six months ended June 30, 2008. Consolidated Results of Operations Three and six Months Ended June 30, 2008 and 2007
 Total revenues .
 22




---



##### Table of Contents



Premiums earned .
  CededDates
    
    Quota Share Reinsurance Agreement With
    
    AmountApril 6, 2006 - June 30, 2006 *
    
    CastlePoint Reinsurance
    
    30%July 1, 2006 - December 31, 2006
    
    CastlePoint Reinsurance
    
    40%January 1, 2007 - March 31, 2007
    
    CastlePoint Reinsurance
    
    49%April 1, 2007 - June 30, 2007
    
    CastlePoint Reinsurance
    
    40%April 1, 2007 - June 30, 2007
    
    CastlePoint Insurance Company
    
    9%July 1, 2007 - December 31, 2007
    
    CastlePoint Reinsurance
    
    40%January 1, 2008 - March 31, 2008
    
    CastlePoint Reinsurance
    
    40%April 1, 2008 - June 30, 2008
    
    CastlePoint Reinsurance
    
    35%April 1, 2008 - June 30, 2008
    
    Swiss Re America Corporation
    
    5%
 
 *
    
    Multi year quota share agreements with CastlePoint Reinsurance began April 6, 2006. Commission and fee income .
 Net investment income and net realized gains (losses) . Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases
  Losses and loss adjustment expenses .
 23




---



##### Table of Contents



Operating expenses .
 Interest expense .
 Income tax expense .
 Net income and return on average equity .
  24




---



##### Table of Contents



Insurance Segment Results of Operations
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2008
    
    2007
    
    Change
    
    Percent
    
    2008
    
    2007
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    138.6
    
    
    $
    130.6
    
    
    $
    8.0
    
    
    
    6.1
    %
    
    $
    273.8
    
    
    $
    239.2
    
    
    $
    34.5
    
    
    
    14.4
    %Less: ceded premiums earned
    
    
    (68.5
    )
    
    
    (56.6
    )
    
    
    (11.9
    )
    
    
    21.1
    %
    
    
    (135.2
    )
    
    
    (104.8
    )
    
    
    (30.4
    )
    
    
    29.0
    %Net premiums earned
    
    
    70.1
    
    
    
    74.0
    
    
    
    (3.9
    )
    
    
    -5.3
    %
    
    
    138.5
    
    
    
    134.4
    
    
    
    4.1
    
    
    
    3.1
    %Ceding commission revenue
    
    
    21.5
    
    
    
    17.0
    
    
    
    4.5
    
    
    
    26.2
    %
    
    
    42.1
    
    
    
    31.3
    
    
    
    10.9
    
    
    
    34.8
    %Policy billing fees
    
    
    0.5
    
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    -15.5
    %
    
    
    1.0
    
    
    
    0.8
    
    
    
    0.1
    
    
    NMTotal
    
    
    92.1
    
    
    
    91.6
    
    
    
    0.5
    
    
    
    0.5
    %
    
    
    181.6
    
    
    
    166.5
    
    
    
    15.1
    
    
    
    9.1
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    70.0
    
    
    
    66.8
    
    
    
    3.1
    
    
    
    4.7
    %
    
    
    137.1
    
    
    
    124.2
    
    
    
    12.9
    
    
    
    10.4
    %Less:ceded loss and loss adjustment expenses
    
    
    (33.0
    )
    
    
    (26.2
    )
    
    
    (6.8
    )
    
    
    26.0
    %
    
    
    (62.9
    )
    
    
    (49.6
    )
    
    
    (13.2
    )
    
    
    26.6
    %Net loss and loss adjustment expenses
    
    
    36.9
    
    
    
    40.6
    
    
    
    (3.7
    )
    
    
    -15.5
    %
    
    
    74.2
    
    
    
    74.5
    
    
    
    (0.3
    )
    
    
    -0.4
    %Underwriting expensesDirect commission expense
    
    
    24.9
    
    
    
    21.7
    
    
    
    3.2
    
    
    
    14.8
    %
    
    
    48.1
    
    
    
    40.3
    
    
    
    7.8
    
    
    
    19.4
    %Other underwriting expenses
    
    
    17.4
    
    
    
    18.3
    
    
    
    (0.9
    )
    
    
    -5.0
    %
    
    
    36.1
    
    
    
    32.2
    
    
    
    3.9
    
    
    
    12.2
    %Total underwriting expenses
    
    
    42.3
    
    
    
    40.0
    
    
    
    2.3
    
    
    
    5.7
    %
    
    
    84.2
    
    
    
    72.5
    
    
    
    11.7
    
    
    
    16.2
    %Underwriting profit
    
    $
    12.9
    
    
    $
    11.0
    
    
    $
    1.9
    
    
    
    16.8
    %
    
    $
    23.2
    
    
    $
    19.5
    
    
    $
    3.7
    
    
    
    18.9
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    166.0
    
    
    $
    148.8
    
    
    $
    17.1
    
    
    
    11.5
    %
    
    $
    301.1
    
    
    
    259.7
    
    
    $
    41.4
    
    
    
    15.9
    %Less: ceded premiums written
    
    
    (83.3
    )
    
    
    (79.2
    )
    
    
    (4.2
    )
    
    
    5.3
    %
    
    
    (150.1
    )
    
    
    (142.0
    )
    
    
    (8.1
    )
    
    
    5.7
    %Net premiums written
    
    $
    82.6
    
    
    $
    69.7
    
    
    $
    12.9
    
    
    
    18.6
    %
    
    $
    151.0
    
    
    $
    117.7
    
    
    $
    33.3
    
    
    
    28.3
    %Ceded premiums as a percent of gross premiumsWritten
    
    
    50
    %
    
    
    53
    %
    
    
    
    
    
    
    
    
    
    
    50
    %
    
    
    55
    %Earned
    
    
    49
    %
    
    
    43
    %
    
    
    
    
    
    
    
    
    
    
    49
    %
    
    
    44
    %Loss RatiosGross
    
    
    50.6
    %
    
    
    51.2
    %
    
    
    
    
    
    
    
    
    
    
    50.1
    %
    
    
    51.9
    %Net
    
    
    52.6
    %
    
    
    54.9
    %
    
    
    
    
    
    
    
    
    
    
    53.6
    %
    
    
    55.4
    %Accident Year Loss RatiosGross
    
    
    51.5
    %
    
    
    51.9
    %
    
    
    
    
    
    
    
    
    
    
    51.0
    %
    
    
    52.4
    %Net
    
    
    54.5
    %
    
    
    54.9
    %
    
    
    
    
    
    
    
    
    
    
    54.5
    %
    
    
    55.5
    %Underwriting Expense RatiosGross
    
    
    30.2
    %
    
    
    30.2
    %
    
    
    
    
    
    
    
    
    
    
    30.4
    %
    
    
    30.0
    %Net
    
    
    29.0
    %
    
    
    30.3
    %
    
    
    
    
    
    
    
    
    
    
    29.7
    %
    
    
    30.1
    %Combined RatiosGross
    
    
    80.6
    %
    
    
    81.3
    %
    
    
    
    
    
    
    
    
    
    
    80.5
    %
    
    
    81.9
    %Net
    
    
    81.6
    %
    
    
    85.1
    %
    
    
    
    
    
    
    
    
    
    
    83.3
    %
    
    
    85.5
    %
 Insurance Segment Results of OperationsThree and Six Months Ended June 30, 2008 and 2007
 Gross premiums .
  25




---



##### Table of Contents



Ceded premiums .
   Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio
 26




---



##### Table of Contents



Underwriting profit and combined ratio .
  Insurance Services Segment Results of Operations
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in millions)
    
    2008
    
    2007
    
    Change
    
    Percent
    
    2008
    
    2007
    
    Change
    
    PercentRevenueDirect commission revenue from
managing general agency
    
    $
    11.8
    
    
    $
    0.6
    
    
    $
    11.2
    
    
    NM

    
    $
    20.1
    
    
    $
    1.1
    
    
    $
    19.0
    
    
     NMClaims administration revenue
    
    
    1.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    89.3
    %
    
    
    2.0
    
    
    
    1.1
    
    
    
    0.9
    
    
    
    79.1
    %Other administration revenue (1)
    
    
    1.2
    
    
    
    0.3
    
    
    
    0.9
    
    
    
    248.5
    %
    
    
    1.6
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    164.2
    %Reinsurance intermediary fees (2)
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    20.9
    %
    
    
    0.3
    
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    -16.3
    %Policy billing fees
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Total
    
    
    14.3
    
    
    
    1.6
    
    
    
    12.7
    
    
    
    774.8
    %
    
    
    24.1
    
    
    
    3.1
    
    
    
    21.0
    
    
    
    676.8
    %ExpensesDirect commission expense paid to producers
    
    
    5.2
    
    
    
    0.1
    
    
    
    5.0
    
    
     NM

    
    
    8.5
    
    
    
    0.2
    
    
    
    8.4
    
    
     NMOther insurance services expenses
    
    
    3.2
    
    
    
    0.4
    
    
    
    2.8
    
    
    
    785.7
    %
    
    
    4.7
    
    
    
    0.6
    
    
    
    4.1
    
    
    
    671.6
    %Claims expense reimbursement to TICNY (3)
    
    
    1.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    90.1
    %
    
    
    2.0
    
    
    
    1.1
    
    
    
    0.9
    
    
    
    79.5
    %Total
    
    
    9.3
    
    
    
    1.0
    
    
    
    8.3
    
    
    
    802.2
    %
    
    
    15.2
    
    
    
    1.9
    
    
    
    13.4
    
    
    
    717.6
    %Insurance services pre-tax income (loss)
    
    $
    5.0
    
    
    $
    0.6
    
    
    $
    4.4
    
    
    
    727.9
    %
    
    $
    8.8
    
    
    $
    1.2
    
    
    $
    7.6
    
    
    
    615.3
    %Premiums produced by TRM on behalf
of issuing companies
    
    $
    36.1
    
    
    $
    0.7
    
    
    $
    35.4
    
    
     NM

    
    $
    59.4
    
    
    $
    0.7
    
    
    $
    58.7
    
    
     NM
 (1)
    
    Other administration revenue includes amounts reimbursed by CastlePoint Reinsurance
for services rendered pursuant to a service and expense sharing agreement.(2)
    
    Reinsurance intermediary fees include commissions earned for placement of
reinsurance on behalf of our insurance subsidiaries.(3)
    
    Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing
agreement. 27




---



##### Table of Contents



Insurance Services Segment Results of OperationsThree and Six Months Ended June 30, 2008 and 2007
 Total revenues.
  Direct commission expense .
  Other insurance services expenses .
 Claims expense reimbursement .
 Pre-tax income .
 Liquidity and Capital Resources
 Cash flows .
      28




---



##### Table of Contents



Subordinated Debentures
  Investments
 Unrealized Losses
   Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    Aggregate
    
    Unrealized($ in thousands)
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesJune 30, 2008U.S. Treasury securities
    
    $
    6,254
    
    
    $
    (35
    )
    
    $
    8,215
    
    
    $
    (125
    )
    
    $
    14,468
    
    
    $
    (159
    )U.S. Agency securities
    
    
    2,015
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    2,015
    
    
    
    (4
    )Municipal bonds
    
    
    115,087
    
    
    
    (1,545
    )
    
    
    
    
    
    
    
    
    
    
    115,087
    
    
    
    (1,545
    )Corporate and other bonds
    
    
    147,177
    
    
    
    (4,861
    )
    
    
    41,377
    
    
    
    (4,441
    )
    
    
    188,554
    
    
    
    (9,302
    )Commercial mortgage-backed securities
    
    
    17,651
    
    
    
    (2,959
    )
    
    
    18,724
    
    
    
    (7,880
    )
    
    
    36,375
    
    
    
    (10,839
    )Residential mortgage-backed securities
    
    
    30,931
    
    
    
    (1,230
    )
    
    
    13,262
    
    
    
    (3,066
    )
    
    
    44,193
    
    
    
    (4,296
    )Asset-backed securities
    
    
    9,012
    
    
    
    (2,828
    )
    
    
    497
    
    
    
    (7
    )
    
    
    9,509
    
    
    
    (2,835
    )Total fixed-maturity securities
    
    
    328,126
    
    
    
    (13,462
    )
    
    
    82,074
    
    
    
    (15,518
    )
    
    
    410,200
    
    
    
    (28,980
    )Preferred stocks
    
    
    447
    
    
    
    (97
    )
    
    
    3,860
    
    
    
    (1,147
    )
    
    
    4,307
    
    
    
    (1,244
    )Common stocks
    
    
    1,472
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    1,472
    
    
    
    (28
    )Total
    
    $
    330,044
    
    
    $
    (13,588
    )
    
    $
    85,935
    
    
    $
    (16,665
    )
    
    $
    415,979
    
    
    $
    (30,253
    )December 31, 2007Municipal bonds
    
    $
    11,614
    
    
    $
    (78
    )
    
    $
    7,272
    
    
    $
    (24
    )
    
    $
    18,886
    
    
    $
    (102
    )Corporate and other bonds
    
    
    77,262
    
    
    
    (3,164
    )
    
    
    24,631
    
    
    
    (817
    )
    
    
    101,893
    
    
    
    (3,981
    )Commercial mortgage-backed securities
    
    
    24,146
    
    
    
    (5,015
    )
    
    
    8,325
    
    
    
    (162
    )
    
    
    32,471
    
    
    
    (5,177
    )Residential mortgage-backed securities
    
    
    17,263
    
    
    
    (2,511
    )
    
    
    46,196
    
    
    
    (2,733
    )
    
    
    63,459
    
    
    
    (5,244
    )Asset-backed securities
    
    
    2,898
    
    
    
    (573
    )
    
    
    
    
    
    
    
    
    
    
    2,898
    
    
    
    (573
    )Total fixed-maturity securities
    
    
    133,183
    
    
    
    (11,341
    )
    
    
    86,424
    
    
    
    (3,736
    )
    
    
    219,607
    
    
    
    (15,077
    )Preferred stocks
    
    
    3,702
    
    
    
    (1,849
    )
    
    
    
    
    
    
    
    
    
    
    3,702
    
    
    
    (1,849
    )Total
    
    $
    136,885
    
    
    $
    (13,190
    )
    
    $
    86,424
    
    
    $
    (3,736
    )
    
    $
    223,309
    
    
    $
    (16,926
    )
  29




---



##### Table of Contents



Fixed Maturity Investments with Third Party Guarantees
  June 30, 2008With
    
    Without($ in thousands)
    
    Guarantee
    
    GuaranteeAAA
    
    $
    31,329
    
    
    $
    1,933AA
    
    
    39,389
    
    
    
    54,775A
    
    
    30,512
    
    
    
    36,092BBB
    
    
    2,405
    
    
    
    1,487No underlying rating
    
    
    
    
    
    
    9,348Total
    
    $
    103,635
    
    
    $
    103,635
  Guaranteed
    
    Percent($ in thousands)
    
    Amount
    
    of TotalMBIA Inc.
    
    $
    29,706
    
    
    
    29
    %Financial Security Assurance
    
    
    27,379
    
    
    
    26
    %Ambac Financial Corp.
    
    
    21,229
    
    
    
    20
    %FGIC Corp.
    
    
    20,349
    
    
    
    20
    %Others
    
    
    4,972
    
    
    
    5
    %Total
    
    $
    103,635
    
    
    
    100
    %
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk
  30




---



##### Table of Contents



Sensitivity Analysis
     Estimated Increase
    
    Estimated Percentage(Decrease) in Fair Value
    
    Increase (decrease)Change in interest rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    
    (69,816
    )
    
    
    (13.4
    %)200 basis point rise
    
    
    (48,227
    )
    
    
    (9.3
    %)100 basis point rise
    
    
    (25,029
    )
    
    
    (4.8
    %)No change
    
    
    0
    
    
    
    0.0
    %50 basis point decline
    
    
    13,102
    
    
    
    2.5
    %100 basis point decline
    
    
    26,481
    
    
    
    5.1
    %
   
 Item 4. Controls and Procedures
  Changes in internal control over financial reporting
  31




---



##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
    Risks Related to Our Business
 Our investment performance may suffer as a result of adverse capital market developments or
other factors, which may affect our financial results and ability to conduct business.
   Risks Related to Our Proposed Merger with CastlePoint Holdings, Ltd.
 The proposed merger with CastlePoint Holdings, Ltd. may not be completed.
  
    
    approval by our stockholders of an amendment to our certificate of incorporation to
increase the number of authorized shares of common stock;
    
    approval by CastlePoints shareholders of the merger;
    
    approvals by regulatory authorities, including the Bermuda Monetary Authority;
    
    the absence of laws and regulatory actions by governmental authorities that impose
conditions or restrictions upon us that would reasonably be expected to have a material
adverse effect on our financial condition, properties, assets, liabilities, obligations,
businesses or results of operations or on our ability to perform our obligations under the
merger agreement or to consummate the merger on a timely basis; and
    
    other customary closing conditions.
  We may experience difficulties and unanticipated costs in integrating CastlePoints business
and operations into our own, which could cause us to fail to realize many of the anticipated
potential benefits of the merger.
  32




---



##### Table of Contents



The merger with CastlePoint may cause disruptions in our business, which could have an adverse
effect on our business and financial results.
  
    
    current employees and producers may experience uncertainty about their future roles with
the new company, which might adversely affect our ability to retain key managers and other
employees and producers; and
    
    the attention of our management may be directed toward the completion of the merger or the
integration of CastlePoints operations and not their ongoing business.
  The anticipated benefits of combining with CastlePoint may not be realized.
  If the CastlePoint business does not perform well or we do not integrate it successfully, we
may incur significant charges to write down the goodwill established in the merger.
 Goodwill and Other Intangible Assets,
 If the merger is completed, we would have to obtain reinsurance from other sources, and we
will be exposed to greater risk of loss.
  We must obtain many governmental and other consents to complete the merger. If these consents
are delayed, not granted or granted with unacceptable conditions, it may jeopardize or postpone the
completion of the merger, result in additional expenditures of money and resources and/or reduce
the anticipated benefits of the merger.
  Risks Related to Our Industry
 The threat of terrorism and military and other actions may adversely affect our investment
portfolio and may result in decreases in our net income, revenue and assets under management.
    33




---



##### Table of Contents



Our results of operations and revenues may fluctuate as a result of many factors, including
cyclical changes in the insurance industry, which may cause the price of our securities to be
volatile.
  
    
    competition;
    
    rising levels of loss costs that we cannot anticipate at the time we price our products;
    
    volatile and unpredictable developments, including man-made, weather-related and other
natural catastrophes or terrorist attacks;
    
    changes in the level of reinsurance capacity and insurance capacity;
    
    changes in the amount of loss and loss adjustment expense reserves resulting from new types
of claims and new or changing judicial interpretations relating to the scope of insurers
liabilities; and
    
    fluctuations in equity markets and interest rates, inflationary pressures, conditions
affecting the credit markets, segments thereof or particular asset classes and other changes
in the investment environment, which affect returns on invested assets and may impact the
ultimate payout of losses.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of
    
    
    
    
    
    Total Number of Shares
    
    Maximum Number (orShares
    
    Average Price
    
    Purchased as Part of Publicly
    
    Approximate Dollar Value) ofPeriod
    
    Purchased
    
    Paid per Share
    
    Announced Plans or
    
    Shares that May Yet BeApri 1 - 30, 2008
    
    
    577
    
    
    $
    26.16
    
    
    
    
    
    
    $
    May 1 - 31, 2008
    
    
    12,744
    
    
    
    23.48
    
    
    
    
    
    
    
    June 1 - 30, 2008
    
    
    2,084
    
    
    
    24.40
    
    
    
    
    
    
    
    Total
    
    
    15,405
    
    
    $
    23.77
    
    
    
    
    
    
    $
    
 
 Item 4. Submission of Matters to a Vote of Security Holders
  (a)
    
    Three directors were elected to serve with a term ending 2011 as follows:
 Nominee
    
    Votes For
    
    Votes WithheldMichael H. Lee
    
    
    17,085,527
    
    
    
    1,142,282William W. Fox, Jr.
    
    
    17,518,231
    
    
    
    709,578Steven W. Schuster
    
    
    16,571,916
    
    
    
    1,605,893
  (b)
    
    The appointment of Johnson Lambert & Co., LLP as the Companys Independent registered
Public Accounting Firm for the year 2008 was approved as follows:
 Shares VotedFor
    
    
    18,212,243Against
    
    
    11,618Abstain
    
    
    3,947
 (c)
    
    Approved the Amendment and Restatement of the Companys 2004 Long Term Equity
Compensation Plan
 Shares VotedFor
    
    
    15,169,184Against
    
    
    1,010,926Abstain
    
    
    10,749
 (d)
    
    Approved the material terms of the Companys 2004 Long Term Equity Compensation Plan
 Shares VotedFor
    
    
    15,224,493Against
    
    
    953,703Abstain
    
    
    12,663
 34




---



##### Table of Contents



(e)
    
    Approved the material terms of the Companys Short Term Performance Incentive Plan
 Shares VotedFor
    
    
    17,178,144Against
    
    
    1,032,644Abstain
    
    
    17,020
 
 Item 6. Exhibits
 31.1
    
    Chief Executive Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30231.2
    
    Chief Financial Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30232
    
    Chief Executive Officer and Chief Financial Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
 35




---



##### Table of Contents



Signatures
  Tower Group, Inc.

          RegistrantDate: August 11, 2008
    
    /s/ Michael H. Lee
  Michael
H. LeeChairman of the Board,President and Chief Executive OfficerDate: August 11, 2008
    
    /s/ Francis M. Colalucci
  Francis
M. ColalucciSenior Vice President,Chief Financial Officer and Treasurer
 36